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 in our prospectus dated June 16, 2021, filed with the Securities and Exchange Commission (the “SEC”) on June 21, 2021 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”) (the “Prospectus”), which is part of a registration statement on Form S-11, as amended (File No. 333-256301) (the “Registration Statement”), under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the SEC, including reports on Forms 10-K, 10-Q and 8-K. 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 severity and duration of the COVID-19 pandemic, actions that have been taken and may be taken in the future by governmental authorities to contain the COVID-19 outbreak, including variants and resurgences thereof, or to mitigate its impact and the adverse impacts that the COVID-19 pandemic has had, and may continue to have, on the global economy and on our business, financial results and performance; • the effects of adverse conditions or developments in the financial markets and the economy, including the impact of the COVID-19 pandemic, upon our ability to acquire 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, interest rates, the debt or equity markets, the general economy (or in specific regions) or the residential real estate finance and the 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 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; 20 • 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; • 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, pandemics such as COVID-19, acts of war and/or terrorism and others that may cause unanticipated and uninsured performance declines 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 Government Sponsored Entities 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 qualify and maintain our qualification 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 Prospectus. 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 “Risk Factors” in the Prospectus 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 our Manager, a registered investment adviser under the Investment Advisers Act 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 $13.0 billion in assets under management as of June 30, 2021 across its private credit strategies, public funds, and separately managed accounts, including $7.6 billion of mortgage‑related assets. Angel Oak Mortgage Lending is a market leader in non‑QM loan production and, as of June 30, 2021, had originated over $10.4 billion in total non‑QM loan volume since its inception in 2011. Angel Oak is headquartered in Atlanta and has over 850 employees across its enterprise. Through our relationship with our Manager, we benefit from Angel Oak’s vertically integrated platform and in‑house expertise, providing us with the resources that we believe are necessary to generate attractive risk‑adjusted returns for our stockholders. Angel Oak Mortgage Lending provides us with proprietary access to non‑QM loans, as well as transparency over the underwriting process and the ability to acquire loans with our desired credit and return profile. We believe our ability to identify and acquire target assets through the secondary market is bolstered by Angel Oak’s experience in the mortgage industry and expertise in structured credit investments. In addition, we believe we have significant competitive advantages due to Angel Oak’s analytical investment tools, extensive relationships in the financial community, financing and capital structuring skills, investment surveillance capabilities, and operational expertise. 21 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, 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. Recent Developments We completed our Initial Public Offering 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, pursuant to the Registration Statement filed with the SEC under 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 “concurrent private placement”). Nomura Loan Financing Line On August 6, 2021, the Company and one of its subsidiaries entered into an amendment to its loan financing line with Nomura Corporate Funding Americas, LLC to, among other matters: (a) extend the expiration date from December 3, 2021 to August 5, 2022; (b) add one-month LIBOR as a base interest rate for certain loans; and (c) change the interest rate spread to 1.70% to 3.50%. Dividend Declared On August 12, 2021, the Company declared a dividend of $0.12 per share of common stock, to be paid on August 31, 2021 to common stockholders of record as of August 23, 2021. Key Financial Metrics As a real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, Distributable 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 GAAP, excluding (1) unrealized gains and losses on our aggregate portfolio, and realized gains (losses) on derivatives, (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 that we and Angel Oak Mortgage Operating Partnership, LP (the “Operating Partnership”) entered into with the Manager upon the completion of the IPO (the “Management Agreement”). For information on the fees that are payable to the Manager under the Management Agreement, see “Our Manager and the Management Agreement — The Management Agreement” in the Prospectus. 