Angel Oak Mortgage REIT, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm (PCAOB ID 185 ) 89 Consolidated Balance Sheets 91 Consolidated Statements of Operations and Comprehensive Income (Loss) 92 Consolidated Statements of Changes in Stockholder(s)’ Equity 93 Consolidated Statements of Cash Flows 94 Notes to the Consolidated Financial Statements 96 88 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Angel Oak Mortgage, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Angel Oak Mortgage, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), changes in stockholder(s)’ equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Assessment of the valuation of residential mortgage loans at fair value As discussed in Notes 2, 3, 4, and 10 to the consolidated financial statements, the Company records performing residential mortgage loans and residential mortgage loans in securitization trusts (together, “residential mortgage loans”) at fair value on its consolidated balance sheet as a result of electing the fair value option at the time of acquisition. As of December 31, 2021, the recorded balance of the Company’s residential mortgage loans was $1.7 billion. The Company determines the fair value of its residential mortgage loans based on trading activity observed in the marketplace, provided by a third-party pricing service, using both market comparable information and discounted cash flow modeling techniques. We identified the assessment of the valuation of residential mortgage loans as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, was involved in determining certain of the underlying assumptions, including prepayment, default, loss severity, and discount rates, which are not readily observable in the market and subject to significant measurement uncertainty. The evaluation of these assumptions to determine the valuation of residential mortgage loans required subjective and complex auditor judgment since the assumptions used were sensitive to variation, such that changes in the assumptions could cause significant changes in the estimate. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of certain internal controls related to valuation of residential mortgage loans at fair value and involved valuation professionals with specialized skills and knowledge who assisted in: • assessment of the third-party developed valuation techniques and models through comparison to industry practices 89 • evaluating whether the underlying third-party assumptions which were used to determine the fair value reflect those which a market participant would use to determine an exit price in the current market environment • evaluating the assumptions used to determine the fair value of residential mortgage loans by comparing the assumptions above for a selection of residential mortgage loans to market research and relevant industry practices • independently recalculating the fair value of a selection of loans using the Company’s assumptions and comparing the results of our recalculation of fair value to the Company’s fair value estimate. /s/ KPMG We have served as the Company’s auditor since 2018. Atlanta, Georgia March 28, 2022 90 Angel Oak Mortgage, Inc. Consolidated Balance Sheets (in thousands, except for share data) As of: December 31, 2021 December 31, 2020 ASSETS Residential mortgage loans - at fair value $ 1,061,912 $ 142,030 Residential mortgage loans in securitization trusts - at fair value 667,365 — Commercial mortgage loans - at fair value 18,664 7,466 RMBS - at fair value 485,634 149,936 CMBS - at fair value 10,756 8,796 U.S. Treasury securities - at fair value 249,999 149,995 Cash and cash equivalents 40,801 43,569 Restricted cash 11,508 2,404 Principal and interest receivable 25,984 5,058 Receivable from affiliate — 14 Other assets 5,306 388 Total assets $ 2,577,929 $ 509,656 LIABILITIES AND STOCKHOLDER(S)’ EQUITY LIABILITIES Notes payable $ 853,408 $ 81,905 Non-recourse securitization obligations, collateralized by residential mortgage loans, net 616,557 — Securities sold under agreements to repurchase 609,251 178,291 Unrealized depreciation on futures contracts - at fair value 728 198 Accrued expenses 442 121 Accrued expenses payable to affiliate 1,425 732 Interest payable 1,283 100 Income taxes payable 1,600 — Management fee payable to affiliate 1,845 — Total liabilities $ 2,086,539 $ 261,347 Commitments and contingencies STOCKHOLDER(S)’ EQUITY Series A preferred stock, $ 0.01 par value, 12 % cumulative, non-voting, 125 shares issued and outstanding as of December 31, 2021 and 2020 101 101 Common stock, $ 0.01 par value. As of December 31, 2021: 350,000,000 shares authorized, 25,227,328 shares issued and outstanding. As of December 31, 2020: 90,000,000 shares authorized, 15,724,050 shares issued and outstanding. 252 157 Additional paid-in capital 476,510 246,489 Accumulated other comprehensive income (loss) 3,000 ( 1,039 ) Retained earnings 11,527 2,601 Total stockholder(s)’ equity $ 491,390 $ 248,309 Total liabilities and stockholder(s)’ equity $ 2,577,929 $ 509,656 The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 91 Angel Oak Mortgage, Inc. Consolidated Statements of Operations and Comprehensive Income (Loss) (in thousands, except for share and per share data) For the Year Ended December 31, 2021 For the Year Ended December 31, 2020 INTEREST INCOME, NET Interest income $ 60,555 $ 40,820 Interest expense 11,476 7,499 NET INTEREST INCOME 49,079 33,321 REALIZED AND UNREALIZED LOSSES, NET Net realized loss on mortgage loans, derivative contracts, RMBS, and CMBS ( 4,926 ) ( 20,793 ) Net unrealized loss on mortgage loans and derivative contracts ( 2,392 ) ( 2,144 ) TOTAL REALIZED AND UNREALIZED LOSSES, NET ( 7,318 ) ( 22,937 ) EXPENSES Operating expenses 6,060 1,680 Due diligence and transaction costs 2,551 356 Stock compensation 1,715 — Operating expenses incurred with affiliate 2,828 1,742 Securitization costs — 2,527 Management fee incurred with affiliate 5,894 3,343 Total operating expenses 19,048 9,648 INCOME BEFORE INCOME TAXES 22,713 736 Income tax expense 1,600 — NET INCOME 21,113 736 Preferred dividends ( 15 ) ( 15 ) NET INCOME ALLOCABLE TO COMMON STOCKHOLDER(S) $ 21,098 $ 721 Other comprehensive income (loss) 4,039 ( 4,593 ) TOTAL COMPREHENSIVE INCOME (LOSS) $ 25,137 $ ( 3,872 ) Basic earnings per common share $ 1.02 $ 0.05 Diluted earnings per common share $ 1.01 $ 0.05 Weighted average number of common shares outstanding: Basic 20,601,964 15,724,050 Diluted 20,852,554 15,724,050 The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 92 Angel Oak Mortgage, Inc. Consolidated Statements of Changes in Stockholder(s)’ Equity (in thousands) Preferred Stock Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Stockholder(s)’ Equity Stockholder’s equity as of December 31, 2019 $ 101 $ 157 $ 87,471 $ 3,554 $ 3,580 $ 94,863 Distributions to common stockholder — — ( 75,000 ) — ( 1,700 ) ( 76,700 ) Contributions from common stockholder — — 234,018 — — 234,018 Dividends declared - preferred — — — — ( 15 ) ( 15 ) Unrealized loss on RMBS and CMBS — — — ( 4,593 ) — ( 4,593 ) Net income — — — — 736 736 Stockholder’s equity as of December 31, 2020 $ 101 $ 157 $ 246,489 $ ( 1,039 ) $ 2,601 $ 248,309 Contributions from common stockholder prior to IPO — — 56,261 — — 56,261 Private placement concurrent with IPO — 21 39,979 — — 40,000 Common stock issued in IPO — 72 136,728 — — 136,800 Shares repurchased — ( 3 ) ( 4,657 ) — — ( 4,660 ) Non-cash equity compensation — 5 1,710 — — 1,715 Dividends declared - preferred — — — — ( 15 ) ( 15 ) Unrealized gain on RMBS and CMBS — — — 4,039 — 4,039 Dividends paid on common stock — — — — ( 12,172 ) ( 12,172 ) Net income — — — — 21,113 21,113 Stockholders’ equity as of December 31, 2021 $ 101 $ 252 $ 476,510 $ 3,000 $ 11,527 $ 491,390 The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 93 Angel Oak Mortgage, Inc. Consolidated Statements of Cash Flows (in thousands) For the Year Ended December 31, 2021 For the Year Ended December 31, 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 21,113 $ 736 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Net realized losses 4,926 20,793 Net unrealized loss on mortgage loans and derivative contracts 2,392 2,144 Accretion of securities — ( 110 ) Amortization of debt issuance costs 458 55 Net amortization of premiums and discounts on mortgage loans 635 355 Non-cash stock compensation 1,715 — Net change in: Purchases of residential mortgage loans from affiliates ( 909,442 ) ( 423,172 ) Purchases of residential mortgage loans from non-affiliates ( 820,141 ) ( 71,577 ) Sales of residential mortgage loans into affiliate’s securitization trust — 504,731 Principal payments on residential mortgage loans 138,587 16,359 Margin posted on interest rate futures contracts 13,253 ( 14,135 ) Principal and interest receivable ( 20,926 ) ( 1,971 ) Receivable from affiliate 14 1,102 Other assets ( 6,172 ) ( 175 ) Management fee payable to affiliate 1,845 ( 27 ) Accrued expenses 321 ( 317 ) Accrued expenses payable to affiliate 693 ( 48 ) Income taxes payable 1,600 Interest payable 1,183 ( 334 ) NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ ( 1,567,946 ) $ 34,409 94 Angel Oak Mortgage, Inc. Consolidated Statements of Cash Flows (in thousands) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments in RMBS and CMBS ( 1,481,011 ) ( 1,456,004 ) Purchases of investments in U.S. Treasury Bills ( 604,995 ) — Sale of investments in RMBS and CMBS 1,120,071 1,385,000 Sale of investments in U.S. Treasury Bills 504,984 — Principal payments on RMBS and CMBS securities 11,234 10,091 Purchases of commercial mortgage loans from affiliate ( 12,328 ) ( 26,334 ) Sale of commercial mortgage loans into affiliate’s securitization trust — 34,041 Sale of commercial mortgage loans to third parties 1,540 — Principal payments on commercial mortgage loans 21 770 NET CASH USED IN INVESTING ACTIVITIES $ ( 460,484 ) $ ( 52,436 ) CASH FLOWS FROM FINANCING ACTIVITIES Contributions from prior common stockholder 56,261 234,018 Proceeds from issuance of common stock in IPO 136,800 — Proceeds from private placement concurrent with IPO 40,000 — Shares of stock repurchased ( 4,660 ) — Distributions to prior common stockholder — ( 76,700 ) Dividends paid to common stockholders ( 12,172 ) — Principal payments on loans held in securitization trusts ( 60,594 ) — Preferred dividends paid ( 15 ) ( 15 ) Cash paid for debt issuance costs ( 3,002 ) ( 153 ) Proceeds from securitizations 679,685 — Net proceeds from (purchases of) securities sold under agreements to repurchase 430,960 ( 45,800 ) Net proceeds from (payments on) notes payable 771,503 ( 56,552 ) NET CASH PROVIDED BY FINANCING ACTIVITIES $ 2,034,766 $ 54,798 CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH $ 6,336 $ 36,771 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, beginning of period 45,973 9,202 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, end of period $ 52,309 $ 45,973 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest $ 10,293 $ 7,833 (1) Cash, cash equivalents, and restricted cash as of December 31, 2021 included cash and cash equivalents of $ 40.8 million and restricted cash of $ 11.5 million, and at December 31, 2020 included cash and cash equivalents of $ 43.6 million and restricted cash of $ 2.4 million. The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. 