Angel Oak Mortgage REIT, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Angel Oak Mortgage, Inc. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except for share data) As of: September 30, 2021 December 31, 2020 ASSETS Residential mortgage loans - at fair value $ 723,139 $ 142,030 Residential mortgage loans in securitization trust - at fair value 319,812 — Commercial mortgage loans - at fair value 7,936 7,466 RMBS - at fair value 621,670 149,936 CMBS - at fair value 11,349 8,796 U.S. Treasury securities - at fair value 80,000 149,995 Cash and cash equivalents 49,177 43,569 Restricted cash 3,093 2,404 Principal and interest receivable 12,313 5,072 Other assets 7,113 388 Total assets $ 1,835,602 $ 509,656 LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES Notes payable $ 550,752 $ 81,905 Non-recourse securitization obligation, collateralized by residential mortgage loans 290,529 — Securities sold under agreements to repurchase 489,287 178,291 Unrealized depreciation on futures contracts - at fair value — 198 Accrued expenses 770 121 Accrued expenses payable to affiliate 749 732 Interest payable 608 100 Management fee payable to affiliate 1,845 — Total liabilities $ 1,334,540 $ 261,347 Commitments and contingencies STOCKHOLDERS’ EQUITY Series A preferred stock, $ 0.01 par value, 12 % cumulative, non-voting, 125 shares issued and outstanding as of September 30, 2021 and December 31, 2020 101 101 Common stock, $ 0.01 par value. As of September 30, 2021: 350,000,000 shares authorized, 25,405,544 shares issued and outstanding. As of December 31, 2020: 90,000,000 shares authorized, 15,724,050 shares issued and outstanding. 254 157 Additional paid-in capital 478,723 246,489 Accumulated other comprehensive income (loss) 4,394 ( 1,039 ) Retained earnings 17,590 2,601 Total stockholders’ equity $ 501,062 $ 248,309 Total liabilities and stockholders’ equity $ 1,835,602 $ 509,656 The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 2 Angel Oak Mortgage, 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, 2021 September 30, 2020 September 30, 2021 September 30, 2020 INTEREST INCOME, NET Interest income $ 15,587 $ 9,387 $ 37,763 $ 31,929 Interest expense 2,599 788 5,277 7,454 NET INTEREST INCOME 12,988 8,599 32,486 24,475 REALIZED AND UNREALIZED GAINS (LOSSES), NET Net realized loss on derivative contracts, RMBS, CMBS, and mortgage loans ( 7,144 ) ( 3,102 ) ( 19,656 ) ( 18,717 ) Net unrealized gain (loss) on derivative contracts and mortgage loans 6,821 616 16,151 ( 4,369 ) TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET ( 323 ) ( 2,486 ) ( 3,505 ) ( 23,086 ) EXPENSES Operating and investment expenses 3,830 347 5,293 1,957 Operating expenses incurred with affiliate 645 566 1,617 1,101 Securitization costs — — — 2,094 Management fee incurred with affiliate 1,846 958 4,015 2,503 Total operating expenses 6,321 1,871 10,925 7,655 NET INCOME (LOSS) $ 6,344 $ 4,242 $ 18,056 $ ( 6,266 ) Preferred dividends ( 4 ) ( 4 ) ( 11 ) ( 11 ) NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDER(S) $ 6,340 $ 4,238 $ 18,045 $ ( 6,277 ) Other comprehensive income (loss) 1,818 5,171 5,433 ( 5,054 ) TOTAL COMPREHENSIVE INCOME (LOSS) $ 8,158 $ 9,409 $ 23,478 $ ( 11,331 ) Basic earnings (loss) per common share $ 0.25 $ 0.27 $ 0.94 $ ( 0.40 ) Diluted earnings (loss) per common share $ 0.25 $ 0.27 $ 0.93 $ ( 0.40 ) Weighted average number of common shares outstanding: Basic 24,999,891 15,724,050 19,190,827 15,724,050 Diluted 25,470,226 15,724,050 19,366,679 15,724,050 The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 3 Angel Oak Mortgage, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) (in thousands) For the Three Months Ended September 30, 2020 Preferred Stock Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Deficit Total Equity Stockholders’ equity as of June 30, 2020 $ 101 $ — $ 302,779 $ ( 6,671 ) $ ( 8,635 ) $ 287,574 Distributions to common stockholder — — ( 75,000 ) — — ( 75,000 ) Dividends declared - preferred — — — — ( 4 ) ( 4 ) Unrealized gain on RMBS and Treasury Bills — — — 5,171 — 5,171 Additional equity contribution from common stockholder — — 26 — — 26 Net income — — — — 4,242 4,242 Stockholders’ equity as of September 30, 2020 $ 101 $ — $ 227,805 $ ( 1,500 ) $ ( 4,397 ) $ 222,009 For the Three Months Ended September 30, 2021 Preferred Stock Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive Income Retained Earnings Total Equity Stockholders’ equity as of June 30, 2021 $ 101 $ 255 $ 479,542 $ 2,576 $ 14,307 $ 496,781 Shares repurchased — ( 1 ) ( 1,652 ) — — ( 1,653 ) Non-cash equity compensation — — 833 — — 833 Dividends declared - preferred — — — — ( 5 ) ( 5 ) Unrealized gain on RMBS and CMBS — — — 1,818 — 1,818 Dividends paid on common stock — — — — ( 3,056 ) ( 3,056 ) Net income — — — — 6,344 6,344 Stockholders’ equity as of September 30, 2021 $ 101 $ 254 $ 478,723 $ 4,394 $ 17,590 $ 501,062 The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 4 Angel Oak Mortgage, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) (in thousands) For the Nine Months Ended September 30, 2020 Preferred Stock Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Deficit) Total Equity Stockholders’ equity as of December 31, 2019 $ 101 $ — $ 87,628 $ 3,554 $ 3,580 $ 94,863 Dividends declared - preferred — — — — ( 11 ) ( 11 ) Unrealized loss on RMBS and Treasury Bills — — — ( 5,054 ) — ( 5,054 ) Additional equity contribution from common stockholder — — 215,177 — — 215,177 Distributions to commons stockholder — — ( 75,000 ) — ( 1,700 ) ( 76,700 ) Net loss — — — — ( 6,266 ) ( 6,266 ) Stockholders’ equity as of September 30, 2020 $ 101 $ — $ 227,805 $ ( 1,500 ) $ ( 4,397 ) $ 222,009 For the Nine Months Ended September 30, 2021 Preferred Stock Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Equity