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, Inc. The following should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto. References herein to “the Company,” “we,” “us,” or “our” refer to Angel Oak Mortgage, Inc. and its subsidiaries unless the context requires otherwise. 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, 2021 (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 impact of the ongoing COVID-19 pandemic; • the effects of adverse conditions or developments in the financial markets and the economy upon our ability to acquire non-qualified residential mortgage (“non-QM”) loans sourced from Angel Oak’s proprietary mortgage lending platform, Angel Oak Mortgage Lending, and other target assets; • the level and volatility of prevailing interest rates and credit spreads; • changes in our industry, inflation, interest rates, the debt or equity markets, the general economy (or in specific regions) or the residential real estate finance and real estate markets specifically; • changes in our business strategies or target assets; • 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 platforms; • the ability of our Falcons I, LLC (the “Manager”) to locate suitable investments for us, manage our portfolio, and implement our strategy; • 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; • our ability to profitably execute securitization transactions; • 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 our Company, our Manager, or Angel Oak; • the availability of qualified personnel; 22 • conflicts with Angel Oak, including our Manager and its personnel, including our officers, and entities managed by Angel Oak; • 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, escalation of military conflicts (such as the recent 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 collectively 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. General Angel Oak Mortgage, Inc. is a publicly-traded REIT 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 operates through wholesale and retail channels and has a national origination footprint. 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 the Manager, 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 Capital was established in 2009 and had approximately $13.4 billion in assets under management as of March 31, 2022 across its private credit strategies, public funds, and separately managed accounts, including approximately $9.1 billion of mortgage‑related assets. Angel Oak Mortgage Lending is a market leader in non‑QM loan production and, as of March 31, 2022, had originated over $14.4 billion in total non‑QM loan volume since its inception in 2011. Angel Oak is headquartered in Atlanta and has over 900 employees across its enterprise. Through our relationship with the 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. We have elected to be taxed as a REIT for U.S. federal income tax purposes. We believe that we have been organized and operated, and we intend to continue to operate in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). Our qualification as a REIT, and maintenance of such qualification, will depend 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, 23 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 of June 17, 2021. We expect to derive our returns primarily from the difference between the interest we earn on loans we make 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 The 2022 macroeconomic environment for the first three months of the year appeared more challenging than that of the 2021 full-year macroeconomic environment. Major challenges to the U.S. economy in 2022 involved continued supply chain issues, labor shortages, and an inflationary environment exacerbated by the military conflict between Ukraine and Russia and the economic sanctions related thereto. Interest rates have increased in 2022, which has resulted in a slowdown of mortgage originations and refinancing activity, as the 30-year mortgage rate average exceeded 5% by the end of March 2022, up from approximately 3% in December 2021. The availability of housing stock in many areas of the U.S. has remained low, and supply chain issues continue to constrain home building in many areas of the U.S., as raw materials are, in some cases, unavailable for extended periods of time. A slowdown in homeowner prepayment activities (including refinancing existing mortgages, as referred to above) may have a positive impact on some of the bonds that we hold from older securitization transactions, as we typically hold the lower junior and XS (interest only) tranches of bonds from a securitization transaction, and the lack of prepayment activity within a securitization transaction results in more interest income available to be allocated to the XS bonds. On March 16, 2022, the Federal Reserve Bank of the U.S. (the “Fed”) approved a 25 basis point increase to the federal funds rate, the first increase to the rate in nearly three years. In addition, the Fed approved a 50 basis point increase to the federal funds rate on May 5, 2022. An increase in the federal funds rate generally has the effect of increasing borrowing rates for all types of consumer credit, including mortgages. The Fed has also indicated that it plans to continue to increase interest rates in the near term. We believe that a further increase in interest rates from the previous historically low levels is unlikely to significantly affect demand for non-QM mortgages; however, an increase in interest rates generally causes interest rate spreads to widen, which may negatively impact the valuation of our whole loan portfolio, as wider interest rate spreads generally cause a decrease in the value of whole loans originated at lower interest rates. Our whole loan portfolio was affected in this manner during the first quarter of 2022, with unrealized losses incurred on our whole loan portfolio, with the size of the portfolio magnifying the unrealized loss effect. These unrealized losses were partially offset by our economic hedges in interest rate futures contracts and “To be Announced” forward-settling of mortgage-backed securities trades (“TBAs”). Although we currently have unrealized losses in our whole loan portfolio, which may continue as interest rate spreads widen, given the Fed’s planned further interest rate increases, holding whole loans originated at higher interest rates generally has the effect of increasing our net interest income, resulting in prepayment speeds likely slowing for existing securitization transactions, which will also increase our net interest income as we primarily hold junior and interest only tranches of the securitized bonds that we have issued. Our investment performance Our non-QM whole loan portfolio experienced unrealized losses on the portfolio during the first three months of 2022, which were driven by mark-to-market losses due to yield spreads widening. The residential mortgage-backed securities (“RMBS”) portfolio and commercial mortgage-backed securities (“CMBS”) portfolio results also included mark-to-market losses on the valuation of this asset class. Realized gains on our TBA investments and interest rate futures partially offset these unrealized mark-to-market losses. The non-QM portfolio unrealized losses and the realized gains of the TBAs and interest rate futures are reflected in net income, while the RMBS and CMBS portfolios’ unrealized losses are reflected in other comprehensive income. Purchases of whole loans in the first quarter of 2022 and our 2022 securitizations During the quarter ended March 31, 2022, we purchased $675.6 million in residential whole loans. On February 11, 2022, we issued one new securitization, AOMT 2022-1, securitizing a total of $537.6 million of unpaid principal balance of seasoned residential non-QM mortgage loans. The issuance of AOMT 2022-1, along with our 2021 issuances of AOMT 2021-4 and AOMT 2021-7, securitized a total of $1.2 billion of unpaid principal balance of seasoned residential non-QM mortgage loans. We issued these securitizations as the sole participant in the securitization. We own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds. Given the accounting rules surrounding these types of transactions, we have consolidated these securitizations on our condensed consolidated balance sheets, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheets for the period and year ended March 31, 2022 and December 31, 2021. Our securitizations prior to 2021 were securitization transactions for which we did not meet the accounting rules to be considered a “primary beneficiary” of the applicable securitization vehicle, and therefore, for these prior securitizations, the bonds retained in the securitization are held on our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021. 