95 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements 1. Organization Angel Oak Mortgage, Inc. (together with its subsidiaries the “Company”), is a real estate finance company focused on acquiring and investing in first lien non-qualified residential mortgage (“non-QM”) loans and other mortgage‑related assets in the U.S. mortgage market. The Company’s strategy is to make investments in first lien non‑QM loans that are primarily made to higher‑quality non‑QM loan borrowers and primarily sourced from the proprietary mortgage lending platform of affiliates, Angel Oak Mortgage Solutions LLC and Angel Oak Home Loans LLC (together, “Angel Oak Mortgage Lending”), which operates through wholesale and retail channels and has a national origination footprint. The Company may also invest in other residential mortgage loans, residential mortgage‑backed securities (“RMBS”), and other mortgage‑related assets. The Company’s objective is to generate attractive risk‑adjusted returns for its stockholders, through cash distributions and capital appreciation, across interest rate and credit cycles. The Company is a Maryland corporation incorporated on March 20, 2018. On September 18, 2018 (commencement of operations), the Board of Directors of the Company (the “Board of Directors”) authorized the Company to commence operations and on October 19, 2018 the Company began its investing activities. For the period prior to September 18, 2018, the Company had no operating activity. The Company achieves certain of its investment objectives by investing a portion of its assets in its wholly‑owned subsidiary, Angel Oak Mortgage REIT TRS, LLC (“AOMR TRS”), a Delaware limited liability company formed on March 21, 2018, which invests its assets in Angel Oak Mortgage Fund TRS, a Delaware statutory trust formed on June 15, 2018. On June 21, 2021, the Company completed its initial public offering (the “IPO”) of 7,200,000 shares of common stock, $ 0.01 par value per share (“common stock”), at an initial public offering price of $ 19.00 per share for total proceeds of approximately $ 136.8 million, excluding the underwriting discounts and commissions and offering expenses of the IPO, each of which was paid by Angel Oak Capital Advisors, LLC (“Angel Oak Capital”), pursuant to a registration statement on Form S-11, as amended (File No. 333-256301) (the “Registration Statement”), filed with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”). Such underwriting discounts and commissions were $ 8.2 million. Angel Oak Capital Advisors, LLC also agreed to pay all of the Company’s expenses incurred in connection with the IPO. Such expenses were $ 4.4 million. The common stock of the Company trades on the New York Stock Exchange under the ticker symbol “AOMR”. Concurrently with the completion of the IPO, the Company sold an additional 2,105,263 shares of common stock to CPPIB Credit Investments Inc. in a private placement at $ 19.00 per share, for total proceeds of approximately $ 40.0 million. The Operating Partnership On February 5, 2020, the Company formed Angel Oak Mortgage Operating Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), through which substantially all of its assets are held and substantially all of its operations are conducted, either directly or through subsidiaries. The Company holds all of the limited partnership interests in the Operating Partnership and indirectly holds the sole general partnership interest in the Operating Partnership through the general partner, which is the Company’s wholly-owned subsidiary. The Company’s Manager and REIT status The Company is externally managed and advised by Falcons I, LLC (the “Manager”), a registered investment adviser with the SEC. The Company has elected to be taxed as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2019 and will operate in conformity with the requirements for qualification as a REIT under the Code. 2. Summary of Significant Accounting Policies Basis of Presentation and Consolidation The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company and its wholly‑owned subsidiaries. All significant inter‑company balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements requires the Company to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amounts and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported periods. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ from the Company’s estimates and the differences could be material. 96 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements Recent Accounting Standards - Recently Issued In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . The standard was issued to ease the accounting effects of reform to the London Interbank Offered Rate (“LIBOR”) and other reference rates. The standard provides optional expedients and exceptions for applying GAAP to debt, derivatives, and other contracts affected by reference rate reform. In January 2021, the FASB amended the standard to clarify option expedients and exceptions for contract modifications and hedge accounting. The standard is effective for all entities as of March 12, 2020 through December 31, 2022 and may be elected over time as reference rate reform activities occur. The Company has determined that the impact of this accounting standard is immaterial to its financial statements. Variable Interest Entities A variable interest entity (“VIE”) is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that has both (i) the power to control the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. For VIEs that do not have substantial on-going activities, the power to direct the activities that most significantly impact the VIE’s economic performance may be determined by an entity’s involvement with the design and structure of the VIE. The Company’s securitization trusts are structured as VIEs that receive principal and interest on the underlying collateral and distribute those payments to the security holders. The assets held by the securitization entities are restricted in that they can only be used to fulfill the obligations of the securitization entity. The Company’s risks associated with its involvement with these VIEs are limited to its risks and rights as a holder of the security it has retained as well as certain associated risks which may occur when the Company acts as either the sponsor and/or depositor of and the seller, directly or indirectly to, the securitization entities. Determining the primary beneficiary of a VIE requires judgment. The Company determined that for the securitizations it consolidates, its ownership provides the Company with the obligation to absorb losses or the right to receive benefits from the VIE that could be significant to the VIE. In addition, the Company has the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance, or power, such as rights to replace the servicer without cause or the Company was determined to have power in connection with its involvement with the structure and design of the VIE. As of December 31, 2021, the Company’s interest in the assets held by consolidated securitization vehicles, which are consolidated on the Company’s consolidated balance sheet is restricted by the structural provisions of these trusts, and a recovery of the Company’s investment in the vehicles will be limited by each entity’s distribution provisions. The liabilities of the securitization vehicles, which are also consolidated on the Company’s consolidated balance sheet as of December 31, 2021, are non-recourse to the Company, and can only be satisfied using proceeds from each securitization vehicle’s respective asset pool. As of and for the year ended December 31, 2020, the Company was not a primary beneficiary in the VIEs in which it had an interest, which are comprised of the securitizations in which the Company participated within the purview of Angel Oak Mortgage Trust I (“AOMT”). The assets of securitization entities are comprised of RMBS or residential mortgage loans. See Note 3 - Variable Interest Entities for further discussion of the characteristics of the securities and loans in the Company’s portfolio relating to asset pools arising from securitization transactions. The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE would cause the Company’s consolidation conclusion to change. Segment Reporting Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM is its Chief Executive Officer. The Company has determined it currently operates in a single operating segment and has one reportable segment, which is to acquire, invest in, and finance mortgage‑related assets. The CODM reviews financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance. Cash and Cash Equivalents Cash represents cash deposits held at financial institutions. Cash equivalents include short‑term highly liquid investments of sufficient credit quality that are readily convertible to known amounts of cash and have maturities of three months or less at acquisition. The Company maintains its cash and cash equivalents with major financial institutions. Accounts at these institutions are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 for each bank. The Company is exposed to credit risk for amounts held in excess of the FDIC limit. The Company does not anticipate nonperformance by these financial institutions. 97 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements Restricted Cash Restricted cash represents cash held at financial institutions for both margin on futures trading activity and short-term collateral for repurchase agreements. If margin were to be due to the Company from either of these financial institutions as a counterparty, it would represent cash posted with the Company by its counterparties as collateral under the Company’s interest rate derivative financial instruments and repurchase agreements, and be reflected as a liability of “due to counterparties” on the consolidated balance sheets. Fair Value Measurements The Company reports various investments at fair value in accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurement . A fair value measurement represents the price at which an orderly transaction would occur between willing market participants at the measurement date. This definition of fair value focuses on exit price and prioritizes the use of market‑based inputs over entity‑specific inputs when determining fair value. In addition, the framework for measuring fair value establishes a three‑level hierarchy for fair value measurements based upon the observability of inputs to the valuation of an asset or liability as of the measurement date. See Note 10, Fair Value Measurements for further discussion on fair value measurements. The Company accounts for any purchases or sales of Investment Securities on a trade date basis. At the time of disposition, realized gains or losses on sales of Investment Securities are determined based on a specific identification basis and are a component of “net realized loss on mortgage loans, derivative contracts, RMBS, and