Stockholders’ equity as of December 31, 2020 $ 101 $ 157 $ 246,489 $ ( 1,039 ) $ 2,601 $ 248,309 Contributions from common stockholder prior to IPO — — 56,261 — — 56,261 Private placement concurrent with IPO — 21 39,979 — — 40,000 Common stock issued in IPO — 72 136,728 — — 136,800 Shares repurchased — ( 1 ) ( 1,652 ) — — ( 1,653 ) Non-cash equity compensation — 5 918 — — 923 Dividends declared - preferred — — — — ( 11 ) ( 11 ) Unrealized gain on RMBS and CMBS — — — 5,433 — 5,433 Dividends paid on common stock — — — — ( 3,056 ) ( 3,056 ) Net income — — — — 18,056 18,056 Stockholders’ equity as of September 30, 2021 $ 101 $ 254 $ 478,723 $ 4,394 $ 17,590 $ 501,062 The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 5 Angel Oak Mortgage, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 18,056 $ ( 6,266 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Net realized loss on derivative contracts, RMBS, CMBS, and mortgage loans 19,656 18,718 Net unrealized (gain) loss on derivative contracts and mortgage loans ( 16,151 ) 4,369 Accretion of and amortization 438 263 Non-cash equity compensation 923 — Net change in: Purchases of residential mortgage loans from non-affiliates ( 202,387 ) ( 71,578 ) Purchases of residential mortgage loans from affiliates ( 751,416 ) ( 331,878 ) Sales of residential mortgage loan into affiliate’s securitization trust — 505,467 Principal payments on residential mortgage loans 63,199 14,104 Margin posted on interest rate futures contracts and TBAs ( 9,297 ) ( 14,186 ) Principal and interest receivable ( 7,255 ) 330 Receivable from affiliate 14 ( 159 ) Other assets ( 2,511 ) ( 39 ) Management fee payable to affiliate 1,845 ( 27 ) Accrued expenses 638 ( 235 ) Accrued expenses payable to affiliate 17 ( 459 ) Interest payable 509 ( 301 ) NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ( 883,722 ) 118,123 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investment securities ( 1,463,966 ) ( 1,297,135 ) Sale of U.S. Treasury securities 424,984 1,335,000 Sale of RMBS 623,364 — Principal payments on RMBS 7,238 5,878 Purchases of commercial mortgage loans ( 1,500 ) ( 26,446 ) Principal payments on commercial mortgage loans 1,401 378 NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ( 408,479 ) 17,675 CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid to common stockholders ( 3,056 ) — Stock repurchase ( 1,653 ) — Contributions from prior common stockholder 56,262 215,177 Distributions to prior common stockholder — ( 76,700 ) Proceeds from private placement concurrent with IPO 40,000 — Proceeds from IPO 136,800 — Other ( 16,050 ) ( 153 ) Proceeds from securitization 306,352 — Net proceeds from (payments on) securities sold under agreements to repurchase 310,996 ( 173,550 ) Net proceeds from (payments on) notes payable 468,847 ( 102,890 ) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,298,498 ( 138,116 ) CHANGE IN CASH AND RESTRICTED CASH 6,297 ( 2,318 ) CASH AND RESTRICTED CASH, beginning of period (1) 45,973 9,202 CASH AND RESTRICTED CASH, end of period (1) $ 52,270 $ 6,884 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for interest $ 2,170 $ 7,755 (1) Cash, cash equivalents, and restricted cash as of September 30, 2021 included cash and cash equivalents of $ 49.2 million and restricted cash of $ 3.1 million, and at December 31, 2020 included cash and cash equivalents of $ 43.6 million and restricted cash of $ 2.4 million. The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 6 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 1. Organization and Basis of Presentation Angel Oak Mortgage, 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 investments in 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 affiliates, Angel Oak Mortgage Solutions LLC and Angel Oak Home Loans LLC (together, “Angel Oak Lending”), which operates through wholesale and retail channels 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. On September 18, 2018 (commencement of operations), the Board of Directors of the Company (the “Board of Directors”) authorized the Company to commence operations and on October 19, 2018 the Company began its investing activities. For the period prior to September 18, 2018, the Company had no operating activity. The Company achieves certain of its investment objectives by investing a portion of its assets in its wholly‑owned 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. On June 21, 2021, the Company completed its initial public offering (the “IPO”) of 7,200,000 shares of common stock, $ 0.01 par value per share (“common stock”), at an initial public offering price of $ 19.00 per share for total proceeds of approximately $ 136.8 million, excluding the underwriting discounts and commissions and offering expenses of the IPO, each of which was paid by Angel Oak Capital Advisors, LLC (“Angel Oak Capital”), pursuant to a registration statement on Form S-11, as amended (File No. 333-256301) (the “Registration Statement”), filed with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”). The common stock of the Company trades on the New York Stock Exchange under the ticker symbol “AOMR”. Concurrently with the completion of the IPO, the Company sold an additional 2,105,263 shares of common stock to CPPIB Credit Investments Inc. in a private placement at $ 19.00 per share, for total proceeds of approximately $ 40.0 million. The Operating Partnership On February 5, 2020, the Company formed Angel Oak Mortgage Operating Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), through which substantially all of its assets are held and substantially all of its operations are conducted, either directly or through subsidiaries. The Company holds all of the limited partnership interests in the Operating Partnership and indirectly holds the sole general partnership interest in the Operating Partnership through the general partner, which is the Company’s wholly-owned subsidiary. The Company’s Manager and REIT status The Company is externally managed and advised by Falcons I, LLC (the “Manager”), a registered investment adviser with the SEC. The Company has elected to be taxed as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2019 and will operate in conformity with the requirements for qualification as a REIT under the Code. 