24 New whole loan financing facilities On April 13, 2022, we entered into a new financing facility, which afforded us $340.0 million of additional borrowing capacity, for a total capacity of $1.6 billion with which to execute our core strategy of purchasing whole loans and retaining them until securitized. 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 and book value per share. 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 required to distribute at least 90% of our annual REIT taxable income and to pay tax at regular corporate rates 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 will use Distributable Earnings to determine the incentive fee payable to the Manager pursuant to the management agreement (the “Management Agreement”) that we and Angel Oak Mortgage Operating Partnership, LP (the “Operating Partnership”) entered into with the Manager upon the completion of our initial public offering (“IPO”) on June 21, 2021. For information on the fees that are payable to the Manager under the Management Agreement, see the Annual Report on Form 10-K. 25 Distributable Earnings were approximately $37.3 million and $4.8 million for the three months ended March 31, 2022 and 2021, respectively. The table below sets forth a reconciliation of net (loss) income allocable to common stockholder(s), calculated in accordance with GAAP, to Distributable Earnings for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 March 31, 2021 (in thousands) Net (loss) income allocable to common stockholder(s) $ (43,545) $ 9,483 Adjustments: Net other-than-temporary credit impairment losses — — Net unrealized (gains) losses on derivatives (15,326) (1,610) Net unrealized (gains) losses on residential loans in securitization trusts and non-recourse securitization obligation 30,210 — Net unrealized (gains) losses on residential loans 64,587 (2,892) Net unrealized (gains) losses on commercial loans 496 (142) Net unrealized (gains) losses on financial instruments at fair value — — (Gains) losses on extinguishment of debt — — Non-cash equity compensation expense 871 — Incentive fee earned by the Manager — — Realized gains (losses) on terminations of interest rate swaps — — Total other non-recurring (gains) losses — — Distributable Earnings $ 37,293 $ 4,839 26 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, 2022 and 2021: Three Months Ended March 31, 2022 March 31, 2021 ($ in thousands) Annualized Distributable Earnings $ 149,171 $ 19,356 Average total stockholder(s)’ equity $ 456,415 $ 281,481 Distributable Earnings Return on Average Equity 32.7 % 6.9 % Book Value per Share The following table sets forth the calculation of our book value per share as of March 31, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 (in thousands except for share and per share data) Total stockholders’ equity $ 421,436 $ 491,390 Preferred stock (101) (101) Stockholders’ equity, net of preferred stock $ 421,335 $ 491,289 Number of shares outstanding at period end 25,085,796 25,227,328 Book value per share $ 16.80 $ 19.47 Results of Operations Our results of operations presented herein for the three months ended March 31, 2021 do not reflect the expenses typically associated with being a public company for the reporting period, including increased insurance, legal, and accounting fees, full periods of equity compensation expense, expenses incurred in complying with the reporting and other requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), and increased expense of the base management fee to our Manager as a result of differences in the way fees and expense reimbursements are calculated under the Management Agreement as compared to the pre-IPO management agreement as among us, our Manager and Angel Oak Mortgage Fund, LP (“Angel Oak Mortgage Fund”), our sole common stockholder prior the IPO (the “pre-IPO management agreement”). Additionally, pursuant to the Management Agreement, we are required to reimburse our Manager for its operating expenses, including third‑party expenses, incurred on our behalf; and our Manager is entitled to reimbursement for costs of the wages, salaries, and benefits incurred by our Manager for our dedicated Chief Financial Officer and Treasurer and a proportionate amount of the costs of the wages, salaries, and benefits of our Chief Executive Officer and President (who, after the completion of the IPO, has dedicated a substantial majority of his business time to us) based on the percentage of his business time spent on our matters, and any other dedicated or partially dedicated employees based on the percentage of each such person’s working time spent on matters related to us. 27 Three Months Ended March 31, 2022 and 2021 The following table sets forth a summary of our results of operations for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 Three Months Ended March 31, 2021 (in thousands) INTEREST INCOME, NET Interest income $ 27,109 $ 10,033 Interest expense 10,170 832 NET INTEREST INCOME 16,939 9,201 REALIZED AND UNREALIZED (LOSSES) GAINS, NET Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS 26,416 (2,288) Net unrealized (loss) gain on mortgage loans and derivative contracts (80,181) 4,518 TOTAL REALIZED AND UNREALIZED (LOSSES) GAINS, NET (53,765) 2,230 EXPENSES Operating expenses 3,784 523 Operating expenses incurred with affiliate 855 439 Due diligence and transaction costs 770 64 Stock compensation 871 — Securitization costs 2,019 — Management fee incurred with affiliate 1,873 918 Total operating expenses 10,172 1,944 INCOME BEFORE INCOME TAXES (46,998) 9,487 Income tax benefit (3,457) — NET (LOSS) INCOME (43,541) 9,487 Preferred dividends (4) (4) NET (LOSS) INCOME ALLOCABLE TO COMMON STOCKHOLDER(S) $ (43,545) $ 9,483 Other comprehensive (loss) income (12,987) 529 TOTAL COMPREHENSIVE (LOSS) INCOME $ (56,532) $ 10,012 28 Net Interest Income The following table sets forth the components of net interest income for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 March 31, 2021 (in thousands) Interest income Interest income / expense Average balance Interest income / expense Average balance Residential mortgage loans $ 11,981 $ 1,108,704 $ 2,550 $ 182,652 Residential mortgage loans in securitization trusts 10,418 881,294 — — Commercial mortgage loans 302 19,061 128 7,552 RMBS 4,108 350,236 6,801 165,588 CMBS 300 10,499 549 10,389 U.S. Treasury Bills — 149,998 3 37,499 Other interest income — 57,955 2 35,289 Total interest income 27,109 10,033 Interest expense Notes payable 5,497 918,536 725 113,678 Non-recourse securitization obligation, collateralized by residential mortgage loans 4,583 837,504 — — Repurchase facilities 90 356,525 107 65,221 Total interest expense 10,170 832 Net interest income $ 16,939 $ 9,201 Net interest income for the three months ended March 31, 2022 and 2021 was $16.9 million and $9.2 million, respectively. Net interest income increased due to the additional average portfolio balance in the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to the composition of the