CMBS” in the consolidated statements of operations and comprehensive income (loss). RMBS, CMBS, and U.S. Treasury Bills (“Investment Securities”), at Fair Value; and Purchase and Sale of Investment Securities The Company classifies its investments in RMBS, CMBS, and U.S. Treasury Bills as available for sale and accordingly records them at fair value in the consolidated balance sheets. Changes in fair value for these Investment Securities are reported in other comprehensive income (loss) in the consolidated statements of operations and comprehensive income (loss). Residential Mortgage Loans, Residential Mortgage Loans in Securitization Trusts, and Commercial Mortgage Loans, at Fair Value Residential mortgage loans, residential mortgage loans in securitization trusts, and commercial loans are recorded using the fair value option in ASC Topic 825 - Financial Instruments , and therefore recorded at fair value in the consolidated balance sheets. Changes in fair value are reported in current earnings in “net unrealized loss on mortgage loans and derivative contracts” in the consolidated statements of operations and comprehensive income (loss). Residential and commercial mortgage loans include loans that the Company may be marketing for sale to third parties, including transfers to securitization entities with either solely contributed loans or with loans contributed to securitization entities along with other Angel Oak entities. Derivative Financial Instruments, at Fair Value The Company uses a variety of derivative instruments to economically hedge a portion of its exposure to market risks, including interest rate risk and prepayment risk. Derivatives are accounted for in accordance with ASC 815, Derivatives and Hedging , which requires recognition of all derivatives as either assets or liabilities at fair value on the consolidated balance sheets. These derivative financial instrument contracts are not designated as hedges for U.S. GAAP purposes; therefore, all changes in fair value are recognized in earnings. See Note 9, Derivative Financial Instruments for further information. Revenue Recognition Investment Securities Interest income on Investment Securities is recognized based on outstanding principal balances and contractual terms. Premiums and discounts are generally amortized into interest income over the life of such securities using the effective yield method. Adjustments to premium amortization are made for actual prepayments. Residential Mortgage Loans Interest income on residential mortgage loans is recognized using the effective interest method over the life of the loans. The amortization of any premiums and discounts is included in interest income. Interest income recognition is suspended when residential mortgage loans are placed on non-accrual status. Generally, residential mortgage loans are placed on non-accrual status when delinquent for more than 90 days or when determined not to be probable of full collection. Interest accrued, but not collected, at the date residential mortgage loans are placed on nonaccrual status is reversed and subsequently recognized only to the extent it is received in cash or until it qualifies for return to accrual status. Commercial Mortgage Loans Interest income on commercial mortgage loans is recognized using the effective interest method over the life of the loans. The amortization of any related premiums and discounts is included in interest income. Interest income recognition is suspended when the commercial mortgage loan becomes more than 90 days past due. Interest received after the loan becomes past due or impaired is used to 98 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements reduce the outstanding loan principal balance. A delinquent loan previously placed on non-accrual status is placed back on accrual status when all delinquent principal and interest has been remitted by the borrower. Alternatively, the delinquent or impaired loan may be placed back on accrual status if restructured and after the loan is considered re‑performing. A restructured loan is considered re‑performing when the loan has been current for at least 12 months. Repurchase Agreements The Company finances purchases of residential and commercial mortgage loans and Investment Securities through the use of repurchase agreements. The repurchase agreements are treated as collateralized financing transactions, which expire within approximately one year or less and are carried at their contractual amounts, including accrued interest as specified in the respective agreements. Interest paid and accrued in accordance with repurchase agreements is recorded as interest expense. Earnings Per Share Basic net income (loss) per share is computed by dividing net income (loss) allocable to common stockholders by the weighted‑average number of shares of common stock outstanding during the period. Diluted EPS is calculated by dividing net income (loss) allocable to common stockholders by the weighted average number of shares of common stock outstanding plus the additional dilutive effect of common stock equivalents during each period, unless anti-dilutive. Share-Based Compensation The Company amortizes the fair value of previously granted share-based awards to expense over the vesting period using the straight line method. The initial cost of share-based awards is established at the Company’s closing share price on the grant date of the award. The Company recognizes adjustments for forfeitures as forfeitures occur. Income Taxes The Company has elected to be taxed as a REIT under the Code starting with its taxable year ended December 31, 2019 and will operate in conformity with the requirements for qualification as a REIT under the Code. Accordingly, the Company will generally not be subject to corporate U.S. federal income tax to the extent that the Company makes qualifying distributions to stockholders, and provided that the Company satisfies, on a continuing basis, through actual investment and operating results, the REIT requirements, including certain asset, income, distribution, and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal, state, and any applicable local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which the Company lost its REIT qualification. Accordingly, the failure to qualify as a REIT could have a material adverse impact on the Company’s results of operations and amounts available for distribution to stockholders. The dividends paid deduction for qualifying dividends paid to stockholders is computed using the Company’s taxable income as opposed to net income reported in the consolidated statements of operations and comprehensive income (loss). Taxable income will generally differ from net income reported in the consolidated statements of operations and comprehensive income (loss) because the determination of taxable income is based on tax regulations and not U.S. GAAP. The Company has created and elected to treat AOMR TRS as a taxable REIT subsidiary (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non‑real estate‑related business. A domestic TRS is subject to U.S. federal, state, and local corporate income taxes, and the value of the securities of the TRS together with the value of the securities of any other TRS owned by the Company may not exceed 20% of the value of the Company’s total assets. If the TRS generates net income, it may declare dividends to the Company, which will be included in the Company’s taxable income and may necessitate a distribution to its stockholders to satisfy distribution requirements and to avoid U.S. federal income and excise tax. Conversely, if the Company retains earnings at the TRS level, no distribution is required. Current and deferred taxes are recorded on earnings (losses) recognized by AOMR TRS. Deferred income tax assets and liabilities are calculated based upon temporary differences between the Company’s U.S. GAAP consolidated financial statements and the U.S. federal and state tax basis of assets and liabilities as of the consolidated balance sheet date. If any deferred tax assets exist, the Company evaluates the realizability of such, and subsequently may recognize a valuation allowance if, based on available evidence, it is more likely than not that some or all of its deferred tax assets will not be realized. In evaluating the realizability of a deferred tax asset, the Company will consider expected future taxable income, existing and projected book to tax differences, and any tax planning strategies. Such an analysis is inherently subjective, as it is based on forecast earnings and business and economic activity. As a REIT, if the Company fails to distribute in any calendar year (subject to specific timing rules for certain dividends paid in January) at least the sum of (i) 85% of its ordinary income for such year, (ii) 95% of its capital gain net income for such year, and (iii) any undistributed taxable income from the prior year, the Company would be subject to a nondeductible 4% excise tax on the excess of such required distribution over the sum of (i) the amounts actually distributed and (ii) the amounts of income retained and on which the Company has paid U.S. federal corporate income tax. 99 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements Risks and Uncertainties Credit Risk The Company assumes credit risk through its investments in mortgage loans and other mortgage‑related assets. Credit losses on mortgage loans can occur for many reasons, including: fraud; poor underwriting; poor servicing practices; weak economic conditions; increases in payments required to be made by borrowers; declines in the value of real estate; declining rents on single‑ and multi‑family residential rental properties; natural disasters, including the effects of climate change (including flooding, drought, wildfires, and severe weather), and other natural events; uninsured property loss; over‑leveraging of the borrower; costs of remediation of environmental conditions, such as indoor mold; changes in zoning or building codes and the related costs of compliance; acts of war or terrorism; changes in legal protections for lenders and other changes in law or regulation; and personal events affecting borrowers, such as reduction in income, job loss, divorce, or health problems. In addition, the amount and timing of credit losses could be affected by loan modifications, delays in the liquidation process, documentation errors, and other action by servicers. Weakness in the U.S. economy or the housing market could cause the Company’s credit losses to increase. In addition, rising interest rates may increase the credit risk associated with certain residential mortgage loans. For example, the interest rate is adjustable for many of the loans held by the Company or within the securitization entities in which the Company participates. In addition, a portion of the loans the Company has pledged to secure loan financing lines have adjustable interest rates. Accordingly, when short‑term interest rates rise, required monthly payments from homeowners will rise under the terms of these adjustable‑rate mortgages, and this may increase borrowers’ delinquencies