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, 2020, included in the Company’s prospectus dated June 16, 2021, filed with the SEC on June 21, 2021 pursuant to Rule 424(b)(4) under the Securities Act (the “Prospectus”), which is part of the Registration Statement. 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., valuation changes due to supply and 7 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ from the Company’s estimates and the differences could be material. Significant Accounting Policies Recently Adopted The Company uses securitization trusts considered to be variable interest entities (“VIEs”) in its securitization transactions. VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary and is generally the entity with (i) the power to direct the activities that most significantly impact the VIE’s economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. For VIEs that do not have substantial on-going activities, the power to direct the activities that most significantly impact the VIE’s economic performance may be determined by an entity’s involvement with the design and structure of the VIE. The trusts are structured as entities that receive principal and interest on the underlying collateral and distribute those payments to the security holders. The assets held by the securitization entities are restricted in that they can only be used to fulfill the obligations of the securitization entity. The Company’s risks associated with its involvement with these VIEs are limited to its risks and rights as a holder of the security it has retained as well as certain risks associated which may occur when the Company acts as either the sponsor and/or depositor of and the seller, directly or indirectly to, the securitization entities. Determining the primary beneficiary of a VIE requires judgment. The Company determined that for the securitizations it consolidates, its ownership provides the Company with the obligation to absorb losses or the right to receive benefits from the VIE that could be significant to the VIE. In addition, the Company has the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance, or power, such as rights to replace the servicer without cause or the Company was determined to have power in connection with its involvement with the structure and design of the VIE. The Company’s interest in the assets held by consolidated securitization vehicles, which are consolidated on the Company’s Consolidated Balance Sheets, is restricted by the structural provisions of these trusts, and a recovery of the Company’s investment in the vehicles will be limited by each entity’s distribution provisions. The liabilities of the securitization vehicles, which are also consolidated on the Company’s Consolidated Balance Sheets, are non-recourse to the Company, and can only be satisfied using proceeds from each securitization vehicle’s respective asset pool. The assets of securitization entities are comprised of residential mortgage-backed securities (or RMBS), or residential mortgage loans. See Note 2 for further discussion of the characteristics of the securities and loans in the Company’s portfolio relating to asset pools arising from securitization transactions. Recent Accounting Standards - Recently Issued In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard was issued to ease the accounting effects of reform to the London Interbank Offered Rate (“LIBOR”) and other reference rates. The standard provides optional expedients and exceptions for applying GAAP to debt, derivatives, and other contracts affected by reference rate reform. The standard is effective for all entities as of March 12, 2020 through December 31, 2022 and may be elected over time as reference rate reform activities occur. The Company does not believe that this ASU will have a material impact upon its consolidated financial statements. 8 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 2. Variable Interest Entities Since its inception, the Company has utilized VIEs for the purpose of securitizing whole mortgage loans to obtain long-term non-recourse financing. The Company evaluates its interest in each VIE to determine if it is the primary beneficiary. VIEs for Which the Company is the Primary Beneficiary In the third quarter of 2021, the Company entered into a securitization transaction where it was determined that the Company was the primary beneficiary. The Company was the sole entity to contribute residential whole mortgage loans to the securitization vehicle, AOMT 2021-4. During the three and nine months ended September 30, 2021, in the AOMT 2021-4 transaction, the Company securitized and consolidated approximately $ 316.6 million unpaid principal balance of seasoned residential non-QM mortgage loans. The retained beneficial interest in VIE for which the Company is the primary beneficiary (currently solely comprised of AOMT 2021-4) is the subordinated tranches of the securitization and further interests in additional tranches. The table below sets forth the fair values of the assets and liabilities recorded in the condensed consolidated balance sheet related to this consolidated VIE as of September 30, 2021: Assets: (in thousands) Residential mortgage loans in securitization trust - at fair value $ 319,812 Accrued interest receivable 986 Other