22 Distributable Earnings were approximately $2.0 million and $2.2 million for the three months ended June 30, 2021 and 2020, respectively, and $6.9 million and $(5.5) million for the six months ended June 30, 2021 and 2020, respectively. The table below sets forth a reconciliation of net income allocable to common stockholder(s), calculated in accordance with GAAP, to Distributable Earnings for the three and six months ended June 30, 2021 and 2020: Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 (in thousands) Net income (loss) allocable to common stockholder(s) $ 2,223 $ 26,221 $ 11,706 $ (10,516) Adjustments: Net other-than-temporary credit impairment losses — — — — Net realized and unrealized (gains) losses on derivatives 3,903 (1,169) 2,294 176 Net unrealized (gains) losses on residential loans (4,062) (22,586) (6,954) 2,839 Net unrealized (gains) losses on commercial loans (123) (254) (265) 1,970 Net unrealized (gains) losses on financial instruments at fair value — (8) — 10 (Gains) losses on extinguishment of debt — — — — Non-cash equity compensation expense 90 — 90 — Inventive fee earned by the Manager — — — — Realized gains (losses) on terminations of interest rate swaps — — — — Total other non-recurring (gains) losses — — — — Distributable Earnings $ 2,031 $ 2,204 $ 6,871 $ (5,521) 23 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 and six months ended June 30, 2021 and 2020: Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 ($ in thousands) Annualized Distributable Earnings $ 2,031 $ 2,204 $ 6,871 $ (5,521) Average total stockholders’ equity $ 334,503 $ 265,464 $ 289,130 $ 208,495 Distributable Earnings Return on Average Equity 2.43 % 3.32 % 9.51 % (10.59) % Book Value per Share The following table sets forth the calculation of our book value per share as of June 30, 2021 and December 31, 2020: June 30, 2021 December 31, 2020 (in thousands except for share and per share data) Total stockholders’ equity $ 496,781 $ 248,309 Preferred stock (101) (101) Stockholder(s)’ equity, net of preferred stock $ 496,680 $ 248,208 Number of shares outstanding at period end 25,502,997 15,724,050 Book value per share $ 19.48 $ 15.79 Results of Operations Our results of operations presented herein for the three and six months ended June 30, 2021 and the comparable periods ended June 30, 2020 do not reflect the expenses typically associated with being a public company, including the payment of increased directors’ fees for our independent directors and the expenses incurred in complying with the reporting and other requirements of the Exchange Act; the payment of a base management fee and an incentive 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 described in our Registration Statement, full periods of equity compensation expenses, and increased legal and accounting fees. Additionally, pursuant to the management agreement, we will be required to reimburse our Manager for its operating expenses, including third‑party expenses, incurred on our behalf; and our Manager will also be 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 has dedicated a substantial majority of his business time to us upon the completion of our IPO) based on the amount 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. 24 Three Months Ended June 30, 2021 and 2020 The following table sets forth a summary of our results of operations for the three months ended June 30, 2021 and 2020: Three Months Ended June 30, 2021 Three Months Ended June 30, 2020 (in thousands) INTEREST INCOME, NET Interest income $ 12,143 $ 12,926 Interest expense 1,846 3,711 NET INTEREST INCOME 10,297 9,215 REALIZED AND UNREALIZED GAINS (LOSSES), NET Net realized loss on derivative contracts, RMBS, CMBS, and mortgage loans (10,224) (2,847) Net unrealized gain (loss) on derivative contracts and mortgage loans 4,813 24,009 TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET (5,411) 21,162 EXPENSES Operating and investment expenses 876 725 Operating expenses incurred with affiliate 533 345 Securitization costs — 2,094 Management fee incurred with affiliate 1,250 988 Total operating expenses 2,659 4,152 NET INCOME 2,227 26,225 Preferred dividends (4) (4) NET INCOME ALLOCABLE TO COMMON STOCKHOLDER(S) $ 2,223 $ 26,221 Other comprehensive income (loss) 3,085 (944) TOTAL COMPREHENSIVE INCOME $ 5,308 $ 25,277 25 Net Interest Income The following table sets forth the components of net interest income for the three months ended June 30, 2021 and 2020: Three Months Ended June 30, 2021 Three Months Ended June 30, 2020 (in thousands) Interest income Interest income / expense Interest income / expense Residential mortgage loans $ 4,811 $ 6,404 Commercial mortgage loans 227 1,009 RMBS 6,461 5,469 CMBS 639 — U.S. Treasury bills 4 5 Other interest income 1 39 Total interest income 12,143 12,926 Interest expense Notes payable 1,735 3,489 Repurchase facilities 111 222 Total interest expense 1,846 3,711 Net interest income $ 10,297 $ 9,215 Net interest income for the three months ended June 30, 2021 and 2020 was $10.3 million and $9.2 million, respectively. Net interest income increased due to the additional average portfolio balance in the three months ended June 30, 2021 as compared to the same period in 2020, primarily due to the composition of the portfolio during June 30, 2021 having a lower average balance of loan and repurchase financing facilities, due to the timing of the use of those financing facilities, which