portfolio during March 31, 2022 having a higher average balance of residential mortgage loans and residential mortgage loans in securitization trusts, along with a higher RMBS average balance, which increased net interest income. These average asset balances were partially offset by higher average balances in related liabilities in the three months ended March 31, 2022 as compared to the same period in 2021, which resulted in increased interest expense during the comparative period. Total Realized and Unrealized (Losses) Gains The components of total realized and unrealized (losses) gains, net for the three months ended March 31, 2022 and 2021 are set forth as follows: Three Months Ended March 31, 2022 Three Months Ended March 31, 2021 (in thousands) Unrealized loss on securitization, net of unrealized gain on non-recourse securitization obligation (30,240) — Realized loss on RMBS, net (5,042) (3,976) Realized loss on CMBS (42) (227) Realized gain on interest rate futures 19,684 2,076 Realized and unrealized gain (loss) on TBAs 15,462 (440) Realized and unrealized (loss) gain on residential mortgage loans (67,112) 2,837 Realized and unrealized (loss) gain on commercial mortgage loans (482) 284 Unrealized appreciation on interest rate futures 14,007 1,676 Total realized and unrealized (losses) gains, net $ (53,765) $ 2,230 For the three months ended March 31, 2022 and 2021, total realized and unrealized gains (losses), net were $(53.8) million and $2.2 million, respectively. During the three months ended March 31, 2022, widening interest rate spreads caused the valuation of residential mortgage loans to decrease, which resulted in an unrealized loss in residential mortgage loans, the losses of which were partially offset by the mark to market of the liability associated with securitized loans held in residential mortgage trusts and realized and unrealized gains on 29 interest rate futures and TBAs. In the three months ended March 31, 2021, realized and unrealized gains on residential mortgage loans and interest rate futures were partially offset by realized loss on RMBS, which was primarily due to prepayment speeds on the junior and interest only bonds that we held. Expenses Operating Expenses For the three months ended March 31, 2022 and 2021, our operating expenses were $3.8 million and $0.5 million, respectively. The increase in operating expenses in the three month period ended March 31, 2022 was due to an increase in costs due to being a public company, including increased insurance, audit, and legal fees. We also experienced an increase in loan administration costs, commensurate with an increase in the number of loans in our portfolio during the comparative period. Operating Expenses Incurred with Affiliate For the three months ended March 31, 2022 and 2021, our operating expenses incurred with affiliate were $0.9 million and $0.4 million, respectively. These expenses were primarily due to the allocated time of partially dedicated employees’ compensation being reimbursed by us, which time allocated to us increased during the comparative periods. Due Diligence and Transaction Costs For the three months ended March 31, 2022 and 2021, our due diligence and transaction costs were $0.8 million and $0.1 million, respectively. The increase in these costs was due to whole loan acquisition diligence costs, which increased over the comparative period as we purchased more whole loans during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. Stock Compensation For the three months ended March 31, 2022, our stock compensation expense was $0.9 million. We did not have any stock compensation expense for the three months ended March 31, 2021 as no grants were made during that period. In connection with the IPO in June 2021, we issued restricted stock awards to key employees of Angel Oak, including our Manager, as well as the independent directors on our Board of Directors. We issued additional restricted stock awards to other key employees on January 1, 2022. Restricted stock awards vest in over one to three years, commencing on the one year anniversary of the grant date. Securitization Costs Securitization costs of $2.0 million were incurred for the three months ended March 31, 2022 in the securitization of AOMT 2022-1. During the comparative period of the three months ended March 31, 2021, we incurred no securitization expense as we did not enter into any securitizations during that period. Management Fee Incurred with Affiliate Prior to the completion of the IPO, we were required to pay the Manager, in cash, a management fee pursuant to a pre-IPO management agreement among us, the Manager and Angel Oak Mortgage Fund, our sole common stockholder prior the IPO (the “pre-IPO management agreement”). The management fee payable under the pre-IPO management agreement was calculated based on the Actively Invested Capital (as defined in the pre-IPO management agreement) of the limited partners in Angel Oak Mortgage Fund, which we believe is reflective of a typical management fee payable by a private investment vehicle. The pre-IPO management agreement terminated on the completion of the IPO, and we and the Operating Partnership subsequently entered into the Management Agreement with the Manager effective as of the completion of the IPO. Pursuant to the Management Agreement, the Manager is entitled to a base management fee, which is calculated based on our Equity (as defined in the Management Agreement), and an incentive fee based on certain performance criteria, as well as a termination fee in certain cases and reimbursement of certain expenses as described in the Management Agreement. For the three months ended March 31, 2022 and 2021, our management fee incurred with affiliate was $1.9 million and $0.9 million, respectively. The increase is due to the increase in our average equity for the three months ended March 31, 2022 as compared to the same period in 2021. 30 Our Portfolio As of March 31, 2022, our portfolio consisted of approximately $2.7 billion of residential mortgage loans, RMBS, and other target assets. The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as of March 31, 2022: Fair Value Collateralized Debt Allocated Capital % of Total Capital Portfolio: ($ in thousands) Residential mortgage loans $ 1,103,773 $ 955,734 $ 148,039 35.1 % Residential mortgage loans in securitization trust 1,077,967 1,031,200 $ 46,767 11.1 % Commercial mortgage loans 20,704 431 20,273 4.8 % Total whole loan portfolio $ 2,202,444 $ 1,987,365 $ 215,079 51.0 % Investment securities RMBS $ 491,287 $ 128,555 $ 362,732 86.1 % CMBS 10,055 — 10,055 2.4 % U.S. Treasury Bills 349,992 348,867 1,125 0.3 % Total investment securities 851,334 $ 477,422 $ 373,912 88.8 % Total investment portfolio $ 3,053,778 $ 2,464,787 $ 588,991 139.8 % Target assets (1) $ 2,703,786 $ 2,115,920 $ 587,866 139.5 % Cash 90,445 — 90,445 21.5 % Other assets and liabilities (2) (258,000) — (258,000) (61.2) % Total $ 2,886,223 $ 2,464,787 $ 421,436 100.1 % (1) “Target assets” as presented above includes the total investment portfolio excluding U.S. Treasury Bills. (2) Substantially comprised of $298.7 million due to broker. 