assets — Liabilities: Non-recourse securitization obligation, collateralized by residential mortgage loans $ 290,529 Accrued interest payable — Other liabilities — Income and expense amounts related to the consolidated VIE recorded in the condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2021 is set forth as follows: (in thousands) Interest income, assets of AOMT 2021-4 $ 2,620 Interest expense, non-recourse liabilities of AOMT 2021-4 ( 394 ) Net interest income, AOMT 2021-4 $ 2,226 Servicing fees $ 34 VIEs for Which the Company is Not the Primary Beneficiary In 2019 and 2020, the Company both co‑sponsored and participated in the formation of various entities that were considered to be VIEs, which were formed to facilitate securitization issuances that were comprised of secured residential whole loans 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 AOMT 2019-2, AOMT 2019-4, AOMT 2019-6, AOMT 2020-3, and AOMT 2020-SBC1. The Company determined that it was not then and is not now the primary beneficiary of any of these 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 the VIEs in which the Company participated during the years 2019 and 2020 remains unchanged. The securities received in the aforementioned 2019 and 2020 securitization transactions are included in “RMBS - at fair value” and “CMBS - at fair value” on the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, and details on the accounting treatment and fair value methodology of the securities can be found in Note 9, Fair Value Measurements . See Note 5, Investment Securities , for the fair value of AOMT securities held by the Company as of September 30, 2021 and December 31, 2020 that were retained by the Company as a result of the securitization transactions in 2020 and 2019. 9 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 3. Residential Mortgage Loans Residential mortgage loans are measured at fair value. The following table sets forth the cost, fair value, weighted average interest rate, and weighted average remaining maturity of the Company’s residential mortgage loan portfolio as of September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 ($ in thousands) Cost $ 714,367 $ 143,455 Unpaid principal balance $ 688,843 $ 139,278 Premium on mortgage loans purchased 25,524 4,177 Change in fair value 8,772 ( 1,425 ) Fair value $ 723,139 $ 142,030 Weighted average interest rate 4.74 % 5.95 % Weighted average remaining maturity (years) 29.7 29.8 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, 2021 and December 31, 2020: As of: September 30, 2021 December 31, 2020 ($ in thousands) Number of mortgage loans 90 or more days past due 12 22 Recorded investment in mortgage loans 90 or more days past due $ 3,934 $ 10,855 Unpaid principal balance of loans 90 or more days past due $ 3,930 $ 11,932 Number of mortgage loans in foreclosure 11 10 Recorded investment in mortgage loans in foreclosure $ 3,767 $ 2,277 Unpaid principal balance of loans in foreclosure $ 3,767 $ 2,636 10 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 4. Commercial Mortgage Loans Commercial mortgage loans are measured at fair value. The following table sets forth the cost, fair value, weighted average interest rate, and weighted average remaining maturity of the Company’s commercial mortgage loan portfolio as of September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 ($ in thousands) Cost $ 7,921 $ 7,674 Unpaid principal balance $ 7,997 $ 7,756 Net discount on commercial mortgage loans purchased ( 76 ) ( 82 ) Change in fair value 15 ( 208 ) Fair value $ 7,936 $ 7,466 Weighted average interest rate 6.7 % 6.58 % Weighted average remaining maturity (years) 10.6 14.3 There was one commercial mortgage loan more than 90 days overdue as of September 30, 2021, and there was one commercial mortgage loan more than 90 days overdue, which was also in foreclosure as further described below, as of December 31, 2020. As of September 30, 2021, the unpaid principal balance was $ 0.6 million and the recorded investment was $ 0.6 million in the loan that was more than 90 days overdue. There were no commercial mortgage loans in foreclosure as of September 30, 2021, and there was one commercial mortgage loan in foreclosure as of December 31, 2020. In the second quarter of 2021, the loan that had been in foreclosure on December 31, 2020 was cured, with all prior principal and interest due paid to a current status. As of December 31, 2020, the recorded investment in this loan was $ 0.6 million with an unpaid principal balance of $ 0.8 million. 5. Investment Securities As of September 30, 2021 investment securities were comprised of non‑agency RMBS and Freddie Mac and Fannie Mae “whole pool agency RMBS” (together, “RMBS”), commercial mortgage backed securities (“CMBS”), and U.S. Treasury securities as presented in the condensed consolidated balance sheet. As of December 31, 2020, investment securities were comprised of non‑agency RMBS, CMBS, and U.S. Treasury securities in the condensed consolidated balance sheet. The U.S. Treasury securities held by the Company as of September 30, 2021 and December 31, 2020 matured on October 21, 2021 and January 19, 2021, respectively. The Company recognized a nominal amount of accretion on U.S. Treasury securities for the three and nine months ended September 30, 2021 and 2020, respectively. 