and defaults. Credit losses on commercial mortgage loans can occur for many of the reasons noted above for residential mortgage loans. Moreover, these types of real estate loans may not be fully amortizing and, therefore, the borrower’s ability to repay the principal when due may depend upon the ability of the borrower to refinance or sell the property at maturity. Business purpose real estate loans are particularly sensitive to conditions in the rental housing market and to demand for rental residential properties. Within a securitization of residential, multi‑family, or business purpose real estate loans, various securities are created, each of which has varying degrees of credit risk. The Company may own the securities in which there is more (or the most) concentrated credit risk associated with the underlying real estate loans. In general, losses on an asset securing a loan or loan included as collateral to a securitization will be borne first by the owner of the property (i.e., the owner will first lose any equity invested in the property) and, thereafter, by the first loss security holder, and then by holders of more senior securities. In the event the losses incurred upon default on the loan exceed any classes in which the Company invests, the Company may not be able to recover all of its investment in the securities it holds. In addition, if the underlying properties have been overvalued by the originating appraiser or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related security, then the first‑loss securities may suffer a total loss of principal, followed by losses on the second‑loss and then third‑loss securities (or other residential and commercial securities that the Company owns). In addition, with respect to residential securities the Company owns, the Company may be subject to risks associated with the determination by a loan servicer to discontinue servicing advances (advances of mortgage interest payments not made by a delinquent borrower) if they deem continued advances to be unrecoverable, which could reduce the value of these securities or impair the Company’s ability to project and realize future cash flows from these securities. Investments in subordinated RMBS and CMBS involve greater credit risk than the senior classes of the issue or series. Many of the default‑related risks of whole loan mortgages will be magnified in subordinated securities. Default risks may be further pronounced in the case of RMBS and CMBS by, or evidencing an interest in, a relatively small or less diverse pool of underlying mortgage loans. Certain subordinated securities absorb all losses from default before any other class of securities is at risk, particularly if such securities have been issued with little or no credit enhancement or equity. In addition, principal payments on subordinated securities may be subject to a “lockout” period in which some or all of the principal payments are directed to the related senior securities. This lock‑out period may be for a set period of time and/or may be determined based on pool performance criteria such as losses and delinquencies. Such securities therefore possess some of the attributes typically associated with equity investments. Interest Rate Risk Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control. A significant portion of the Company’s financial assets and liabilities, including the Company’s whole loan investments, investment securities, loan financing facilities, and security repurchase facilities, are interest earning or interest bearing and, as a result, the Company is subject to risks arising from fluctuations in the prevailing levels of market interest rates. In addition, all of the Company’s warehouse loan financing arrangements (notes payable) have a variable rate component or include rates which reset monthly and add additional risk due to fluctuations in market interest rates. Any excess cash and cash equivalents of the Company are invested in instruments earning short‑term market interest rates. Subject to maintaining its qualification as a REIT and maintaining its exclusion from regulation as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”), the Company may utilize various derivative instruments and other hedging instruments to mitigate interest rate risk. 100 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements Liquidity Risk An insufficient secondary market may prevent the liquidation of an asset or limit the funds that can be generated from selling an asset. A portion of the Company’s financial assets are considered to be illiquid and may be subject to high liquidity risk. Prepayment Risk The frequency at which prepayments occur on loans held and loans underlying RMBS and CMBS will be affected by a variety of factors including the prevailing level of interest rates as well as economic, demographic, tax, social, legal, and other factors. Generally, mortgage obligors tend to prepay their mortgages when prevailing mortgage rates fall below the interest rates on their mortgage loans. Generally, whole loans, RMBS, and CMBS purchased at a premium are adversely affected by faster than anticipated prepayments; and whole loans, RMBS, and CMBS purchased at a discount are adversely affected by slower than anticipated prepayments. The adverse effects of prepayments may impact the Company in two ways. First, particular investments may experience outright losses, as in the case of an interest‑only security in an environment of faster actual or anticipated prepayments. Second, particular investments may underperform relative to the financial instruments that the Company’s Manager may have constructed to reduce specific financial risks for these investments, resulting in a loss to the Company. In particular, prepayments (at par) may limit the potential upside of many whole loans, RMBS, and CMBS to their principal or par amounts, whereas their corresponding hedges, if any, often have the potential for unlimited loss. Extension Risk The Company’s Manager computes the projected weighted average life of the Company’s investments based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgage loans. In general, when fixed rate, adjustable rate, or hybrid mortgage loans or other mortgage‑related assets are acquired via borrowings, the Company may, but is not required to, enter into an interest rate swap agreement or other economic hedging instrument that attempts to fix the Company’s borrowing costs for a period close to the anticipated average life of the fixed rate portion of the related assets, in each case subject to maintaining the Company’s qualification as a REIT and maintaining the Company’s exclusion from regulation as an investment company under the Investment Company Act. This strategy is designed to protect the Company from rising interest rates, as the borrowing costs are managed to maintain a net interest spread for the duration of the fixed rate portion of the related assets. However, if prepayment rates decrease in a rising interest rate environment, the life of the fixed rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have an adverse impact on the Company’s earnings, as borrowing costs would no longer be fixed after the end of the hedging instrument, while the income earned on the fixed rate, adjustable rate, or hybrid assets would remain fixed. In extreme situations, the Company may be forced to sell assets to maintain adequate liquidity, which could cause the Company to incur losses. 101 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements 3. Variable Interest Entities Since its inception, the Company has utilized VIEs for the purpose of securitizing whole mortgage loans to obtain long-term non-recourse financing. The Company evaluates its interest in each VIE to determine if it is the primary beneficiary. VIEs for Which the Company is the Primary Beneficiary In the third and fourth quarters of 2021, the Company entered into securitization transactions where it was determined that the Company was the primary beneficiary, as it controls the class of securities with call rights, or “controlling class” of securities, the XS tranche. The Company was the sole entity to contribute residential whole mortgage loans to the securitization vehicles, AOMT 2021-4 and AOMT 2021-7. During the year ended December 31, 2021, in the AOMT 2021-4 and AOMT 2021-7 transactions, the Company securitized and consolidated approximately $ 703.5 million unpaid principal balance of seasoned residential non-QM mortgage loans. The retained beneficial interest in VIEs for which the Company is the primary beneficiary (currently comprised of AOMT 2021-4 and AOMT 2021-7) is the subordinated tranches of the securitization and further interests in additional interest‑only tranches. The table below sets forth the fair values of the assets and liabilities recorded in the consolidated balance sheet related to these consolidated VIEs as of December 31, 2021: Assets: (in thousands) Residential mortgage loans in securitization trusts - at fair value $ 667,365 Accrued interest receivable 1,728 Liabilities: Non-recourse securitization obligations, collateralized by residential mortgage loans $ 619,108 Less: debt issuance costs capitalized ( 2,551 ) Non-recourse securitization obligations, collateralized by residential mortgage loans, net $ 616,557 Income and expense amounts related to the consolidated VIEs recorded in the consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2021 is set forth as follows: Total Consolidated VIEs (in thousands) Interest income $ 7,933 Interest expense, non-recourse liabilities ( 1,792 ) Net interest income 6,141 Net unrealized loss on mortgage loans ( 1,308 ) Operating expenses ( 86 ) Income from consolidated VIEs $ 4,747 VIEs for Which the Company is Not the Primary Beneficiary In 2019 and 2020, the Company co‑sponsored and participated in the formation of various entities that were considered to be VIEs. These VIEs were formed to facilitate securitization issuances that were comprised of secured residential whole loans or small balance commercial loans contributed to securitization trusts. These securities were issued as a result of the unconsolidated securitizations where the Company retained bonds from the issuances of AOMT 2019-2, AOMT 2019-4, AOMT 2019-6, AOMT 2020-3, and AOMT 2020-SBC1. The Company determined that it was not then and is not now the primary beneficiary of any of these entities, as no primary beneficiary was identified in the assessment of primary beneficiary determination, and thus has not consolidated the operating results or statements of financial position of any of these entities. The Company performs ongoing reassessments of all VIEs in which the Company has participated since its inception as to whether changes in the facts and circumstances regarding the Company’s involvement with a VIE would cause the Company’s consolidation conclusion to change, and the Company’s assessment of the VIEs in which the Company participated during the years 2019 and 2020 remains unchanged. The securities received in the aforementioned 2019 and 2020 securitization transactions are included in “RMBS - at fair value” and “CMBS - at fair value” on the consolidated balance sheets as of December 31, 2021 and 2020, and details on the accounting treatment and fair value methodology of the securities can be found in Note 10, Fair Value Measurements . See Note 6, Investment Securities , for the fair value of AOMT securities held by the Company as of December 31, 2021 and 2020 that were retained by the Company as a result of the securitization transactions in 2020 and 2019. 