decreased the interest expense associated with borrowings. Total Realized and Unrealized Gains (Losses) The components of total realized and unrealized gains (losses), net for the three months ended June 30, 2021 and 2020 are set forth as follows: Three Months Ended June 30, 2021 Three Months Ended June 30, 2020 (in thousands) Gain on securitization $ — $ 1,813 Realized loss on RMBS, net (4,834) (1,523) Realized loss on CMBS (153) — Realized loss on interest rate futures (2,546) (3,127) Realized and unrealized loss on TBAs (2,187) — Realized and unrealized gain on residential mortgage loans 3,489 22,580 Realized and unrealized gain on commercial mortgage loans 74 254 Realized and unrealized loss on U.S. Treasury bills — (5) Unrealized appreciation on interest rate futures 746 1,170 Total realized and unrealized gains (losses), net $ (5,411) $ 21,162 For the three months ended June 30, 2021 and 2020, total realized and unrealized gains (losses), net were $(5.4) million and $21.2 million, respectively. In the three months ended June 30, 2020, we securitized a substantial amount of residential loans, which allowed us to recover a significant amount of unrealized losses from residential loan valuation, which had previously experienced significant decreases in market value due to the financial effects of the onset of the COVID‑19 pandemic. The three months ended June 30, 2021 presented a less volatile market environment as substantially all the credit and asset valuation issues related to the financial effects of the COVID-19 pandemic had lessened. 26 Expenses Operating and Investment Expenses For the three months ended June 30, 2021 and 2020, our operating and investment expenses were $0.9 million and $0.7 million, respectively. The increase in operating expenses in the three month period ended June 30, 2021 was primarily due to an increase in whole loan acquisition diligence costs, as we purchased more whole loans in the three months ended June 30, 2021 as compared to the three months ended June 30, 2020. Operating Expenses Incurred with Affiliate For the three months ended June 30, 2021 and 2020, our operating expenses incurred with affiliate were $0.5 million and $0.3 million, respectively. The increase in these expenses was primarily due to an increase in the allocated time of partially dedicated employees’ compensation being reimbursed by us during 2021. Securitization costs For the three months ended June 30, 2021, we did not incur any securitization costs, as we did not participate in any securitization transactions during this period. For the three months ended June 20, 2020,we incurred securitization costs of $2.1 million. During the three months ended June 30, 2020, we had participated in one securitization transaction. Management Fee Incurred with Affiliate We are required to pay our Manager, in cash, a management fee pursuant to certain management agreements, including the pre-IPO management agreement and the post-IPO management agreement. The management fee payable under the pre-IPO management agreement was calculated based on the Actively Invested Capital of the limited partners in Angel Oak Mortgage Fund (as defined in the limited partnership agreement of 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 completion of our IPO, the concurrent private placement and our formation transactions, and we and our operating partnership subsequently entered into the management agreement with our Manager effective as of the completion of our IPO. Pursuant to the management agreement, our Manager will be entitled to a base management fee, which will be calculated based on our Equity, 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. See “Our Manager and the Management Agreement — The Management Agreement” in our Prospectus for additional information regarding the fees that will be payable to our Manager under the management agreement subsequent to the date of our IPO on June 21, 2021. For the three months ended June 30, 2021 and 2020, our management fee incurred with affiliate was $1.3 million and $1.0 million, respectively. The increase is due to the increase in our average equity for the three months ended June 30, 2021 as compared to the same period in 2020. 27 Six Months Ended June 30, 2021 and 2020 The following table sets forth a summary of our results of operations for the six months ended June 30, 2021 and 2020: Six Months Ended June 30, 2021 Six Months Ended June 30, 2020 (in thousands) INTEREST INCOME, NET Interest income $ 22,177 $ 22,543 Interest expense 2,678 6,665 NET INTEREST INCOME 19,499 15,878 REALIZED AND UNREALIZED GAINS (LOSSES), NET Net realized loss on derivative contracts, RMBS, CMBS, and mortgage loans (12,512) (15,616) Net unrealized gain (loss) on derivative contracts and mortgage loans 9,330 (4,985) TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET (3,182) (20,601) EXPENSES Operating and investment expenses 1,462 1,610 Operating expenses incurred with affiliate 972 536 Securitization costs — 2,094 Management fee incurred with affiliate 2,169 1,545 Total operating expenses 4,603 5,785 NET INCOME (LOSS) 11,714 (10,508) Preferred dividends (8) (8) NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDER(S) $ 11,706 $ (10,516) Other comprehensive income (loss) 3,615 (10,225) TOTAL COMPREHENSIVE INCOME (LOSS) $ 15,321 $ (20,741) 28 Net Interest Income The following table sets forth the components of net interest income for the six months ended June 30, 2021 and 2020: Six Months Ended June 30, 2021 Six Months Ended June 30, 2020 (in thousands) Interest income Interest income / expense Interest income / expense Residential mortgage loans $ 7,361 $ 11,815 Commercial mortgage loans 357 1,246 RMBS 13,259 9,352 CMBS 1,189 — U.S. Treasury bills 7 70 Other interest income 4 60 Total interest income 22,177 22,543 Interest expense Notes payable 2,460 5,989 Repurchase facilities 218 676 Total interest expense 2,678 6,665 Net interest income $ 19,499 $ 15,878 Net interest income for the six months ended June 30, 2021 and 2020 was $19.5 million and $15.9 million, respectively. Net interest income increased due to the additional average portfolio balance in the six months ended June 30, 2021 as compared to the same period in 2020, while interest expense decreased due to the timing of the use of loan and repurchase financing facilities, which decreased the interest expense associated with borrowings during the six months ended June 30, 2021 as compared to 2020. Total Realized and Unrealized Gains (Losses) The components of total realized and unrealized gains (losses), net for the six months ended June 30, 2021 and 2020 are set forth as follows: Six Months Ended June 30, 2021 Six Months Ended June 30, 2020 (in thousands) Gain on securitization $ — $ 1,813 Realized loss on RMBS, net (8,808) (3,181) Realized loss on CMBS (380) — Realized loss on interest rate futures (471) (14,039) Realized and unrealized loss on TBAs (2,620) — Realized and unrealized gain (loss) on residential mortgage loans 6,326 (3,045) Realized and unrealized gain (loss) on commercial mortgage loans 358 (1,969) Realized and unrealized loss on U.S. Treasury bills (8) (5) Unrealized appreciation (depreciation) on interest rate futures 2,421 (175) Total realized and unrealized gains (losses), net $ (3,182) $ (20,601) For the six months ended June 30, 2021 and 2020, total realized and unrealized gains (losses), net were $(3.2) million and $(20.6) million, respectively. In the six months ended June 30, 2020, we experienced significant decreases in market values of the assets including whole loans, residential mortgage-backed securities (“RMBS”), and interest rate futures due to the financial effects of the onset of the COVID‑19 pandemic. The three months ended June 30, 2021 presented a less volatile market environment as substantially all the credit and asset valuation issues related to the financial effects of the COVID-19 pandemic had lessened. 29 Expenses Operating and Investment Expenses For the six months ended June 30, 2021 and 2020, our operating and investment expenses were $1.5 million and $1.6 million, respectively. The relatively flat operating expenses in the six month period ended June 30, 2021 as compared to 2020 was primarily due to relatively stable operating expenses incurred during the comparative six month periods. Operating Expenses Incurred with Affiliate For the six months ended June 30, 2021 and 2020, our operating expenses incurred with affiliate were $1.0 million and $0.5 million, respectively. The increase in these expenses was primarily due to an increase in the allocated time of partially dedicated employees’ compensation being reimbursed by us during 2021. Securitization costs For the six months ended June 30, 2021, we did not incur any securitization costs, as we did not participate in any securitization transactions during this period. For the six months ended June 20, 2020,we incurred securitization costs of $2.1 million. During the six months ended June 30, 2020, we had participated in one securitization transaction.. Management Fee Incurred with Affiliate We are required to pay our Manager, in cash, a management fee pursuant to certain management agreements, including the pre-IPO management agreement and the post-IPO management agreement. The management fee payable under the pre-IPO management agreement was calculated based on the Actively Invested Capital of the limited partners in Angel Oak Mortgage Fund (as defined in the limited partnership agreement of 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 completion of our IPO, the concurrent private placement and our formation transactions, and we and our operating partnership subsequently entered into the management agreement with our Manager effective as of the completion of our IPO. Pursuant to the management agreement, our Manager will be entitled to a base management fee, which will be calculated based on our Equity, 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. See “Our Manager and the Management Agreement — The Management Agreement” in our Prospectus for additional information regarding the fees that will be payable to our Manager under the management agreement subsequent to the date of our IPO on June 21, 2021. For the six months ended June 30, 2021 and 2020, our management fee incurred with affiliate was $2.2 million and $1.5 million, respectively. The increase is due to the increase in our average equity for the six months ended June 30, 2021 as compared to the same period in 2020. 