11 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) The following table sets forth a summary of RMBS and CMBS at cost as of September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 (in thousands) RMBS $ 617,841 $ 151,222 CMBS $ 11,221 $ 8,857 The following table sets forth certain information about the Company’s investments in RMBS and CMBS as of September 30, 2021 and December 31, 2020: Real Estate Securities at Fair Value Securities Sold Under Agreement to Repurchase Allocated Capital September 30, 2021: (in thousands) AOMT RMBS (1) Senior $ 4,607 $ ( 5,994 ) $ ( 1,387 ) Mezzanine 2,185 ( 1,633 ) 552 Subordinate 80,201 — 80,201 Interest Only/Excess 18,579 — 18,579 Total AOMT RMBS $ 105,572 $ ( 7,627 ) $ 97,945 Other Non-Agency RMBS Subordinate $ 10,406 $ — $ 10,406 Interest Only/Excess 3,062 — 3,062 Total Other Non-Agency RMBS $ 13,468 $ — $ 13,468 Whole Pool Agency RMBS Fannie Mae $ 250,832 $ ( 238,250 ) $ 12,582 Freddie Mac 251,798 ( 243,410 ) 8,388 Whole Pool Total Agency RMBS $ 502,630 $ ( 481,660 ) $ 20,970 Total RMBS $ 621,670 $ ( 489,287 ) $ 132,383 AOMT CMBS Subordinate $ 7,841 $ — $ 7,841 Interest Only/Excess 3,508 — 3,508 Total AOMT CMBS $ 11,349 $ — $ 11,349 (1) AOMT RMBS held as of September 30, 2021 included both retained tranches of securitizations in which the Company participated within the purview of Angel Oak Mortgage Trust I (“AOMT”) and additional AOMT securities purchased in secondary market transactions. 12 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) December 31, 2020: Real Estate Securities at Fair Value Securities Sold Under Agreement to Repurchase Allocated Capital (in thousands) AOMT RMBS (1) Senior $ 11,477 $ ( 11,936 ) $ ( 459 ) Mezzanine 2,207 ( 1,633 ) 574 Subordinate 78,806 ( 15,104 ) 63,702 Interest Only/Excess 31,842 — 31,842 Total AOMT RMBS $ 124,332 $ ( 28,673 ) $ 95,659 Other Non-Agency RMBS Senior $ 6,820 $ — $ 6,820 Subordinate 18,784 — 18,784 Total Other Non-Agency RMBS $ 25,604 $ — $ 25,604 Total RMBS $ 149,936 $ ( 28,673 ) $ 121,263 AOMT CMBS Subordinate $ 5,766 $ — $ 5,766 Interest Only/Excess 3,030 — 3,030 Total AOMT CMBS $ 8,796 $ — $ 8,796 (1) AOMT RMBS held as of December 31, 2020 included both retained tranches of AOMT securitizations in which the Company participated and additional AOMT securities purchased in secondary market transactions. The following table sets forth certain information about the Company’s investments in U.S. Treasury Bills as of September 30, 2021 and December 31, 2020: Date Face Value Unamortized Discount, net Amortized Cost (1) Unrealized Loss Fair Value Net Effective Yield ($ in thousands) September 30, 2021 $ 80,000 $ — $ 80,000 $ — $ 80,000 2.00 basis points December 31, 2020 $ 150,000 $ ( 3 ) $ 149,997 $ ( 2 ) $ 149,995 6.25 basis points (1) Cost and amortized cost of U.S. Treasury Bills is substantially equal, due to the short length of time until maturity on these financial instruments. 6. Notes Payable The Company has the ability to finance residential and commercial whole loans, utilizing lines of credit from various counterparties, as further described below. Outstanding borrowings bear interest at floating rates depending on the lending counterparty, the collateral pledged, and the rate in effect for each interest period, as the same may change from time to time at the end of each interest period. Some loans include upfront fees, fees on unused balances, covenants and concentration limits on types of collateral pledged; all vary based on the counterparty. 13 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) The following table sets forth the details of all the lines of credit available to the Company and drawn amounts for whole loan purchases as of September 30, 2021 and December 31, 2020: Drawn Amount Line of Credit Facility Limit Base Interest Rate Interest Rate Spread September 30, 2021 December 31, 2020 ($ in thousands) Barclays Bank PLC (1) $ 400,000 1 month or 3 month LIBOR 1.70 % - 3.50 % $ 104,644 N/A Nomura Corporate Funding Americas, LLC (2) $ 300,000 3 month LIBOR 1.70 % - 3.50 % $ 101,210 $ 8,011 Deutsche Bank, AG (3) $ 250,000 1 month LIBOR 2.00 % - 3.25 % $ 74,552 $ 34,905 Goldman Sachs Bank USA (4) $ 200,000 3 month LIBOR 2.25 % $ 194,959 N/A Banc of California, National Association (5) $ 50,000 1 month LIBOR 2.50 % - 3.13 % $ 38,498 $ 38,989 Veritex Community Bank (6) $ 50,000 1 month LIBOR 2.30 % $ 36,889 N/A Total $ 1,250,000 $ 550,752 $ 81,905 (1) On September 20, 2021, the Company entered into a $ 400.0 million repurchase facility with Barclays Bank PLC which expires on September 20, 2022. (2) On August 6, 2021, this facility was amended to extend the expiration date from December 3, 2021 to August 5, 2022, add the one-month LIBOR as a base interest rate for certain loans, and change the interest rate spread to 1.70 % (from 1.75 %) to 3.50 %. (3) On June 21, 2021, this facility was amended to increase the facility limit from $ 150.0 million to $ 250.0 million. This facility expires on February 11, 2022. (4) The master repurchase agreement with Goldman Sachs Bank USA, was entered into on March 5, 2021, and expires on March 5, 2022. (5) This agreement expires on March 16, 2022. (6) On August 16, 2021, the Company entered into a financing facility with Veritex Community Bank, which expires on August 16, 2023. 7. 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 was substantially comprised of margin collateral for securities sold under agreements to repurchase as of each of September 30, 2021 and December 31, 2020, respectively. 14 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) The following table summarizes certain characteristics of the Company’s repurchase agreements as of September 30, 2021 and December 31, 2020: September 30, 2021 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) RMBS 489,287 0.11 % 14 Total $ 489,287 0.11 % 14 December 31, 2020 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) U.S. Treasury Bills $ 149,618 0.25 % 19 RMBS 28,673 1.40 % 19 Total $ 178,291 0.44 % 19 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. 8. 