31 As of December 31, 2021, our portfolio consisted of approximately $2.2 billion of residential mortgage loans, RMBS, and other target assets. The following table sets forth additional information regarding our portfolio including the manner in which our equity capital was allocated among investment types, as of December 31, 2021: Fair Value Collateralized Debt Allocated Capital % of Total Capital Portfolio: ($ in thousands) Residential mortgage loans $ 1,061,912 $ 852,961 $ 208,951 42.5 % Residential mortgage loans in securitization trust 667,365 616,557 50,808 10.3 % Commercial mortgage loans 18,664 447 18,217 3.7 % Total whole loan portfolio $ 1,747,941 $ 1,469,965 $ 277,976 56.5 % Investment securities RMBS $ 485,634 $ 360,501 $ 125,133 25.5 % CMBS 10,756 — 10,756 2.2 % U.S. Treasury Bills 249,999 248,750 1,249 0.3 % Total investment securities $ 746,389 $ 609,251 $ 137,138 28.0 % Total investment portfolio $ 2,494,330 $ 2,079,216 $ 415,114 84.5 % Target assets (1) $ 2,244,331 $ 1,830,466 $ 413,865 84.2 % Cash $ 40,801 $ — $ 40,801 8.3 % Other assets and liabilities 35,475 — 35,475 7.2 % Total $ 2,570,606 $ 2,079,216 $ 491,390 100.0 % (1) “Target assets” as presented above includes the total investment portfolio excluding U.S. Treasury Bills. Residential Mortgage Loans The following table sets forth additional information on the residential mortgage loans in our portfolio as of March 31, 2022: Portfolio Range Portfolio Weighted Average ($ in thousands) Unpaid principal balance (“UPB”) $71 - $3,489 $513 Interest rate 2.88% - 9.25% 4.52% Maturity date 10/1/2036 - 3/1/2062 12/21/2052 FICO score at loan origination 521 - 823 735 LTV at loan origination 8% - 95% 70% DTI at loan origination 1.15% - 59.06% 24% Percentage of first lien loans N/A 100% Percentage of loans 90+ days delinquent (based on UPB) N/A 0.60% 32 The following table sets forth additional information on the residential mortgage loans in our portfolio as of December 31, 2021: Portfolio Range Portfolio Weighted Average ($ in thousands) UPB $48 - $3,410 $506 Interest rate 2.75% - 9.25% 4.49% Maturity date 10/1/2036 - 12/1/2061 4/20/2053 FICO score at loan origination 521 - 823 740 LTV at loan origination 12% - 95% 70% DTI at loan origination 1.60% - 59.06% 27% Percentage of first lien loans N/A 100% Percentage of loans 90+ days delinquent (based on UPB) N/A 0.30% The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of March 31, 2022: ($ in thousands) UPB $1,092,291 Number of loans 2,483 Weighted average loan coupon 4.71% Average loan amount 442 Weighted average LTV at loan origination and deal date 70% Weighted average credit score at loan origination and deal date 745 Current 3-month constant prepayment rate (“CPR”) (1) 26% Percentage of loans 90+ days delinquent (based on UPB) 0.1% (1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of March 31, 2022: (1) No state in “Other” represents more than a 3% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of March 31, 2022 . 33 The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2021: ($ in thousands) UPB $642,951 Number of loans 1494 Weighted average loan coupon 4.98% Average loan amount 433 Weighted average LTV at loan origination and deal date 72% Weighted average credit score at loan origination and deal date 741 Current 3-month CPR 35.1 Percentage of loans 90+ days delinquent (based on UPB) 0.13 The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2021: (1) 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, 2021 . 34 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, 2022: 35 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, 2021: 36 The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as of March 31, 2022, 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, 2022: (1) 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, 2022 . 37 The following charts illustrate additional characteristics of the residential mortgage loans in our portfolio that we owned directly as of December 31, 2021, 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, 2021: (1) 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, 2021. 38 Commercial Mortgage Loans The following table provides additional information on the commercial mortgage loans in our portfolio as of March 31, 2022: Portfolio Range Portfolio Weighted Average ($ in thousands) UPB $243 - $4,300 $1,929 Interest rate 5.50% - 8.38% 6.12% Loan term 2.17 - 28.94 years 8.82 years LTV at loan origination 46.7% - 75.0% 38.7% The following table provides additional information on the commercial mortgage loans in our portfolio as of December 31, 2021: Portfolio Range Portfolio Weighted Average ($ in thousands) UPB $244 - $4,300 $1,700 Interest rate 5.75% - 8.38% 6.25% Loan term 1.42 - 28.18 years 8.36 years LTV at loan origination 46.7% - 75.0% 59.8% 39 The following charts illustrate the geographic location of the commercial mortgage loans in our portfolio that we owned directly as of March 31, 2022 and December 31, 2021 (percentages are based on the aggregate unpaid principal balance of such loans): Geographic Diversification of Our Commercial Mortgage Loans as of March 31, 2022: Geographic Diversification of Our Commercial Mortgage Loans as of December 31, 2021: 40 RMBS In March 2019, we participated in our first securitization transaction pursuant to which we contributed to AOMT 2019‑2 non‑QM loans with a carrying value of approximately $255.7 million that we had accumulated and held on our balance sheet. The remaining non‑QM loans that we contributed to AOMT 2019‑2 were purchased from affiliated and unaffiliated entities. We received bonds from AOMT 2019‑2 with a fair value of approximately $55.8 million, including approximately $33.0 million in risk retention securities (representing 5% of each class of the bonds issued as part of the transaction). Additionally, in July 2019, we participated in a second securitization transaction pursuant to which we contributed to AOMT 2019‑4 non‑QM loans with a carrying value of approximately $147.4 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 2019‑4 with a fair value of approximately $16.8 million. Furthermore, in November 2019, we participated in a third securitization transaction pursuant to which we contributed to AOMT 2019‑6 non‑QM loans with a carrying value of approximately $104.3 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 2019‑6 with a fair value of approximately $10.7 million. In June 2020, we participated in a fourth securitization transaction pursuant to which we contributed to AOMT 2020‑3 non‑QM loans with a carrying value of approximately $482.9 million that we had accumulated and held on our balance sheet. The remaining non‑QM loans that we contributed to AOMT 2020‑3 were purchased from an affiliated entity. We received bonds from AOMT 2020‑3 with a fair value of approximately $66.5 million, including approximately $23.0 million in horizontal risk retention securities (representing 5% of the fair value of the securities and other interests issued as part of the transaction). Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in Angel Oak Mortgage Trust I (“AOMT”) securitization transactions is set forth below as of March 31, 2022, unless otherwise stated: AOMT 2019-2 AOMT 2019-4 AOMT 2019-6 AOMT 2020-3 ($ in thousands) UPB of loans $159,331 $156,137 $180,051 $227,962 Number of loans 511 531 668 666 Weighted average loan coupon 7.1 % 7.1 % 6.4 % 5.9 % Average loan amount $312 $294 $270 $342 Weighted average LTV at loan origination and deal date 75 % 73 % 71 % 74 % Weighted average credit score at loan origination and deal date 694 702 715 717 Current 3-month CPR 42.3 % 48.3 % 41.3 % 42.2 % 90+ day delinquency (as a % of UPB) 12.9 % 11.1 % 5.4 % 4.0 % Fair value of first loss piece (1) $13,686 $4,008 $2,277 $26,455 Investment thickness (2) 21.82 % 10.19 % 7.11 % 13.61 % (1) Represents the fair value of the securities we hold in the first loss tranche in each securitization. (2) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization. 