30 Our Portfolio As of June 30, 2021, our portfolio consisted of approximately $1.3 billion of residential mortgage loans, RMBS, and other target assets. “Target assets” is defined as the total investment portfolio excluding U.S. Treasury bills. The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as of June 30, 2021: Fair Value Collateralized Debt Allocated Capital % of Total Capital Portfolio: ($ in thousands) Residential mortgage loans $ 529,329 $ 313,888 $ 215,441 43.4 % Commercial mortgage loans 6,464 1,191 5,273 1.1 % Total whole loan portfolio $ 535,793 $ 315,079 $ 220,714 44.5 % Investment securities RMBS $ 723,368 $ 512,868 $ 210,500 42.4 % CMBS 11,943 — 11,943 2.4 % U.S. Treasury bills 274,992 274,308 684 0.1 % Total investment securities 1,010,303 $ 787,176 $ 223,127 44.9 % Total investment portfolio $ 1,546,096 $ 1,102,255 $ 443,841 89.4 % Cash 28,893 — 28,893 5.8 % Other assets 24,047 — 24,047 4.8 % Total $ 1,599,036 $ 1,102,255 $ 496,781 100.0 % As of December 31, 2020, our portfolio consisted of approximately $308.2 million of residential mortgage loans, RMBS, and other target assets. “Target assets” is defined as the total investment portfolio excluding U.S. Treasury bills. The following table sets forth additional information regarding our portfolio including the manner in which our equity capital was allocated among investment types, as of December 31, 2020: Fair Value Collateralized Debt Allocated Capital % of Total Capital Portfolio: ($ in thousands) Residential mortgage loans $ 142,030 $ 80,345 $ 61,685 24.8 % Commercial mortgage loans 7,466 1,560 5,906 2.4 % Total whole loan portfolio $ 149,496 $ 81,905 $ 67,591 27.2 % Investment securities RMBS 149,936 $ 28,673 $ 121,263 48.8 % CMBS 8,796 — 8,796 3.5 % U.S. Treasury bills 149,995 149,618 377 0.2 % Total investment securities 308,727 $ 178,291 $ 130,436 52.5 % Total investment portfolio $ 458,223 $ 260,196 $ 198,027 79.8 % Cash 43,569 — 43,569 17.5 % Other assets 6,713 — 6,713 2.7 % Total $ 508,505 $ 260,196 $ 248,309 100.0 % 31 Residential Mortgage Loans The following table sets forth additional information on the residential mortgage loans in our portfolio as of June 30, 2021: Portfolio Range Portfolio Weighted Average ($ in thousands) Unpaid principal balance (“UPB”) $312 - $3,547 $477 Interest rate 2.63% - 10.75% 5.14% Maturity date 4/1/2046 - 6/1/2061 5/12/2051 FICO score at loan origination 500 - 823 741 LTV at loan origination 39% - 90% 73% DTI at loan origination 0.85% - 50.48% 33% Percentage of first lien loans N/A 99.90% Percentage of loans 90+ days delinquent (based on UPB) N/A 1.10% The following table sets forth additional information on the residential mortgage loans in our portfolio as of December 31, 2020: Portfolio Range Portfolio Weighted Average ($ in thousands) UPB $32 - $2,357 $489 Interest rate 3.88% - 10.75% 5.95% Maturity date 11/2048 - 1/2061 10/2050 FICO score at loan origination 500 - 811 733 LTV at loan origination 5% - 90% 75% DTI at loan origination 3% - 50% 35% Percentage of first lien loans N/A 99.90% Percentage of loans 90+ days delinquent (based on UPB) N/A 10.70% 32 The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of June 30, 2021: The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of December 31, 2020: 33 The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as of June 30, 2021, based on the product profile, borrower profile and geographic location (percentages are based on the aggregate unpaid principal balance of such loans): Characteristics of Our Residential Mortgage Loans as of June 30, 2021: (1) No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of June 30, 2021. 34 The following charts illustrate additional characteristics of the residential mortgage loans in our portfolio that we owned directly as of December 31, 2020, based on the product profile, borrower profile and geographic location (percentages are based on the aggregate unpaid principal balance of such loans): Characteristics of Our Residential Mortgage Loans as of December 31, 2020: (1) No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of December 31, 2020. 35 Commercial Mortgage Loans The following table provides additional information on the commercial mortgage loans in our portfolio as of June 30, 2021: Portfolio Range Portfolio Weighted Average ($ in thousands) UPB $107 - $4,300 $929 Interest rate 6.10% - 8.38% 6.90% Loan term 1.92 - 28.69 years 10.97 years LTV at loan origination 38.6% - 75.0% 53.6% The following table provides additional information on the commercial mortgage loans in our portfolio as of December 31, 2020: Portfolio Range Portfolio Weighted Average ($ in thousands) UPB $77 - $4,300 $646 Interest rate 5.66% - 8.38% 5.58% Loan term 2.42 - 29.2 years 14.3 years LTV at loan origination 38.6% - 75.0% 54.7% The following charts illustrate the geographic location of the commercial mortgage loans in our portfolio that we owned directly as of June 30, 2021 and December 31, 2020 (percentages are based on the aggregate unpaid principal balance of such loans): Geographic Diversification of Our Commercial Mortgage Loans as of June 30, 2021: Geographic Diversification of Our Commercial Mortgage Loans as of December 31, 2020: 36 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 $23.0 million in horizontal Risk Retention Securities (representing 5% of the fair value of the securities and other interests issued as part of the transaction). Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in AOMT securitization transactions is set forth below as of June 30, 2021, unless otherwise stated: AOMT 2019-2 AOMT 2019-4 AOMT 2019-6 AOMT 2020-3 ($ in thousands) UPB of loans $254,800 $267,972 $298,487 $358,458 Number of loans 781 806 982 963 Weighted average loan coupon 7.04 % 7.00 % 6.46 % 5.86 % Average loan amount $326 $332 $304 $372 Weighted average LTV at loan origination and deal date 76 % 75 % 74 % 74 % Weighted average credit score at loan origination and deal date 698 705 717 721 Current 3-month constant prepayment rate (“CPR”) (1) 48.94 % 49.83 % 47.72 % 41.94 % 90+ day delinquency (as a % of UPB) 13.16 % 10.50 % 6.54 % 2.88 % Fair value of first loss piece (2) $13,022 $3,890 $2,232 $23,763 Investment thickness (3) 13.65 % 5.94 % 4.29 % 8.66 % (1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. (2) Represents the fair value of the securities we hold in the first loss tranche in each securitization. (3) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization. 37 Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in AOMT securitization transactions is set forth below as of December 31, 2020, unless otherwise stated: AOMT 2019-2 AOMT 2019-4 AOMT 2019-6 AOMT 2020-3 ($ in thousands) UPB of loans $337,323 $334,129 $379,535 $442,314 Number of loans 1049 1031 1262 1189 Weighted average loan coupon 7.01 % 6.99 % 6.47 % 5.86 % Average loan amount $331 $340 $307 $381 Weighted average LTV at loan origination and deal date 78 % 78 % 75 % 74 % Weighted average credit score at loan origination and deal date 712 707 715 721 Current 3-month CPR (1) 31.60 % 27.40 % 32.30 % 28.80 % 90+ day delinquency (as a % of UPB) 15.90 % 15.70 % 11.20 % 2.43 % Fair value of first loss piece (2) $12,897 $3,415 $2,029 $23,507 Investment thickness (3) 10.00 % 4.50 % 3.30 % 6.80 % (1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. (2) Represents the fair value of the securities we hold in the first loss tranche in each securitization. (3) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization. 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 June 30, 2021: RMBS Repurchase Debt Allocated Capital AOMT Third Party RMBS Total AOMT Third Party RMBS Total AOMT Third Party RMBS Total (in thousands) Senior $ 6,705 $ — $ 6,705 $ 8,191 $ — 8,191 $ (1,486) $ — $ (1,486) Mezzanine 2,190 — 2,190 1,635 — 1,635 555 — 555 Subordinate 82,494 11,272 93,766 15,253 — 15,253 67,241 11,272 78,513 Interest only / excess 23,466 3,344 26,810 — — — 23,466 3,344 26,810 Whole pool — 593,897 593,897 — 487,789 487,789 — 106,108 106,108 Total $ 114,855 $ 608,513 $ 723,368 $ 25,079 $ 487,789 $ 512,868 $ 89,776 $ 120,724 $ 210,500 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, 2020: RMBS Repurchase Debt Allocated Capital AOMT Third Party RMBS Total AOMT Third Party RMBS Total AOMT Third Party RMBS Total (in thousands) Senior $ 11,477 $ 6,820 $ 18,297 $ 11,936 $ — $ 11,936 $ (459) $ 6,820 $ 6,361 Mezzanine 2,207 — 2,207 1,633 — 1,633 574 — 574 Subordinate 78,830 18,784 97,614 15,104 — 15,104 63,726 18,784 82,510 Interest only / excess 31,818 — 31,818 — — — 31,818 — 31,818 Whole pool — — — — — — — — — Total $ 124,332 $ 25,604 $ 149,936 $ 28,673 $ — $ 28,673 $ 95,659 $ 25,604 $ 121,263 38 The following table sets forth information with respect to our RMBS ending balances, at fair value, as of June 30, 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 7,485 592,899 605,506 Effect of principal payments / called deals (11,461) — (12,770) (3,781) (516) (28,528) IO and excess servicing prepayments — — — (8,938) — (8,938) Changes in fair value, net (130) (17) 1,590 225 1,515 3,183 Ending fair value $ 6,706 $ 2,190 $ 93,765 $ 26,809 $ 593,898 $ 723,368 The following table sets forth information with respect to our RMBS ending balances, at fair value, as of December 31, 2020: Senior Mezzanine Subordinate Interest Only Total (in thousands) Beginning fair value $ 19,060 $ 2,237 $ 31,679 $ 24,016 $ 76,992 Acquisitions: Retained from AOMT securitizations — — 40,380 26,140 66,520 Secondary market purchases of AOMT securities — — 5,663 — 5,663 Third party securities 6,880 — 18,098 — 24,978 Effect of principal payments / called deals (7,709) — (2,377) — (10,086) IO and excess servicing prepayments — — — (9,672) (9,672) Changes in fair value, net 66 (30) 4,171 (8,666) (4,459) Ending fair value $ 18,297 $ 2,207 $ 97,614 $ 31,818 $ 149,936 39 The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of June 30, 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 June 30, 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 June 30, 2021. The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of December 31, 2020 (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, 2020) (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, 2020. 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 $8.9 million. 