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, 2021 included both “To be Announced” forward-settling of mortgage-backed securities trades (“TBAs”) and interest rate futures contracts, while the derivative investments as of December 31, 2020 were solely comprised of interest rate futures contracts. The Company uses interest rate futures as economic hedges to hedge a portion of its interest rate risk exposure. Interest rate risk is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, as well as other factors. The Company’s credit risk with respect to economic hedges is the risk of default on its investments that result from a borrower’s or counterparty’s inability or unwillingness to make contractually required payments. The Company may at times hold TBAs in order to mitigate its interest rate risk on certain specified mortgage-backed securities. Amounts or obligations owed by or to the Company are subject to the right of set-off with the TBA counterparty. As part of executing these trades, the Company may enter into agreements with its TBA counterparties that govern the transactions for the TBA purchases or sales made, including margin maintenance, payment and transfer, events of default, settlements, and various other provisions. Changes in the value of derivatives designed to protect against mortgage-backed securities fair value fluctuations, or economic hedging gains and losses, are reflected in the tables below. All realized and unrealized gains and losses on derivative contracts are recognized in earnings, in “net realized loss on derivative contracts, RMBS, CMBS, and mortgage loans” for realized losses, and “net unrealized gain (loss) on derivative contracts and mortgage loans” for unrealized gains and losses. Unrealized appreciation on futures contracts and unrealized appreciation on TBAs is included in “other assets” on the condensed consolidated balance sheets when an unrealized appreciation position exists. The Company considers the notional amounts, categorized by primary underlying risk, to be representative of the volume of its derivative activities. 15 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) The following table sets forth the derivative instruments presented on the condensed consolidated balance sheets and notional amounts as of September 30, 2021 and December 31, 2020: Notional Amounts As of: Derivatives Not Designated as Hedging Instruments Number of Contracts Assets Liabilities Long Exposure Short Exposure ($ in thousands) September 30, 2021 Futures contracts 8,209 $ 2,421 $ — $ — $ 820,900 September 30, 2021 TBAs N/A $ 1,120 $ — $ — $ 697,523 December 31, 2020 Futures contracts 1,295 $ — $ ( 198 ) $ — $ 129,500 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, 2021 and September 30, 2020 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, 2021 Futures contracts $ 39 $ 1,666 Three Months Ended September 30, 2021 TBAs $ ( 5,378 ) $ 1,305 Nine Months Ended September 30, 2021 Futures contracts $ ( 431 ) $ 2,678 Nine Months Ended September 30, 2021 TBAs $ ( 7,822 ) $ 1,120 Derivatives Not Designated as Hedging Instruments Net Realized Losses on Derivative Instruments Net Change in Unrealized Depreciation on Derivative Instruments (in thousands) Three Months Ended September 30, 2020 Futures contracts $ ( 88 ) $ 101 Nine Months Ended September 30, 2020 Futures contracts $ ( 14,127 ) $ ( 75 ) 9. 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, 2021, our valuation policy and processes had not changed from those described in our consolidated financial statements for the year ended December 31, 2020 included in the Prospectus. Included in Note 10 to the Consolidated Financial Statements for the year ended December 31, 2020 is a more detailed description of our 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. 16 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) The following table sets forth information about the Company’s financial assets measured at fair value as of September 30, 2021 (1) : Level 1 Level 2 Level 3 Total Assets, at fair value (in thousands) Residential mortgage loans $ — $ 715,691 $ 7,448 $ 723,139 Residential mortgage loans in securitization trust — 318,965 847 319,812 Commercial mortgage loans — 7,429 507 7,936 Investments in securities Non-Agency RMBS (2) — 119,040 — 119,040 Agency whole pool loan securities — 502,630 — 502,630 AOMT CMBS (2) — 11,349 — 11,349 U.S. Treasury Bills 80,000 — — 80,000 Unrealized appreciation on futures contracts (3) 2,421 — — 2,421 Unrealized appreciation on TBAs (4) 1,120 — — 1,120 Total assets at fair value $ 83,541 $ 1,675,104 $ 8,802 $ 1,767,447 (1) As of September 30, 2021, there were no financial liabilities measured at fair value. (2) Non‑Agency RMBS held as of September 30, 2021 included both retained tranches of 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 September 30, 2021 were comprised of retained tranches of AOMT securitizations. (3) “Unrealized appreciation on futures contracts” is included in “other assets” on the condensed consolidated balance sheet. (4) “Unrealized appreciation on TBAs” is included in “other assets” on the condensed consolidated balance sheet. 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. All unrealized gains and losses arising from valuation changes in residential and commercial mortgage loans are recognized in net income for the periods presented. 