41 Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in AOMT securitization transactions is set forth below as of December 31, 2021, unless otherwise stated: AOMT 2019-2 AOMT 2019-4 AOMT 2019-6 AOMT 2020-3 ($ in thousands) UPB of loans $183,489 $184,793 $206,392 $262,383 Number of loans 586 604 743 757 Weighted average loan coupon 7.082 % 7.066 % 6.441 % 5.905 % Average loan amount $313 $306 $278 $347 Weighted average LTV at loan origination and deal date 75 % 73 % 71 % 74 % Weighted average credit score at loan origination and deal date 695 703 716 717 Current 3-month CPR 44.89 % 50.89 % 45.08 % 43.61 % 90+ day delinquency (as a % of UPB) 12.33 % 8.86 % 5.31 % 3.82 % Fair value of first loss piece $13,634 $4,019 $2,334 $26,447 Investment thickness 18.95 % 8.61 % 6.20 % 11.82 % The following table provides certain information with respect to our RMBS portfolio received in AOMT securitization transactions and acquired from other third parties as of March 31, 2022: RMBS Repurchase Debt Allocated Capital AOMT Third Party RMBS Total AOMT Third Party RMBS Total AOMT Third Party RMBS Total (in thousands) Senior $ 1,840 $ — $ 1,840 $ 2,725 $ — 2,725 $ (885) $ — $ (885) Mezzanine 2,158 — 2,158 1,622 — 1,622 536 — $ 536 Subordinate 58,618 6,899 65,517 13,695 1,728 15,423 44,923 5,171 $ 50,094 Interest only / excess 12,111 2,815 14,926 — — — 12,111 2,815 $ 14,926 Whole pool — 406,846 406,846 — 108,785 108,785 — 298,061 $ 298,061 Total $ 74,727 $ 416,560 $ 491,287 $ 18,042 $ 110,513 $ 128,555 $ 56,685 $ 306,047 $ 362,732 The following table provides certain information with respect to our RMBS portfolio received in AOMT securitization transactions and acquired from other third parties as of December 31, 2021: RMBS Repurchase Debt Allocated Capital AOMT Third Party RMBS Total AOMT Third Party RMBS Total AOMT Third Party RMBS Total (in thousands) Senior $ 3,076 $ — $ 3,076 $ 4,089 $ — $ 4,089 $ (1,013) $ — $ (1,013) Mezzanine 2,178 — 2,178 1,631 — 1,631 547 — $ 547 Subordinate 80,058 10,292 90,350 — — — 80,058 10,292 $ 90,350 Interest only / excess 15,052 2,923 17,975 — — — 15,052 2,923 $ 17,975 Whole pool — 372,055 372,055 — 354,781 354,781 — 17,274 $ 17,274 Total $ 100,364 $ 385,270 $ 485,634 $ 5,720 $ 354,781 $ 360,501 $ 94,644 $ 30,489 $ 125,133 42 The following table sets forth information with respect to our RMBS ending balances, at fair value, as of March 31, 2022: Senior Mezzanine Subordinate Interest Only Whole Pool Total (in thousands) Beginning fair value $ 3,076 $ 2,178 $ 90,350 $ 17,975 $ 372,055 $ 485,634 Acquisitions: Secondary market purchases of AOMT securities — — — — — — Third party securities — — — — 298,654 298,654 Effect of principal payments / called deals (1,207) — (24,113) — (250,530) (275,850) IO and excess servicing prepayments — — 2,256 (2,919) — (663) Changes in fair value, net (29) (20) (2,975) (130) (13,334) (16,488) Ending fair value $ 1,840 $ 2,158 $ 65,518 $ 14,926 $ 406,845 $ 491,287 The following table sets forth information with respect to our RMBS ending balances, at fair value, as of December 31, 2021: Senior Mezzanine Subordinate Interest Only Whole Pool Total (in thousands) Beginning fair value $ 18,297 $ 2,207 $ 97,614 $ 31,818 $ — $ 149,936 Acquisitions: Secondary market purchases of AOMT securities — — 2,209 — — 2,209 Third party securities — — 5,122 7,485 1,466,854 1,479,461 Effect of principal payments / called deals (15,029) — (19,576) (3,781) (1,096,112) (1,134,498) IO and excess servicing prepayments — — — (17,355) — (17,355) Changes in fair value, net (192) (29) 4,981 (192) 1,313 5,881 Ending fair value $ 3,076 $ 2,178 $ 90,350 $ 17,975 $ 372,055 $ 485,634 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, 2022 (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, 2022) (1) 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, 2022. The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of December 31, 2021 (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, 2021) (1) 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, 2021. 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 $8.9 million. Certain information regarding the commercial mortgage loans underlying our portfolio of CMBS issued in the AOMT 2020-SBC1 securitization transaction is shown below as of March 31, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 ($ in thousands) UPB of loans $136,791 $140,360 Number of loans 183 189 Weighted average loan coupon 7.4 % 7.4 % Average loan amount $703 $743 Weighted average LTV at loan origination and deal date 58.4 % 58.4 % 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, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 CMBS Repurchase Debt Allocated Capital CMBS Repurchase Debt Allocated Capital (in thousands) Senior $ — $ — $ — $ — $ — $ — Mezzanine — — — — — — Subordinate 7,383 — 7,383 5,766 — 5,766 Interest only / excess 2,672 — 2,672 3,031 — 3,031 Total $ 10,055 $ — $ 10,055 $ 8,797 $ — $ 8,797 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 capital contributions from our investors prior to our IPO, the proceeds from our IPO and concurrent private placement, 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. 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, 2022, we were a party to six loan financing lines, which permitted borrowings in an aggregate amount of up to $1.3 billion. Borrowings under these agreements may be used to purchase whole loans for securitization or loans purchased for long‑term investment purposes. A description of each loan financing line is set forth as follows: Nomura Loan Financing Line. On December 6, 2018, we and one of our subsidiaries entered into a master repurchase agreement with Nomura Corporate Funding Americas, LLC (“Nomura”). We are considered the “Seller” under this agreement. From time to time, we and one of our subsidiaries have amended such master repurchase agreement with Nomura. Pursuant to the agreement, we and our subsidiary may sell to Nomura, and later repurchase, up to $300.0 million aggregate borrowings on mortgage loans. The agreement terminates on August 5, 2022, unless terminated earlier pursuant to the terms of the agreement. However, we are permitted to extend the expiration date by up to 364 additional days, subject to certain conditions being satisfied. The principal amount paid by Nomura for each eligible mortgage loan is based on a percentage of both the market value, unpaid principal balance and acquisition price of the mortgage loan (generally ranging from 65% to 92%, depending on the type of loan and certain other factors and subject to certain other adjustments). Pursuant to the agreement, Nomura retains the right to determine the market value of the mortgage loan collateral for certain mortgage loans in its sole and absolute discretion. Additionally, Nomura 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, we are, or our subsidiary is, required to repay Nomura the adjusted 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) one-month LIBOR or three‑month LIBOR (depending on the type of mortgage loan) and (b) the applicable LIBOR floor, and (2) a spread generally ranging from 1.70% to 3.50% depending on the type of loan. The agreement requires us to maintain various financial and other covenants, such as that: (1) adjusted tangible net worth on an aggregate basis must not be less than the sum of 50% of our adjusted tangible net worth as of the date of the agreement plus 50% of any future capital raised by us; (2) adjusted tangible net worth must not decline more than 25% in any rolling three month period or 35% in any rolling twelve month period; (3) the ratio of indebtedness to adjusted tangible net worth must not exceed 7:1; and (4) liquidity, on an aggregate basis, must exceed the greater of 5% of the aggregate purchase price and $2.0 million. The agreement contains margin call provisions that provide Nomura with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions, Nomura may require us or our subsidiary to transfer cash and/or additional eligible mortgage loans with an aggregate market value 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, material adverse effects, 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 Nomura’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 Nomura and to reimburse Nomura for certain costs and expenses incurred in connection with Nomura’s structuring, management and ongoing administration of the agreement. Banc of California Loan Financing Line. On December 21, 2018, we and our subsidiary entered into a master repurchase agreement