40 Certain information regarding the commercial mortgage loans underlying our portfolio of commercial mortgage-backed securities “CMBS” issued in the AOMT 2020-SBC1 securitization transaction is shown below as of June 30, 2021 and December 31, 2020: June 30, 2021 December 31, 2020 ($ in thousands) UPB of loans $164,474 $179,789 Number of loans $216 $234 Weighted average loan coupon 7.5 % 7.4 % Average loan amount $761 $768 Weighted average LTV at loan origination and deal date 62.3 % 62.3 % The following table provides certain information with respect to the CMBS we received in connection with the AOMT 2020-SBC1 securitization transactions as of June 30, 2021 and December 31, 2020: June 30, 2021 December 31, 2020 CMBS Repurchase Debt Allocated Capital CMBS Repurchase Debt Allocated Capital (in thousands) Senior $ — $ — $ — $ — $ — $ — Mezzanine — — — — — — Subordinate 7,996 — 7,996 5,766 — 5,766 Interest only / excess 3,947 — 3,947 3,031 — 3,031 Total $ 11,943 $ — $ 11,943 $ 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 expect 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 expect 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. Description of Existing Financing Arrangements As of June 30, 2021, we were a party to four loan financing lines, which permitted borrowings in an aggregate amount of up to $800.0 million. 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: 41 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 expires 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 expires on March 16, 2022, unless terminated earlier pursuant to the terms of the agreement. 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%. The agreement requires the 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. 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. 42 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 expires on February 11, 2022, unless terminated earlier pursuant to the terms of the agreement. The principal amount paid by Deutsche Bank for each mortgage loan is 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 retains the right to determine the market value of the mortgage loan collateral in its sole good faith discretion. Additionally, Deutsche Bank 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 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%. 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 expires on March 5, 2022, unless terminated earlier pursuant to the terms of the agreement. 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. Upon our or our subsidiary’s repurchase of the mortgage loan, we are, or our subsidiary is, 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%. 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) $5 million and (z) any other amount of liquidity that we have covenanted to maintain in any other note, indenture, loan agreement, guaranty, swap agreement or any other contract, agreement or transaction (including, without limitation, any repurchase agreement, loan and security agreement, or similar credit facility or agreement for borrowed funds); and (3) the maximum ratio of our and our subsidiaries’ total indebtedness to tangible net worth must not be greater than 5:1. The agreement contains margin call provisions that provide Goldman with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions, Goldman may require us or our subsidiary to transfer cash sufficient to eliminate any margin deficit resulting from such a decline. 43 In addition, the agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross‑defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and Goldman’s right to liquidate the mortgage loans then subject to the agreement. We and our subsidiary are also required to pay certain customary fees to Goldman and to reimburse Goldman for certain costs and expenses incurred in connection with Goldman’s structuring, management and ongoing administration of the agreement. The following table sets forth the details of our financing lines as of each of June 30, 2021 and December 31, 2020: Drawn Amount Line of Credit Facility Limit Base Interest Rate Interest Rate Spread June 30, 2021 December 31, 2020 ($ in thousands) Nomura Corporate Funding Americas, LLC (1) $ 300,000 3 month LIBOR 1.70% - 3.50% $ 6,529 $ 8,011 Banc of California, National Association (2) $ 50,000 1 month LIBOR 2.50% - 3.13% $ 45,259 $ 38,989 Deutsche Bank, AG (3) $ 250,000 1 month LIBOR 2.00% - 3.25% $ 131,016 $ 34,905 Goldman Sachs Bank USA (4) $ 200,000 3 month LIBOR 2.25% $ 132,275 N/A $ 315,079 $ 81,905 (1) On June 21, 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%. (2) This agreement expires on March 16, 2022. (3) On June 21, 2021, the agreement was amended to increase the credit facility from $150.0 million to $250.0 million, and replace the previous sole shareholder as guarantor with the Company and its subsidiaries. This agreement 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. 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 June 30, 2021, there was approximately $787.2 million outstanding under these repurchase facilities, with weighted average interest rates ranging from 0.09% to 0.16%. The following table sets forth certain characteristics of our short-term repurchase facilities as of June 30, 2021 and December 31, 2020: June 30, 2021 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) U.S. Treasury Bills $ 274,308 0.09 % 22 RMBS 512,868 0.16 % 21 Total $ 787,176 0.14 % 21 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 44 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 2020 $ 578,860 $ 85,822 $ 578,860 Q2 2020 587,375 69,712 587,375 Q3 2020 50,541 139,439 50,541 Q4 2020 178,291 41,866 178,291 Q1 2021 27,796 57,470 27,796 Q2 2021 787,176 407,486 787,176 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. We may continue to purchase securities for