102 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements 4. Residential Mortgage Loans Residential mortgage loans are measured at fair value. The following table sets forth the cost, fair value, weighted average interest rate, and weighted average remaining maturity of the Company’s residential mortgage loan portfolio as of December 31, 2021 and 2020: As of: December 31, 2021 December 31, 2020 ($ in thousands) Cost $ 1,063,146 $ 143,455 Unpaid principal balance $ 1,022,461 $ 139,278 Net premium on mortgage loans purchased 40,685 4,177 Change in fair value ( 1,234 ) ( 1,425 ) Fair value $ 1,061,912 $ 142,030 Weighted average interest rate 4.49 % 5.95 % Weighted average remaining maturity (years) 30 30 The following table sets forth data regarding the number of consumer mortgage loans secured by residential real property 90 or more days past due and also those in formal foreclosure proceedings, and the recorded investment and unpaid principal balance of such loans as of December 31, 2021 and 2020: As of: December 31, 2021 December 31, 2020 ($ in thousands) Number of mortgage loans 90 or more days past due 8 22 Recorded investment in mortgage loans 90 or more days past due $ 3,241 $ 10,855 Unpaid principal balance of loans 90 or more days past due $ 3,100 $ 11,932 Number of mortgage loans in foreclosure 7 10 Recorded investment in mortgage loans in foreclosure $ 2,125 $ 2,277 Unpaid principal balance of loans in foreclosure $ 2,113 $ 2,636 5. Commercial Mortgage Loans Commercial mortgage loans are measured at fair value. The following table sets forth the cost, fair value, weighted average interest rate, and weighted average remaining maturity of the Company’s commercial mortgage loan portfolio as of December 31, 2021 and 2020: As of: December 31, 2021 December 31, 2020 ($ in thousands) Cost $ 18,641 $ 7,674 Unpaid principal balance $ 18,698 $ 7,756 Net discount on mortgage loans purchased ( 51 ) ( 82 ) Change in fair value 17 ( 208 ) Fair value $ 18,664 $ 7,466 Weighted average interest rate 6.25 % 6.58 % Weighted average remaining maturity (years) 8 14 There was one commercial mortgage loan in foreclosure as of both December 31, 2021 and 2020, respectively. The recorded investment in these loans was $ 0.6 million and $ 0.6 million as of December 31, 2021 and 2020, respectively, with an unpaid principal balance of $ 0.6 million and $ 0.8 million as of December 31, 2021 and 2020, respectively. 103 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements 6. Investment Securities As of December 31, 2021 Investment Securities were comprised of non‑agency RMBS and Freddie Mac and Fannie Mae “whole pool agency RMBS” (together, “RMBS”), CMBS, and U.S. Treasury securities as presented in the consolidated balance sheet. As of December 31, 2020, Investment Securities were comprised of non‑agency RMBS, CMBS, and U.S. Treasury securities in the consolidated balance sheet. The U.S. Treasury securities held by the Company as of December 31, 2021 and 2020 matured on January 6, 2022 and January 19, 2021, respectively. The Company recognized a nominal amount of accretion during each of the years ended December 31, 2021 and 2020, respectively. The following table sets forth a summary of RMBS and CMBS at cost as of December 31, 2021 and 2020: December 31, 2021 December 31, 2020 (in thousands) RMBS $ 482,824 $ 151,222 CMBS $ 10,875 $ 8,857 The following table sets forth certain information about the Company’s investment in RMBS and CMBS as of December 31, 2021 and 2020, respectively: December 31, 2021 Real Estate Securities at Fair Value Repurchase Debt Allocated Capital (in thousands) AOMT RMBS (1) Senior $ 3,076 $ ( 4,089 ) $ ( 1,013 ) Mezzanine 2,178 ( 1,631 ) 547 Subordinate 80,058 — 80,058 Interest Only/Excess 15,052 — 15,052 Total AOMT RMBS $ 100,364 $ ( 5,720 ) $ 94,644 Other Non-Agency RMBS Subordinate $ 10,292 $ — $ 10,292 Interest Only/Excess 2,923 — 2,923 Total Other Non-Agency RMBS $ 13,215 $ — $ 13,215 Whole Pool Agency RMBS Fannie Mae $ 281,225 $ ( 267,286 ) $ 13,939 Freddie Mac 90,830 ( 87,495 ) 3,335 Whole Pool Total Agency RMBS $ 372,055 $ ( 354,781 ) $ 17,274 Total RMBS $ 485,634 $ ( 360,501 ) $ 125,133 AOMT CMBS Subordinate $ 7,993 $ — $ 7,993 Interest Only/Excess 2,763 — 2,763 Total AOMT CMBS $ 10,756 $ — $ 10,756 (1) AOMT RMBS held as of December 31, 2021 included both retained tranches of AOMT securitizations in which the Company participated and additional AOMT securities purchased in secondary market transactions. 104 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements December 31, 2020 Real Estate Securities at Fair Value Repurchase Debt Allocated Capital (in thousands) AOMT RMBS (1) Senior $ 11,477 $ ( 11,936 ) $ ( 459 ) Mezzanine 2,207 ( 1,633 ) 574 Subordinate 78,806 ( 15,104 ) 63,702 Interest Only/Excess 31,842 — 31,842 Total AOMT RMBS $ 124,332 $ ( 28,673 ) $ 95,659 Other Non-Agency RMBS Senior $ 6,820 $ — $ 6,820 Subordinate 18,784 — 18,784 Total Other Non-Agency RMBS $ 25,604 $ — $ 25,604 Total RMBS $ 149,936 $ ( 28,673 ) $ 121,263 AOMT CMBS Subordinate $ 5,766 $ — $ 5,766 Interest Only/Excess 3,030 — 3,030 Total AOMT CMBS $ 8,796 $ — $ 8,796 (1) AOMT RMBS held as of December 31, 2020 included both retained tranches of AOMT securitizations in which the Company participated and additional AOMT securities purchased in secondary market transactions. The following table sets forth certain information about the Company’s investment in U.S. Treasury Bills as of December 31, 2021 and 2020: Date Face Value Unamortized Discount, net Amortized Cost (1) Unrealized Loss Fair Value Net Effective Yield ($ in thousands) December 31, 2021 $ 250,000 $ — $ 250,000 $ ( 1 ) $ 249,999 2.30 basis points December 31, 2020 $ 150,000 $ ( 3 ) $ 149,997 $ ( 2 ) $ 149,995 6.25 basis points (1) Cost and amortized cost of U.S. Treasury Bills is substantially equal, due to the short length of time until maturity on these financial instruments. 7. Notes Payable The Company has the ability to finance whole loans, utilizing lines of credit (notes payable) from various counterparties, as further described below. Outstanding borrowings bear interest at floating rates depending on the lending counterparty, the collateral pledged, and the rate in effect for each interest period, as the same may change from time to time at the end of each interest period. Some loans include up‑front fees, fees on unused balances, covenants and concentration limits on types of collateral pledged; all vary based on the counterparty. 105 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements The following table sets forth the details of all the lines of credit available to the Company for whole loan purchases during the years ended December 31, 2021 and 2020, and the drawn amounts as of December 31, 2021 and 2020: Drawn Amount Line of Credit (Note Payable) Facility Limit Base Interest Rate Interest Rate Spread December 31, 2021 December 31, 2020 ($ in thousands) Barclays Bank PLC (1) $ 400,000 1 month LIBOR 1.70 % - 3.50 % $ 362,899 N/A Nomura Corporate Funding Americas, LLC (2) 300,000 1 month or 3 month LIBOR 1.70 % - 3.50 % 103,149 $ 8,011 Deutsche Bank, AG (3) 250,000 1 month LIBOR 2.00 % - 3.25 % 231,981 34,905 Goldman Sachs Bank USA (4) 200,000 3 month LIBOR 2.25 % 109,283 N/A Banc of California, National Association (5) 50,000 1 month LIBOR 2.50 % - 3.13 % 34,838 38,989 Veritex Community Bank (6) 50,000 1 month LIBOR 2.30 % 11,258 N/A Total $ 1,250,000 $ 853,408 $ 81,905 (1) On September 20, 2021, the Company entered into a $ 400.0 million repurchase facility with Barclays Bank PLC which expires on September 20, 2022. 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 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 (See Note 16 - Subsequent Events ). (2) On August 6, 2021, this facility was amended to extend the expiration date from December 3, 2021 to August 5, 2022, add the one-month LIBOR as a base interest rate for certain loans, and change the interest rate spread to 1.70 % (from 1.75 %) to 3.50 %. (3) On June 21, 2021, this facility was amended to increase the facility limit from $ 150.0 million to $ 250.0 million. This facility was set to expire on February 11, 2022. 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 and (B) a spread generally ranging from 2.20 % to 3.45 % (See Note 16 - Subsequent Events ). (4) This agreement was entered into on March 5, 2021, and was set to expire on March 5, 2022, unless terminated earlier pursuant to the terms of the agreement; however, on March 2, 2022 was extended to expire on March 5, 2023, unless terminated earlier pursuant to the terms of the agreement (See Note 16 - Subsequent Events ). On January 1, 2022, the agreement was amended to replace a LIBOR-based index rate with a SOFR-based index rate. (5) This agreement expires on March 16, 2022. On March 7, 2022, the agreement was amended to expire 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 (See Note 16 - Subsequent Events ). (6) On August 16, 2021, the Company entered into a financing facility with Veritex Community Bank, which expires 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 plus a margin equal to 2.41 % per annum; provided that the interest rate may not be less than 3.125 % per annum (See Note 16 - Subsequent Events ). 8. Securities Sold Under Agreements to Repurchase Transactions involving securities sold under agreements to repurchase are treated as collateralized financial transactions, and are recorded at their contracted repurchase amounts. Margin (if required) for securities sold under agreements to repurchase represents margin collateral amounts held to ensure that the Company has sufficient coverage for securities sold under agreements to repurchase in case of adverse price changes. As of December 31, 2021 and 2020, there was approximately $ 5.1 million and $ 1.7 million, respectively, held as margin cash collateral for repurchase agreements recorded in “restricted cash” on the consolidated balance sheets. 106 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements The following table summarizes certain characteristics of the Company’s repurchase agreements as of December 31, 2021 and 2020: 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 December 31, 2020 Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days) ($ in thousands) U.S Treasury Bills $ 149,618 0.25 % 19 RMBS 28,673 1.40 % 19 Total $ 178,291 0.44 % 19 Although the transactions under repurchase agreements represent committed borrowings until maturity, the lenders retain the right to mark the underlying collateral at fair value. A reduction in the value of pledged assets would require the Company to provide additional collateral or fund margin calls. 