with Banc of California, National Association (“Banc of California”). We are considered a “Seller” under this agreement. From time to time, we and one of our subsidiaries have amended such master repurchase agreement with Banc of California. Pursuant to the agreement, we or our subsidiary may sell to Banc of California, and later repurchase, up to $50.0 million aggregate borrowings on mortgage loans. The agreement was amended on March 7, 2022 to terminate on March 16, 2023, unless terminated earlier pursuant to the terms of the agreement. Additionally, the amendment increased the aggregate purchase price limit to $75.0 million from $50.0 million, and beginning March 8, 2022, provided that interest will accrue on any new transactions under the Loan Financing Line at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) plus an additional spread. The principal amount paid by Banc of California for each mortgage loan is based on the lesser of (1) a percentage of the original principal amount of the mortgage loan (ranging from 75% to 97%) and (2) a percentage of its take‑out commitment (97%) or $4.0 million, depending on the loan type. Pursuant to the agreement, Banc of California retains the right to determine the market value of the mortgage loan collateral in its sole discretion. Upon our or our subsidiary’s repurchase of the mortgage loan, we are, or our subsidiary is, required to repay Banc of California the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (1) the greater of (A) a specified minimum rate (ranging from 3.50% to 4.13%) and (B) one‑month LIBOR plus a spread ranging from 2.50% to 3.13%, and (2) in the case of loans with maturities over 364 days, the seasoned spread of 1.0%. As discussed above, the LIBOR reference rate was changed to SOFR beginning March 8, 2022 and going forward. The agreement requires us to maintain various financial and other covenants, which include: (1) a minimum tangible net worth of $40.0 million consolidated; (2) minimum liquidity of $5.0 million; (3) a maximum ratio of total liabilities to tangible net worth of 10:1; and (4) we must attain positive net income, determined in accordance with GAAP, as of the last day of each calendar quarter, commencing with the quarter ended June 30, 2021, for the prior four (4) consecutive fiscal quarters then ending. 46 The agreement contains margin call provisions that provide Banc of California with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions, Banc of California may require us or our subsidiary to transfer cash and/or additional eligible mortgage loans with an aggregate market value 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, material adverse effects, 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 Banc of California’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 Banc of California and to reimburse Banc of California for certain costs and expenses incurred in connection with Banc of California’s structuring, management and ongoing administration of the agreement. Deutsche Bank Loan Financing Line. On February 13, 2020, we and our subsidiary entered into a master repurchase agreement with Deutsche Bank, AG (“Deutsche Bank”). We are considered a “Seller” under this agreement. From time to time, we and one of our subsidiaries have amended such master repurchase agreement with Deutsche Bank. Pursuant to the agreement, we or our subsidiary may sell to Deutsche Bank, and later repurchase, up to $250.0 million aggregate borrowings on mortgage loans. The agreement, as amended previously, was set to terminate on February 11, 2022. On February 4, 2022, the agreement was amended to terminate on February 2, 2024, unless terminated earlier pursuant to the terms of the agreement. Prior to the amendment executed on February 4, 2022, the principal amount paid by Deutsche Bank for each mortgage loan was based on a percentage of the market value, cost‑basis value or unpaid principal balance of the mortgage loan (generally ranging from 60% to 92%, depending on the type of loan and certain other factors and subject to certain other adjustments). Pursuant to the agreement, Deutsche Bank retained the right to determine the market value of the mortgage loan collateral in its sole good faith discretion. Additionally, Deutsche Bank was under no obligation to purchase the eligible mortgage loans we offered to sell to them. Prior to the February 2, 2024 amendment, upon our or our subsidiary’s repurchase of the mortgage loan, we or our subsidiary were required to repay Deutsche Bank the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (1) the greater of (A) 0.00% and (B) one‑month LIBOR and (2) a spread generally ranging from 2.00% to 3.25%. Pursuant to the amendment executed on February 4, 2022, interest will now accrue on any outstanding balance under the Master Repurchase Agreement at a rate based on 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). Previously, interest accrued at a rate based on one-month LIBOR. Additionally, the agreement was also amended to remove any draw fees; and adjust the pricing rate whereby upon the Company’s or the subsidiary’s repurchase of a mortgage loan, the Company or the subsidiary is required to repay Deutsche Bank the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (A) the greater of (i) 0.00% and (ii) Term SOFR (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 spread generally ranging from 2.20% to 3.45%. The agreement requires us to maintain various financial and other covenants, which include: (1) our adjusted tangible net worth must be an amount at least equal to the greater of (A) $100.0 million and (B) 20% of the maximum aggregate purchase price limit; (2) our adjusted tangible net worth on the last day of any calendar quarter shall not decline by (A) 20% or more from the adjusted tangible net worth as of the last day of the immediately prior calendar quarter or (B) 40% or more from the adjusted tangible net worth as of the last day of the calendar quarter that is twelve months prior to such calendar quarter; (3) our liquidity must at least equal the greater of (A) $5.0 million and (B) 3.0% of the outstanding purchase price for such mortgage loans transferred to Deutsche Bank; and (4) our indebtedness to our adjusted tangible net worth must not exceed 5.5:1. The agreement contains margin call provisions that provide Deutsche Bank 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, Deutsche Bank 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 Deutsche Bank’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 Deutsche Bank and to reimburse Deutsche Bank for certain costs and expenses incurred in connection with Deutsche Bank’s structuring, management and ongoing administration of the agreement. Goldman Loan Financing Line. On March 5, 2021, we and our subsidiary entered into a master repurchase agreement with Goldman Sachs Bank USA (“Goldman”). We are considered a “Seller” under this agreement. Pursuant to the agreement, we or our subsidiary may sell to Goldman, and later repurchase, up to $200.0 million aggregate borrowings on mortgage loans. The agreement was extended on March 2, 2022 to terminate on March 5, 2023, unless terminated earlier pursuant to the terms of the agreement. 