REIT asset test purposes, although it is expected that, in the future, we may need to purchase fewer (or no) securities as we participate in additional securitizations and retain our pro rata share of securities issued in securitization transactions or acquire assets directly into our Operating Partnership. Securitization Transactions. We did not participate in any securitization transactions for the three and six months ended June 30, 2021. In June 2020, we participated in a securitization transaction of a pool of residential mortgage loans, a substantial majority of which were non‑QM loans, secured primarily by first or second liens on one‑to‑four family residential properties. In the transaction, AOMT 2020‑3 issued approximately $530.3 million in face value of bonds. We served as the “sponsor” (as defined in the U.S. Risk Retention Rules) of the transaction, contributing non‑QM loans with a carrying value of approximately $482.9 million that we had accumulated and held on our balance sheet to AOMT 2020‑3. The remaining non‑QM loans that we contributed to AOMT 2020‑3 were purchased from affiliated and unaffiliated entities. 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). We used the proceeds of the securitization transaction to repay outstanding debt of approximately $394.4 million and retained cash of $42.3 million, which was used to acquire additional non‑QM loans, pay down repurchase facilities, and acquire other target assets. An affiliate of the Manager acted as the servicing administrator for AOMT 2020‑3, and as such is responsible for servicing the securitized mortgage loans pursuant to separate pooling and servicing agreements. Series A Cumulative Non‑Voting Preferred Stock In January 2019, in order for us to satisfy the 100‑holder REIT requirement under the Code, we issued 125 shares of our Series A preferred stock with a liquidation preference of $1,000 per share. The shares of our Series A preferred stock may be redeemed at our option at any time, in whole or in part, for cash equal to $1,000 per share plus all accrued and unpaid dividends thereon to and including the date fixed for redemption. 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. 45 Cash Flows Six Months Ended June 30, 2021 June 30, 2020 (in thousands) Cash flows provided by (used in) operating activities $ (382,091) $ 74,967 Cash flow used in investing activities $ (705,897) $ (495,881) Cash flows provided by financing activities $ 1,075,043 $ 487,787 Net increase (decrease) in cash and restricted cash $ (12,945) $ 66,873 Operating cash flows of $(382.1) million for the six months ended June 30, 2021 as compared to $75.0 millions for the six months ended June 30, 2020 were primarily due to the purchase of additional residential mortgage loans during the the six months ended June 30, 2021. Investing cash flows of $(705.9) million for the six months ended June 30, 2021 as compared to $(495.9) million for the six months ended June 30, 2020 were primarily due to the purchase of RMBS during the quarter, along with the purchase of U.S. Treasury securities, which was partially offset by sales of U.S Treasury securities. Financing cash flows of $1.1 billion for the six months ended June 30, 2021 as compared to $487.8 million for the six months ended June 30, 2020 were increased primarily due to the contributions received from our former sole stockholder, proceeds received from our private placement concurrent with our IPO, and proceeds received from our IPO. 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. Contractual Obligations and Commitments For additional information on our contractual obligations, see the “Management's Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commitments” section included in the Prospectus. As of June 30, 2021, there have been no material changes in our contractual obligations from the information set forth in the Prospectus. Off-Balance Sheet Arrangements Other than the unconsolidated securitization trusts that we participated in, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide funding to any such entities. 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 is included in the “Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” section in the Prospectus. Management discusses the ongoing development and selection of these critical accounting policies 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. In addition to the regular volatility we may experience on a quarterly basis, the ongoing impact of the COVID-19 pandemic on the United States economy, the mortgage finance markets, and the broader financial markets, has caused additional volatility impacting many of our estimates. It is difficult to fully assess the impact of the pandemic at this time, including because of the uncertainty around the severity and duration of the pandemic domestically and internationally, as well as the uncertainty around the efficacy of Federal, State and local governments’ efforts to contain the spread of the pandemic and respond to its direct and indirect impacts on many aspects of U.S. economic activity. Any continued volatility resulting from the economic effects of the COVID-19 pandemic could impact our critical estimates and lead to significant period-to-period earnings volatility. 46 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.