9. Derivative Financial Instruments In the normal course of business, the Company enters into derivative financial instruments to manage its exposure to market risk, including interest rate risk and prepayment risk on its residential whole loans at fair value. The derivatives in which the Company invests, and the market risk that the economic hedge is intended to mitigate are further discussed below. Derivative instruments as of December 31, 2021 included both TBAs and interest rate futures, while the derivative investments as of December 31, 2020 were solely comprised of interest rate futures. The Company uses interest rate futures as economic hedges to hedge a portion of its interest rate risk exposure. Interest rate risk is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, as well as other factors. The Company’s credit risk with respect to economic hedges is the risk of default on its investments that result from a borrower’s or counterparty’s inability or unwillingness to make contractually required payments. The Company may at times hold TBAs in order to mitigate its interest rate risk on certain specified mortgage-backed securities. Amounts or obligations owed by or to the Company are subject to the right of set-off with the TBA counterparty. As part of executing these trades, the Company may enter into agreements with its TBA counterparties that govern the transactions for the TBA purchases or sales made, including margin maintenance, payment and transfer, events of default, settlements, and various other provisions. Changes in the value of derivatives designed to protect against mortgage-backed securities fair value fluctuations, or economic hedging gains and losses, are reflected in the tables below. All realized and unrealized gains and losses on derivative contracts are recognized in earnings, in “net realized loss on mortgage loans, derivative contracts, RMBS, and CMBS” for realized losses, and “net unrealized loss on mortgage loans and derivative contracts” for unrealized gains and losses. Unrealized appreciation on futures contracts and unrealized appreciation on TBAs is included in “other assets” on the consolidated balance sheets when an unrealized appreciation position exists. The Company considers the notional amounts, categorized by primary underlying risk, to be representative of the volume of its derivative activities. 107 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements The following table sets forth the derivative instruments presented on the consolidated balance sheets and notional amounts as of December 31, 2021 and 2020: Notional Amounts As of: Derivatives Not Designated as Hedging Instruments Number of Contracts Assets Liabilities Long Exposure Short Exposure ($ in thousands) December 31, 2021 Interest rate futures 10,438 $ — $ ( 728 ) $ — $ 1,043,800 December 31, 2021 TBAs N/A $ 2,428 $ — $ — $ 523,938 December 31, 2020 Interest rate futures 1,295 $ — $ ( 198 ) $ — $ 129,500 The gains and losses arising from these derivative instruments in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2021, and 2020 are set forth as follows: As of: Derivatives Not Designated as Hedging Instruments Net Realized Gains (Losses) on Derivative Instruments Net Change in Unrealized Appreciation (Depreciation) on Derivative Instruments (in thousands) December 31, 2021 Interest rate futures $ 13,253 $ ( 530 ) December 31, 2021 TBAs $ ( 3,691 ) $ 2,428 December 31, 2020 Interest rate futures $ ( 14,076 ) $ ( 257 ) 10. Fair Value Measurements Definition and Hierarchy Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable or unobservable: • Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. • Unobservable inputs are inputs that reflect the reporting entity’s own assumptions. A fair value hierarchy for inputs is implemented in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs are used when available. The availability of valuation techniques and the ability to attain observable inputs can vary from investment to investment and are affected by a wide variety of factors, including the type of investment, whether the investment is newly issued and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the transaction. The fair value hierarchy is categorized into three broad levels based on the inputs as follows: Level 1 - Valuations based on unadjusted, quoted prices in active markets for identical assets and liabilities. Level 2 - Valuations based on quoted prices in an inactive market, or whose values are based on models - but the inputs to those models are observable either directly or indirectly for substantially the full term of the assets and liabilities. Level 2 inputs include the following: a) Quoted prices for similar assets and liabilities in active markets (e.g. restricted stock); b) Quoted prices for identical or similar assets and liabilities in non‑active markets (e.g. corporate and municipal bonds); c) Pricing models whose inputs are observable for substantially the full term of the assets and liabilities (e.g. over‑the‑counter derivatives); and d) Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability, (e.g. residential and commercial mortgage‑related assets, including whole loans securities and derivatives). Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Valuation of these assets is typically based on the Company’s Manager’s own assumptions or expectations based on the best information available. The degree of judgment exercised by the Company’s Manager in determining fair value is greatest for investments categorized in Level 3. 108 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the actual level is determined based on the level of inputs that is most significant to the fair value measurement in its entirety. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the investments existed. Accordingly, the degree of judgment exercised by the Company’s Manager in determining fair value is greatest for investments categorized in Level 3. Transfers, if any, between levels are determined by the Company on the first day of the reporting period. Valuation Techniques and Inputs Following are descriptions of the valuation methodologies used to measure the Company’s assets and liabilities measured at fair value: Investment Securities - U.S. Government and Agency Securities (“U.S. Treasury Bills”) are valued based on unadjusted, quoted prices for identical assets or liabilities in an active market. These securities are generally categorized as Level 1 securities. Futures Contracts - Futures contracts that are traded on an exchange are valued at their last reported sales price as of the valuation date. Listed futures contracts are categorized in Level 1 of the fair value hierarchy. Non‑Agency Residential Mortgage‑Backed Securities (“Non‑Agency”) - Non‑Agencies consist of investments in collateralized mortgage obligations. The Company utilizes Price Serve , Bank of America’s independent fixed income pricing service, as the primary valuation source for the investments. Price Serve obtains its price quotes from actual sales or quotes for sale of the same or similar securities and/or provides model‑based valuations that consider inputs derived from recent market activity including default rates, conditional prepayment rates, loss severity, expected yield to maturity, baseline DM/Yield, recovery assumptions, tranche type, collateral coupon, age and loan size and other inputs specific to each security. These quotes are most reflective of the price that would be achieved if the security was sold to an independent third party on the date of the consolidated financial statements. Non‑Agencies are categorized in Level 2 of the fair value hierarchy. Commercial Mortgage Loans - Commercial mortgage loans are recognized at fair value. The fair value of commercial mortgage loans at fair value is predominately based on trading activity observed in the marketplace, provided by a third‑party pricing service. The pricing service obtains comparative pricing from banks, brokers, hedge funds, REITs and from its own brokerage business. The pricing service also maintains a spread matrix created from trading levels observed in the secondary market and from indications of holding values in client investments. The spreads are meant to depict the required spread demanded by investors in the current environment. The performing commercial mortgage loans are generally categorized as Level 2 securities in the fair value hierarchy, while non-performing loans are categorized as Level 3 given their limited marketability and availability of observable valuation inputs. Residential Mortgage Loans - The Company recognizes residential mortgage loans at fair value. The fair value of the residential mortgage loans is predominantly based on trading activity observed in the marketplace, provided by a third‑party pricing service. The third‑party pricing service obtains comparative pricing from banks, brokers, hedge funds, REITs and from its own brokerage business. The third‑party pricing service also maintains a spread matrix created from trading levels observed in the secondary market and from indications of holding values in client investments. The spreads are meant to depict the required spread demanded by investors in the current environment. The matrix is segregated by loan structure type (hybrid arm, fixed rate, home equity line of credit, second lien, pay option arm, etc.), delinquency status, and loan to value strata. Significant matrix inputs are analyzed at the loan level. The performing residential mortgage loans are categorized as Level 2 in the fair value hierarchy, while non‑performing loans are categorized as Level 3 given their limited marketability and availability of observable valuation inputs. Both Level 2 and Level 3 loans matrix inputs include collateral behavioral models including prepayment rates, default rates, loss severity, and discount rates. Valuation Processes The Company’s Manager establishes valuation processes and procedures to ensure that the valuation techniques are fair and consistent, and valuation inputs are verifiable. The valuation committee of the Company’s Manager (the “Committee”) oversees the valuation process of the Company’s investments. The Committee is comprised of various personnel of the Company’s Manager, including those that are separate from the Company’s portfolio management and trading functions. The Committee is responsible for developing the Company’s written valuation processes and procedures, conducting periodic reviews of the valuation policies, and evaluating the overall fairness and consistent application of the valuation policies. The Committee meets on a monthly basis, or more frequently as needed, to review the valuations of the Company’s investments. If a security does not have a pricing source which is available or reliable, the Company’s Manager considers all appropriate factors relevant to determine the fair value of the security. Valuations determined by the Company’s Manager are required to be supported by market data, third‑party pricing sources, and industry accepted pricing models. 