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 September 30, 2021: 17 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) Input Values Asset Fair Value Unobservable Input Range Average Residential mortgage loans, at fair value $ 7,448 Prepayment rate (annual CPR) — % - 20.71 % 5.43 % Default rate 2.86 % - 29.32 % 16.21 % Loss severity ( 20.31 )% - 37.30 % ( 0.23 )% Expected remaining life 0.70 - 2.73 years 1.84 years Residential mortgage loans in securitization trust, at fair value $ 847 Prepayment rate (annual CPR) 15.61 % - 21.67 % 18.64 % Default rate 22.83 % - 23.75 % 23.29 % Loss severity 10.00 % 10.00 % Expected remaining life 1.20 - 1.73 years 1.47 years Commercial mortgage loans, at fair value $ 507 Loss severity ( 25.00 )% ( 25.00 )% Sale or Liquidation timeline 42 - 53 months 42 - 53 months The following table sets forth information about the Company’s financial assets and liabilities measured at fair value as of December 31, 2020: Level 1 Level 2 Level 3 Total Assets, at fair value (in thousands) Residential mortgage loans $ — $ 128,897 $ 13,133 $ 142,030 Commercial mortgage loans — 6,859 607 7,466 Investments in securities Non-Agency RMBS (1) — 149,936 — 149,936 AOMT CMBS (1) — 8,796 — 8,796 U.S. Treasury Bills 149,995 — — 149,995 Total assets at fair value $ 149,995 $ 294,488 $ 13,740 $ 458,223 Liabilities, at fair value Unrealized depreciation on futures contracts $ 198 $ — $ — $ 198 Total liabilities at fair value $ 198 $ — $ — $ 198 (1) Non‑Agency RMBS held as of December 31, 2020 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, 2020 was comprised of retained tranches of AOMT securitizations. 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. All unrealized gains and losses arising from valuation changes in residential and commercial mortgage loans are recognized in net income for the periods presented. 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, 2020: 18 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) Input Values Asset Fair Value Unobservable Input Range Average Residential mortgage loans, at fair value $ 13,133 Prepayment rate (annual CPR) — % - 15.77 % 5.95 % Default rate 5.58 % - 24.79 % 16.80 % Loss severity ( 13.21 )% - 29.31 % 3.29 % Expected remaining life 0.70 - 2.42 years 1.87 years Commercial mortgage loans, at fair value $ 607 Loss severity ( 16.75 )% ( 16.75 )% Sale or Liquidation timeline 15 - 23 months 15 - 23 months 10. Related Party Transactions Residential Mortgage Loan Purchases On October 1, 2018, the Company entered into separate Mortgage Loan Purchase and Servicing Agreements with each of Angel Oak Home Loans, LLC, Angel Oak Prime Bridge, LLC, and Angel Oak Mortgage Solutions, LLC (together the “Mortgage Companies”), all of which are affiliated with the Manager. These agreements provide the framework pursuant to which the Company has agreed to purchase from the Mortgage Companies certain fixed and adjustable‑rate residential, first and second lien mortgage loans, all of which are underwritten to predetermined guidelines. 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. As part of each agreement, the Company purchases the mortgage loans on a servicing released basis. The Company also has an agreement with Angel Oak Prime Bridge, LLC whereby the Company purchases the mortgage loans on a servicing retained basis. In accordance with the Manager’s Inter‑Affiliate Transaction Policy, various functional areas within the Manager, including a valuation sub‑committee, risk management, legal, and the independent members of the Board of Directors of the Company, regularly review the loan purchase activities between the Company and the Mortgage Companies. The residential mortgage loans are loans on residences located in various states with a concentration in California, Florida, Georgia, and Texas. The following table sets forth certain financial information pertaining to whole loans purchased from affiliates during the year-to-date or year, respectively, and held as of year-to-date / year end: Period-End/Year-End Amount of Loans Purchased from Affiliates for the period/as of Number of Loans Purchased from Affiliates for the period/as of Number of Loans Purchased from Affiliates Held as of ($ in thousands) September 30, 2021 $ 751,416 1,641 1,802 December 31, 2020 $ 423,172 950 273 Commercial Mortgage Loan Purchases The Company entered into separate Loan Purchase Agreements with each of Cherrywood Mortgage, LLC and Angel Oak Commercial Bridge, LLC, each of which is affiliated with the Manager. The agreements provide the framework pursuant to which the Company agrees to purchase from Cherrywood Mortgage, LLC and Angel Oak Commercial Bridge, LLC certain commercial mortgage loans which are underwritten to predetermined guidelines. 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. In accordance with the Manager’s Inter‑Affiliate Transaction Policy, various functional areas within the Manager, including a valuation sub‑committee, risk management, legal and the independent members of the Board of Directors of the Company, regularly review the loan purchase activities between the Company and Cherrywood Mortgage, LLC and Angel Oak Commercial Bridge, LLC. Commercial mortgage loans are loans on commercial properties which are substantially comprised of an educational facility and retail properties, located in various states with a concentration in Georgia and Montana. The following table sets forth certain financial information pertaining to whole loans purchased from affiliates during the year-to-date or year, respectively, and held as of year-to-date / year end: 19 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) As of and for the Year-to-Date/Year Ended: Amount of Loans Purchased from Affiliates during the Year-to-Date/Year Number of Loans Purchased from Affiliates during the Year-to-Date/Year Number of Loans Purchased from Affiliates Held as of Year-to-Date/Year End: ($ in thousands) September 30, 2021 $ — — 7 December 31, 2020 $ 26,334 30 12 Pre-IPO Management Fee A pre-IPO management agreement (the “Pre-IPO Management Agreement”) existed among the Company, the Manager, and Angel Oak Mortgage Fund, LP (“Angel Oak Mortgage Fund”), the Company’s sole common stockholder prior to the IPO. Per the Pre-IPO Management Agreement, on a quarterly basis in advance, the Company paid the Manager an aggregate, fixed management fee equal to 1.5 % per annum of the total Actively Invested Capital (as defined in the Pre-IPO Management Agreement) of the limited partners in Angel Oak Mortgage Fund. The Pre-IPO Management Agreement terminated on June 20, 2021 in connection with the IPO. Post-IPO Management Fee On and after June 21, 2021, the post-IPO management agreement (the “Management Agreement”) took effect among the Company, the Operating Partnership, and the Manager. Per the Management Agreement, on a quarterly basis in arrears, the Company shall pay the Manager an aggregate, fixed management fee equal to 1.5 % per annum of the Company’s Equity (as defined in the Management Agreement). The Management Agreement was effective for the last 10 days of June 2021, and the additional management fee incurred during the 10 days following the completion of the IPO was de minimis. 