47 The principal amount paid by Goldman 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 (generally ranging from 75% to 85%, depending on the type of loan), whichever is less. Pursuant to the agreement, Goldman retains the right to determine the market value of the mortgage loan collateral in its sole good faith discretion and in a commercially reasonable manner. The loan financing line is marked‑to‑market at fair value. Additionally, Goldman is under no obligation to purchase the eligible mortgage loans we offer to sell to them. Prior to the January 1, 2022 amendment, upon our or our subsidiary’s repurchase of the mortgage loan, we were, or our subsidiary was, required to repay Goldman the principal amount related to such mortgage loan plus accrued interest generally at a rate based on three‑month LIBOR plus 2.25%. On January 1, 2022, the LIBOR-based index was replaced by reference to the sum of Compounded SOFR and a SOFR adjustment of 20 basis points. Compounded SOFR is determined on a one-month basis and is defined as a daily rate as determined by Goldman to be the “USD-SOFR-Compound” rate as defined in the International Swaps and Derivatives Association, Inc. definitions. The agreement requires us to maintain various financial and other covenants, such as that: (1) our minimum tangible net worth of must not 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 fall below 50% of our tangible net worth as of September 30, 2018 plus 50% of any capital contributions made after that date; (2) our minimum liquidity must not fall below the greatest of (x) the product of 5% and the aggregate repurchase price as of such date of determination, (y) $5 million and (z) 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. The agreement contains margin call provisions that provide Goldman with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions, Goldman 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 Goldman’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 Goldman and to reimburse Goldman for certain costs and expenses incurred in connection with Goldman’s structuring, management and ongoing administration of the agreement. Veritex Financing Line. On August 16, 2021, we and our subsidiaries entered into a non-mark-to-market $50.0 million committed financing facility with Veritex Community Bank (“Veritex”) through the execution of a Loan and Security Agreement (the “Loan and Security Agreement”) and a Promissory Note (the “Promissory Note” and together with the Loan and Security Agreement, the “Facility Documents”) among those subsidiaries and Veritex. Pursuant to the Facility Documents, Veritex agreed to make one or more advances to one or more of the subsidiaries of the Company (together, the “Borrowers”) secured by mortgage loans, notes and related collateral (the “Veritex Financing Line”). On February 11, 2022, we amended the financing facility to increase the size of the financing facility to $75.0 million from $50.0 million. The Veritex Financing Line terminates, and amounts outstanding under the Veritex Financing Line will mature, on August 16, 2023, subject to certain exceptions. The amount advanced by Veritex for each eligible loan is based on the unpaid principal balance of the loan, the loan-to-value ratio of the loan and the FICO score of the borrower and ranges from 80.00% to 92.50% depending on the type of loan and the aforementioned criteria. Prior to the February 11, 2022 amendment, the interest rate on any outstanding balance under the Facility Documents is the greater of (1) the sum of (A) one-month LIBOR and (B) 2.30%, and (2) 3.13%. After the February 11, 2022 amendment, interest will accrue on any outstanding balance at a rate based on 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) plus a margin equal to 2.41% per annum; provided that the interest rate may not be less than 3.125% per annum. The obligations of the Borrowers under the Facility Documents are guaranteed by the Company pursuant to a Guaranty Agreement (the “Guaranty”) executed contemporaneously with the Facility Documents. In addition, the Company is subject to various financial and other covenants, including, as of the last day of any fiscal quarter: (1) the Company’s tangible net worth must be at least equal to $150.0 million; (2) the Company’s ratio of (A) EBITDA to (B) debt service shall be at least equal to 1.25 to 1.0 for such quarter; (3) the Company’s ratio of total liabilities to total tangible net worth must not exceed 5.5 to 1.0; and (4) the Company’s liquidity must at least equal $5.0 million. In addition, the Facility Documents contain 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 acceleration of the principal amount outstanding under the Facility Documents and Veritex’s right to liquidate the collateral then subject to the Facility Documents. The Borrowers are also required to pay certain customary fees to Veritex and to reimburse Veritex for certain costs and expenses incurred in connection with Veritex’s management and ongoing administration of the Veritex Financing Line. 48 Barclays Financing Line. On September 20, 2021, we and one of our subsidiaries (the “Subsidiary”) entered into a $400.0 million repurchase facility (the “Barclays Financing Line”) with Barclays Bank PLC (“Barclays”) through the execution of a Master Repurchase Agreement (the “Master Repurchase Agreement”) between the Subsidiary and Barclays. Pursuant to the Master Repurchase Agreement, the Subsidiary may sell certain securities to Barclays representing whole loan assets and later repurchase such securities from Barclays. The Master Repurchase Agreement terminates on September 20, 2022, unless terminated earlier pursuant to the terms of the Master Repurchase Agreement. On January 27, 2022, this repurchase facility was amended to to state that interest will accrue on any outstanding balance at a rate based on 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 increase the maximum purchase price permitted under the Master Repurchase Agreement to $550.0 million from $400.0 million, which is subject to reduction to $400.0 million upon the earlier to occur of (1) the issuance of securities pursuant to a securitization of the assets underlying the Master Repurchase Agreement and (2) March 30, 2022, which triggering event has occurred. The amount expected to be advanced by Barclays is generally in line with other similar agreements that the Company or one of its subsidiaries has entered into, which is a percentage of the unpaid principal balance or market value of the asset depending on the type of underlying asset. Prior to the January 27, 2022 amendment, the interest rate on any outstanding balance under the Master Repurchase Agreement that the Subsidiary was required to pay Barclays was generally in line with other similar agreements that the Company or one of its subsidiaries has entered into, where the interest rate was equal to the sum of (1) a spread ranging from 1.70% to 3.50%, determined based on the type of underlying asset, and (2) one-month LIBOR. Additionally, Barclays is under no obligation to purchase the securities we offer to sell to them. As stated above, the interest rate is now calculated as a rate based on Term SOFR instead of one-month LIBOR. The obligations of the Subsidiary under the Master Repurchase Agreement are guaranteed by the Company pursuant to a Guaranty (the “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) declines in tangible net worth; (2) a maximum ratio of indebtedness to tangible net worth; and (3) minimum liquidity. In addition, the Master Repurchase Agreement and Guaranty contain 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, insolvency 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 amounts outstanding under the Master Repurchase Agreement and Barclays’ right to liquidate the purchased securities then subject to the Master Repurchase Agreement. The Subsidiary is also required to pay certain customary fees to Barclays and to reimburse Barclays for certain costs and expenses incurred in connection with Barclays’ management and ongoing administration of the Master Repurchase Agreement. The following table sets forth the details of our financing lines as of each of March 31, 2022 and December 31, 2021: Drawn Amount Line of Credit Facility Limit Base Interest Rate (A) Interest Rate Spread (A) March 31, 2022 December 31, 2021 ($ in thousands) Barclays Bank PLC (1) $ 400,000 1 month LIBOR 1.70% - 3.50% $ 379,333 $ 362,899 Nomura Corporate Funding Americas, LLC (2) $ 300,000 1 month or 3 month LIBOR 1.70% - 3.50% $ 