109 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements The following table sets forth information about the Company’s financial assets measured at fair value as of December 31, 2021: Level 1 Level 2 Level 3 Total (in thousands) Assets, at fair value Residential mortgage loans $ — $ 1,056,875 $ 5,037 $ 1,061,912 Residential mortgage loans in securitization trusts — 665,802 1,563 667,365 Commercial mortgage loans — 18,145 519 18,664 Investments in securities Non-Agency RMBS (1) — 113,579 — 113,579 Agency whole pool loan securities — 372,055 — 372,055 AOMT CMBS (1) — 10,756 — 10,756 U.S. Treasury Bills 249,999 — — 249,999 Unrealized appreciation on TBAs (2) 2,428 — — 2,428 Total assets $ 252,427 $ 2,237,212 $ 7,119 $ 2,496,758 Liabilities, at fair value Unrealized depreciation on futures contracts $ 728 $ — $ — $ 728 Total liabilities $ 728 $ — $ — $ 728 (1) Non‑Agency RMBS held as of December 31, 2021 included both retained tranches of AOMT securitizations in which the Company participated, additional AOMT securities purchased in secondary market transactions, and other RMBS purchased in secondary market transactions. All AOMT CMBS held as of December 31, 2021 was comprised of retained tranches of AOMT securitizations. (2) “Unrealized appreciation on TBAs” is included in “other assets” on the consolidated balance sheet. All unrealized gains and losses arising from valuation changes in residential and commercial mortgage loans, TBAs, and futures contracts are recognized in net income for the periods presented. Transfers from Level 2 to Level 3 were comprised of residential loans more than 90 days overdue (including those in foreclosure) and commercial mortgage loans in special servicing or otherwise considered “non‑performing” by the Company’s third‑party valuation providers. Transfers between Levels are deemed to take place on the first day of the reporting period in which the transfer has taken place. Transfers between Level 2 and Level 3 were immaterial for the year ended December 31, 2021. We use third‑party valuation firms who utilize proprietary methodologies to value our residential and commercial loans. These firms generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets. Use of these techniques requires determination of relevant input and assumptions, some of which represent significant unobservable inputs such as anticipated credit losses, prepayment rates, default rates, or other valuation assumptions. Accordingly, a significant increase or decrease in any of these inputs in isolation may result in a significantly lower or higher fair value measurement. The following table sets forth information regarding the Company’s significant Level 3 inputs as of December 31, 2021: 110 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements Input Values Asset Fair Value Unobservable Input Range Average Residential mortgage loans, at fair value $ 5,037 Prepayment rate (annual CPR) — % - 20.85 % 6.89 % Default rate — % - 37.32 % 13.05 % Loss severity ( 20.31 )% - 36.35 % 0.89 % Expected remaining life 0.04 - 2.75 years 1.72 years Residential mortgage loans in securitization trust, at fair value $ 1,563 Prepayment rate (annual CPR) — % - 20.85 % 6.89 % Default rate — % - 37.32 % 13.05 % Loss severity ( 20.31 )% - 36.35 % 0.89 % Expected remaining life 0.04 - 2.75 years 1.72 years Commercial mortgage loans, at fair value $ 519 Loss severity ( 25.00 )% ( 25.00 )% Sale or Liquidation timeline 39 - 50 months 39 - 50 months The following table sets forth information about the Company’s financial assets and liabilities measured at fair value as of December 31, 2020 (1) : Level 1 Level 2 Level 3 Total (in thousands) Assets, at fair value Residential mortgage loans $ — $ 128,897 $ 13,133 $ 142,030 Commercial mortgage loans — 6,859 607 7,466 Investments in securities Non-Agency RMBS (1) — 149,936 — 149,936 AOMT CMBS (1) — 8,796 — 8,796 U.S. Treasury Bills 149,995 — — 149,995 Total assets at fair value $ 149,995 $ 294,488 $ 13,740 $ 458,223 Liabilities, at fair value Unrealized depreciation on futures contracts $ 198 $ — $ — $ 198 Total liabilities at fair value $ 198 $ — $ — $ 198 (1) Non‑Agency RMBS held as of December 31, 2020 included both retained tranches of AOMT securitizations in which the Company participated, additional AOMT securities purchased in secondary market transactions, and other RMBS purchased in secondary market transactions. All AOMT CMBS held as of December 31, 2020 was comprised of retained tranches of AOMT securitizations. All unrealized gains and losses arising from valuation changes in residential and commercial mortgage loans and futures contracts are recognized in net income for the periods presented. Transfers from Level 2 to Level 3 were comprised of residential loans more than 90 days overdue (including those in foreclosure) and commercial mortgage loans in special servicing or otherwise considered “non‑performing” by the Company’s third‑party valuation providers. Transfers between Levels are deemed to take place on the first day of the reporting period in which the transfer has taken place. Transfers between Level 2 and Level 3 were immaterial for the year ended December 31, 2020. We use third‑party valuation firms who utilize proprietary methodologies to value our residential and commercial loans. These firms generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets. Use of these techniques requires determination of relevant input and assumptions, some of which represent significant unobservable inputs such as anticipated credit losses, prepayment rates, default rates, or other valuation assumptions. Accordingly, a significant increase or decrease in any of these inputs in isolation may result in a significantly lower or higher fair value measurement. The following table sets forth information regarding the Company’s significant Level 3 inputs as of December 31, 2020: 111 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements Input Values Asset Fair Value Unobservable Input Range Average Residential mortgage loans, at fair value $ 13,133 Prepayment rate (annual CPR) — % - 15.77 % 5.95 % Default rate 5.58 % - 24.79 % 16.80 % Loss severity ( 13.21 )% - 29.31 % 3.29 % Expected remaining life 0.70 - 2.42 years 1.87 years Commercial mortgage loans, at fair value $ 607 Loss severity ( 16.75 %) ( 16.75 %) Sale or Liquidation timeline 15 - 23 months 15 - 23 months 11. Income Taxes Income tax expense for the year ended December 31, 2021 consists of the following: (in thousands) Current Federal $ 1,249 State 351 Total current income tax expense 1,600 Deferred Federal — State — Total deferred income tax expense — Total income tax expense $ 1,600 The difference between the Company’s reported provision for income taxes and the U.S. federal statutory rate of 21% is as follows for the year ended December 31, 2021: Federal statutory rate 21.00 % State statutory rate, net of federal tax effect 4.49 % Non-taxable REIT income ( 19.45 ) % Total provision 6.04 % The Company has elected to be taxed as a REIT commencing with its taxable year ended December 31, 2019, and met the qualifications to be taxed as a REIT under the Code for U.S. federal income tax purposes for that year. As long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes its REIT taxable income to stockholders and does not engage in prohibited transactions. Certain sales by the group consisting of the Company and its subsidiaries may give rise to gain that could be treated as derived from “prohibited transactions” if carried out by the Company directly. Such transactions involve the purchase of residential mortgage loans and the subsequent sale of those mortgage loans or interests therein through the secondary whole loan market or the securitization markets. The Company has designated AOMR TRS to conduct such transactions rather than Angel Oak Mortgage, Inc. AOMR TRS files separate corporate income tax returns and is taxed as a standalone U.S. C‑corporation on all of its separately computed taxable income, including any gain derived in the aforementioned sales. All the income tax expense presented above was incurred on AOMR TRS. The Company files U.S. federal and state income tax returns for Angel Oak Mortgage, Inc. and AOMR TRS. These federal income tax returns for 2018 (commencement of operations) and forward are subject to examination. The Company’s state income tax returns are generally subject to examination for 2018 (commencement of operations) and forward. There were no accrued taxes nor was there any material tax expense as of and for the year ended December 31, 2020. 12. Related Party Transactions Residential Mortgage Loan Purchases The Company purchases residential mortgage loans under loan purchase agreements with various affiliates of the Company. The purchase price of the loans is generally equal to the outstanding principal of the mortgage, adjusted by a premium or discount, depending on 112 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements market conditions. The Company purchases the mortgage loans on a servicing retained basis. The residential mortgage loans are on residences located in various states with a concentration in California and Florida. The following table sets forth certain financial information pertaining to whole loan activity purchased from affiliates during the years ended and as of December 31, 2021 and 2020: As of and for the Year Ended: Amount of Loans Purchased from Affiliates during the Year Number of Loans Purchased from Affiliates during the Year Number of Loans Purchased from Affiliates Held at December 31: ($ in thousands) 2021 $ 909,442 1,959 754 2020 $ 423,172 950 273 Commercial Mortgage Loan Purchases The Company purchases commercial mortgage loans under loan purchase agreements with various affiliates of the Company. The purchase price of the loans is generally equal to the outstanding principal of the mortgage, adjusted by a premium or discount, depending on market conditions. The commercial mortgage loans are on commercial properties, primarily multifamily and retail properties, located in various states with concentrations in California, New York, and Maine. The following table sets forth certain financial information pertaining to whole loan activity purchased from affiliates during the years ended and as of December 31, 2021 and 2020: As of and for the Year Ended: Amount of Loans Purchased from Affiliates during the Year Number of Loans Purchased from Affiliates during the Year Number of Loans Purchased from Affiliates Held at December 31: ($ in thousands) 2021 $ — — 5 2020 $ 26,334 30 12 Pre-IPO Management Fee A pre-IPO management agreement (the “Pre-IPO Management Agreement”) existed among the Company, its Manager, and Angel Oak Mortgage Fund, LP (“Angel Oak Mortgage Fund”), the Company’s sole common stockholder prior to the IPO. Per the Pre-IPO Management Agreement, on a quarterly basis in advance, the Company paid its Manager an aggregate, fixed management fee equal to 1.5 % per annum of the total Actively Invested Capital (as defined in the Pre-IPO Management Agreement) of the limited partners in Angel Oak Mortgage Fund. The Pre-IPO Management Agreement terminated on June 20, 2021 in connection with the IPO. Post-IPO Management Fee On and after June 21, 2021, the post-IPO management agreement (the “Management