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. Transactions by Affiliates Regarding the Company’s IPO The Company’s IPO was completed on June 21, 2021. The Company’s Manager purchased $ 6.0 million in stock at the IPO price of $ 19.00 per share, which was delivered on June 21, 2021. Angel Oak Capital Advisors, LLC, an affiliate of the Company’s Manager, agreed to pay the underwriting discounts and commissions in connection with the IPO. Such underwriting discounts and commissions were $ 8.2 million. Angel Oak Capital Advisors, LLC also agreed to pay all of the Company’s expenses incurred in connection with the IPO. Such expenses were $ 4.4 million. 11. 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, 2021, the Company was not aware of any legal claims that could materially impact its financial condition. As of September 30, 2021, the Company had no unfunded commitments. 12. Equity and Earnings per Share (“EPS”) In the calculations of basic and diluted earnings per common share for the three and nine months ended September 30, 2021, the Company included participating securities, which are certain equity awards that have non-forfeitable dividend participation rights, as it was determined that the two-class method was more dilutive than the alternative treasury stock method for these shares. 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 each of the three months and nine months ended September 30, 2021, no outstanding equity awards were antidilutive. 20 Angel Oak Mortgage, 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 and nine months ended September 30, 2021: Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 (in thousands, except share data) Basic Earnings per Common Share: Net income allocable to common stockholders $ 6,340 $ 18,045 Basic weighted average common shares outstanding 24,999,891 19,190,827 Basic earnings per common share $ 0.25 $ 0.94 Diluted Earnings per Common Share: Net income allocable to common stockholders $ 6,340 $ 18,045 Net effect of dilutive equity awards 470,335 175,852 Diluted weighted average common shares outstanding 25,470,226 19,366,679 Diluted earnings per common share $ 0.25 $ 0.93 Effect of Stock Split and Stock Dividend in Conjunction with the IPO during the nine months ended September 30, 2021 In conjunction with the IPO, the Company declared a stock split that resulted in 15,723,050 being owned by that sole common stockholder, who then distributed its stock in the Company to its investors. As a result of the stock split, 15,724,050 shares of common stock were outstanding as of June 21, 2021 (both outstanding and weighted average outstanding), and the related share data and earnings per share calculations include the share amounts that have been retroactively restated accordingly for the calculations of earnings per share during that time period for the nine months ended September 30, 2021. Basic and Diluted EPS for the three and nine months ended September 30, 2020 For the three and nine months ended September 30, 2020, basic and diluted earnings per share were equivalent as there were no potentially dilutive securities outstanding. For the three and nine months ended September 30, 2020, 1,000 shares of common stock were outstanding (both outstanding and weighted average outstanding), all of which were held by Angel Oak Mortgage Fund, LP, the Company’s sole common stockholder prior to the IPO. These shares have been retroactively restated accordingly as described above for the calculations of earnings per share for the three and nine months ended September 30, 2020. 13. Equity Compensation Plans On June 22, 2021, we established our sole equity compensation plan, the 2021 Equity Incentive Plan (the “Plan”), with 2,125,000 shares initially available for grant. As of September 30, 2021, 1,651,316 shares of common stock were available for grant under the Plan, as on June 21, 2021, we granted 473,684 shares in restricted stock awards, for which the sole restriction to be satisfied is vesting over a period over one to three years . There were no forfeitures during the three and nine months ended September 30, 2021. Compensation expense for the three and nine months ended September 30, 2021 related to these awards was $ 0.8 million and $ 0.9 million, respectively. The Company recognizes compensation expense using the straight-line method. The unamortized compensation expense of the restricted stock awards issued under the Plan totaled approximately $ 8.1 million as of September 30, 2021. As of December 30, 2020, and prior to the establishment of the Plan, there were no equity compensation plans in existence, and therefore, no such compensation costs were incurred during the three and nine months ended September 30, 2020. 14. Subsequent Events Dividend Declared On November 8, 2021, the Company declared a dividend of 36 cents per share of common stock, to be paid on November 30, 2021 to common stockholders of record as of November 22, 2021. 21