20,207 103,149 Deutsche Bank, AG (3) $ 250,000 1 month LIBOR 2.00% - 3.25% $ 235,743 231,981 Goldman Sachs Bank USA (4) $ 200,000 3 month LIBOR 2.25% $ 193,351 109,283 Banc of California, National Association (5) $ 75,000 1 month LIBOR 2.50% - 3.13% $ 52,869 34,838 Veritex Community Bank (6) $ 75,000 1 month LIBOR 2.30% $ 74,662 11,258 Total $ 1,300,000 $ 956,165 $ 853,408 (A) See below for timing of applicable transitions to SOFR as base interest rate and corresponding applicable interest rate spreads. (1) This agreement terminates on September 20, 2022. On January 27, 2022, this repurchase facility was amended to to state that interest will accrue on any outstanding balance at a rate based on Term SOFR plus a spread and increase the maximum purchase price permitted under the Master Repurchase Agreement to $550.0 million from $400.0 million, which was subject to reduction to $400.0 million upon the issuance of securities pursuant to a securitization of the assets underlying the Master Repurchase Agreement which occurred on February 7, 2022. (2) This agreement terminates on August 5, 2022. (3) On February 4, 2022, this facility was amended to extend the initial termination date of the Master Repurchase Agreement from February 11, 2022 to February 2, 2024; remove any draw fees; and adjust the pricing rate whereby upon the Company’s or the Subsidiary’s repurchase of a mortgage loan, the Company or the Subsidiary is required to repay Deutsche Bank the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (A) the greater of (i) 0.00% and (ii) Term SOFR (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 spread generally ranging from 2.20% to 3.45%. 49 (4) On March 2, 2022, the agreement was extended to terminate on March 5, 2023, unless terminated earlier pursuant to the terms of the agreement. On January 1, 2022, the agreement was amended to replace a LIBOR-based index rate with a SOFR-based index rate plus a spread equal to 20 basis points. (5) On March 7, 2022, the agreement was amended to terminate on March 16, 2023, unless terminated earlier pursuant to the terms of the agreement. Additionally, the amendment increased the aggregate purchase price limit to $75.0 million from $50.0 million, and beginning March 8, 2022, provided that interest will accrue on any new transactions under the Loan Financing Line at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) plus an additional spread. (6) This agreement terminates on August 16, 2023. On February 11, 2022, the Company amended the financing facility to (1) increase the size of the financing facility to $75.0 million from $50.0 million, and (2) interest will accrue on any outstanding balance at a rate based on 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) plus a margin equal to 2.41% per annum; provided that the interest rate may not be less than 3.125% per annum. 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. As of March 31, 2022, there was approximately $477.4 million outstanding under these repurchase facilities, with a weighted average interest rate of 0.32%. The following table sets forth certain characteristics of our short-term repurchase facilities as of March 31, 2022 and December 31, 2021: March 31, 2022 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) U.S. Treasury Bills $ 348,867 0.32 % 9 RMBS 128,555 0.56 % 15 Total $ 477,422 0.38 % 11 December 31, 2021 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) U.S. Treasury Bills $ 248,750 0.12 % 6 RMBS 360,501 0.16 % 18 Total $ 609,251 0.15 % 13 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) Q1 2021 27,796 57,470 27,796 Q2 2021 787,176 407,486 787,176 Q3 2021 489,287 173,265 489,287 Q4 2021 609,251 206,897 609,251 Q1 2022 477,422 272,282 477,422 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 equivalent. 50 Securitization Transactions In February 2022, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, approximately 56% of which were mortgage loans originated by third parties and the remainder of which were originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2022-1 issued approximately $551.8 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $458.3 million and retained cash of $60.9 million, which was used to acquire additional non‑QM loans, pay down repurchase facilities, and acquire other target assets. We own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds. Given the accounting rules surrounding this type of transaction, we have consolidated the AOMT 2022-1 securitization on our condensed consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheet as of March 31, 2022. In November 2021, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, a substantial majority of which were non‑QM loans originated by our affiliate mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2021-7 issued approximately $386.9 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $331.8 million and retained cash of $39.8 million, which was used to acquire additional non‑QM loans, pay down repurchase facilities, and acquire other target assets. We own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds. Given the accounting rules surrounding this type of transaction, we have consolidated the AOMT 2021-7 securitization on our condensed consolidated balance sheets, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021. In August 2021, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, a substantial majority of which were non‑QM loans originated by our affiliate mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties. In the transaction, AOMT 2021-4 issued approximately $316.6 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately $249.0 million and retained cash of $55.8 million, which was used to acquire additional non‑QM loans, pay down repurchase facilities, and acquire other target assets. We own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds. Given the accounting rules surrounding this type of transaction, we have consolidated the securitization on our condensed consolidated balance sheets, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021. Leverage and Hedging Strategies 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 qualifying and 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 opportunistically 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 Flows Three Months Ended March 31, 2022 March 31, 2021 (in thousands) Cash flows used in operating activities $ (606,423) $ (81,615) Cash flow provided by investing activities $ 261,363 $ 64,060 Cash flows provided by financing activities $ 388,644 $ 15,599 Net increase (decrease) in cash and restricted cash $ 43,584 $ (1,956) Operating cash flows of $(606.4) million for the three months ended March 31, 2022 as compared to $(81.6) million for the three months ended March 31, 2021 were primarily due to the purchase of additional residential mortgage loans during the three months ended March 31, 2022. 51 Investing cash flows of $261.4 million for the three months ended March 31, 2022 as compared to $64.1 million for the three months ended March 31, 2021 were primarily due to the sale of RMBS during the quarter, partially offset by the purchase and maturity activity of U.S. Treasury securities. Financing cash flows of $388.6 million for the three months ended March 31, 2022 as compared to $15.6 million for the three months ended March 31, 2021 were increased primarily due to proceeds from the AOMT 2022-1 securitization, partially offset by principal payments to bond holders, dividends to common stockholders, and stock repurchase activity. 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, 2021. 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 consolidated financial statements included in this report for a discussion of recent accounting pronouncements and any expected impact on the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide this information.