Agreement”) took effect among the Company, the Operating Partnership, and its Manager. Per the Management Agreement, on a quarterly basis in arrears, the Company shall pay its Manager an aggregate, fixed management fee equal to 1.5 % per annum of the Company’s Equity (as defined in the Management Agreement). Post-IPO Incentive Fee Under the Management Agreement, our Manager is also entitled to an incentive fee, which is calculated and payable in cash with respect to each calendar quarter (or part thereof that the Management Agreement is in effect) in arrears in an amount, not less than zero , equal to the excess of (1) the product of (a) 15 % and (b) the excess of (i) the Company’s Distributable Earnings (as defined in the Management Agreement) for the previous 12-month period, over (ii) the product of (A) the Company’s Equity in the previous 12-month period, and (B) 8 % per annum, over (2) the sum of any incentive fee earned by our Manager with respect to the first three calendar quarters of such previous 12-month period. To date, the incentive fee has not been earned. Operating Expense Reimbursements The Company is also required to pay its Manager reimbursements for certain general and administrative expenses pursuant to the Management Agreement. Accrued expenses payable to affiliate and operating expenses incurred with affiliate are substantially comprised of payroll reimbursements to an affiliate of its Manager. Contribution from Common Stockholder Prior to IPO The Company issued a distribution from additional paid‑in capital as a short‑term recallable return of capital to its common stockholder during the third quarter of 2020. This recallable return of capital was fully repaid to the Company in 2021 prior to the Company’s IPO. 113 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements Transactions by Affiliates Regarding the Company’s IPO The Company’s IPO was completed on June 21, 2021. The Company’s Manager purchased $ 6.0 million in stock at the IPO price of $ 19.00 per share, which was delivered on June 21, 2021. Angel Oak Capital, an affiliate of the Company’s Manager, agreed to pay the underwriting discounts and commissions in connection with the IPO. Such underwriting discounts and commissions were $ 8.2 million. Angel Oak Capital also agreed to pay all of the Company’s expenses incurred in connection with the IPO. Such expenses were $ 4.4 million. 13. Commitments and Contingencies On March 11, 2020, the World Health Organization declared a disease (COVID‑19) caused by a novel strain of coronavirus (SARS CoV‑2) a global pandemic and recommended containment and mitigation measures worldwide. Since that time, numerous coronavirus variants have arisen. In the immediate response to the pandemic, various state and local governments within the United States took preventive and protective actions, such as restricting travel and business operations, and the United States government undertook historic actions to avoid a severe recession, including unprecedented levels of financial support to households in the United States. As a result of these immediate actions, capital, credit, and labor markets experienced extreme volatility and disruptions. As the pandemic continued, supply chains have become strained, labor shortages and inflationary pressures have arisen, and civil unrest has increased. This ongoing volatility has affected and could continue to affect the Company’s consolidated financial position, consolidated results of operations, and consolidated cash flows. None of the developments of the ongoing pandemic or their possible effects on financial and labor markets are certain or predictable. The Company, from time to time, may be party to litigation relating to claims arising in the normal course of business. As of December 31, 2021, the Company was not aware of any legal claims that could materially impact its financial condition. As of December 31, 2021, the Company had no unfunded commitments. 14. Equity and Earnings per Share (“EPS”) In the calculations of basic and diluted earnings per common share for the year ended December 31, 2021, the Company included participating securities, which are certain equity awards that have non-forfeitable dividend participation rights, as it was determined that the two-class method was more dilutive than the alternative treasury stock method for these shares. Dividends and undistributed earnings allocated to participating securities under the basic and diluted earnings per share calculations require specific shares to be included that may differ in certain circumstances. For the year ended December 31, 2021, no outstanding equity awards were antidilutive. The following table sets forth the calculation of basic and diluted earnings per share for the year ended December 31, 2021: December 31, 2021 (in thousands, except share data) Basic Earnings per Common Share: Net income allocable to common stockholders $ 21,098 Basic weighted average common shares outstanding 20,601,964 Basic earnings per common share $ 1.02 Diluted Earnings per Common Share: Net income allocable to common stockholders $ 21,098 Net effect of dilutive equity awards 250,590 Diluted weighted average common shares outstanding 20,852,554 Diluted earnings per common share $ 1.01 Basic and Diluted EPS for the year ended December 31, 2020 For the year ended December 31, 2020, basic and diluted earnings per share were equivalent as there were no potentially dilutive securities outstanding. For the year ended December 31, 2020, 1,000 shares of common stock were outstanding (both outstanding and weighted average outstanding), all of which were held by Angel Oak Mortgage Fund, LP, the Company’s sole common stockholder prior to the IPO. These shares have been retroactively restated accordingly for the calculations of earnings per share for the year ended December 31, 2020 as described below. In conjunction with its IPO, the Company’s sole common shareholder declared a stock split and subsequent stock dividend that resulted in the issuance of 15,723,050 shares of common stock being owned by that sole common stockholder, who then distributed all of its stock in the Company (representing 15,724,050 shares) to its investors. As a result of the stock split and stock dividend, 15,724,050 shares of common stock were outstanding as of June 21, 2021 (both outstanding and weighted average outstanding) immediately prior to the completion of the IPO, and the related share data and earnings per share calculations include the share amounts that have been retroactively restated accordingly for the calculations of earnings per share for the year ended December 31, 2020. 114 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements 15. Equity Compensation Plans On June 21, 2021, the Company established its sole equity compensation plan, the 2021 Equity Incentive Plan (the “Plan”), with 2,125,000 shares initially available for grant. As of December 31, 2021, 1,654,372 shares of common stock were available for grant under the Plan. Compensation expense for the year ended December 31, 2021 related to these awards was approximately $ 1.8 million. The unamortized compensation expense of the restricted stock awards issued under the Plan totaled approximately $ 7.2 million as of December 31, 2021. This cost will be recognized over a weighted average period of 2.4 years. Restrictions on the restricted stock awards outstanding lapse through June 21, 2024, as service conditions are completed and the awards vest accordingly. The following table summarizes activity for our restricted stock awards during the year ended December 31, 2021: Number of awards Weighted average grant date fair market value Outstanding as of December 30, 2020 — $ — Granted 473,684 19.00 Vested — — Forfeited ( 4,211 ) 19.00 Outstanding as of December 31, 2021 469,473 $ 19.00 As of December 30, 2020, and prior to the establishment of the Plan, there were no equity compensation plans in existence, and therefore, no such compensation costs were incurred during the year ended December 31, 2020. 16. Subsequent Events Subsequent events of significance for disclosure purposes only (i.e., subsequent events that are not recognized in the financial statements as of and for the year ended December 31, 2021) are as follows: On January 1, 2022, the Goldman Sachs agreement was amended to replace a LIBOR-based index rate with a SOFR-based index rate. On March 2, 2022, the agreement was amended to expire on March 5, 2023, unless terminated earlier pursuant to the terms of the agreement. On January 27, 2022, the Company and Barclays Bank PLC (“Barclays”) entered into Amendment No. 1 (“Amendment No. 1”) to the Master Repurchase Agreement. Pursuant to the terms of Amendment No. 1, the maximum purchase price permitted under the Master Repurchase Agreement increased 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. Additionally, pursuant to Amendment No. 1, 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. On February 4, 2022, the Company and one of its subsidiaries entered into Amendment No. 1 (the “MRA Amendment”) to the Amended and Restated Master Repurchase Agreement (the “Master Repurchase Agreement”) with Deutsche Bank AG, New York Branch (“Deutsche Bank”). Pursuant to the MRA Amendment, the agreement was amended to (1) adjust the initial termination date of the Master Repurchase Agreement from February 11, 2022 to February 2, 2024; (2) remove any draw fees; and (3) 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 and (B) a spread generally ranging from 2.20 % to 3.45 %. Previously, interest accrued at a rate based on one-month LIBOR. On February 11, 2022, the Company entered into the First Modification Agreement (the “Modification Agreement”) with Veritex Community Bank (“Veritex”) relating to the its financing facility with Veritex. Pursuant to the Modification Agreement, (1) the size of the committed non-mark-to-market financing facility with Veritex was increased to $ 75.0 million from $ 50.0 million, and (2) interest will now 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. Previously, interest accrued at a rate based on one-month LIBOR. On March 7, 2022, the Company entered into an Amended and Restated Variable Terms Letter (the “Variable Terms Letter”) with Banc of California, National Association (“Banc of California”) relating to the Company’s loan financing line with Banc of California (the “Loan Financing Line”). Pursuant to the Variable Terms Letter, the Company and Banc of California agreed: (1) to increase the aggregate 115 Angel Oak Mortgage, Inc. Notes to the Consolidated Financial Statements purchase price limit to $ 75.0 million from $ 50.0 million; (2) to adjust the purchase contract expiration date of the Loan Financing Line from March 16, 2022 to March 16, 2023; and (3) that beginning March 8, 2022, 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. Previously, interest accrued at a rate based on one-month LIBOR. On March 15, 2022, the Company declared a dividend of $ 0.45 per share of common stock, to be paid on March 31, 2022 to common stockholders of record as of March 21, 2022. 116 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.