What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-12 compared with 2022-05-16 · 327 added, 156 removed, 573 unchanged (46% of the section changed)

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The following should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto.

References herein to “the Company,” “we,” “us,” or “our” refer to Angel Oak Mortgage, Inc.

References herein to our “Company,” “we,” “us,” or “our” refer to Angel Oak Mortgage, Inc.

and its subsidiaries unless the context requires otherwise.

Unless otherwise indicated, the term “Angel Oak” refers collectively to Angel Oak Capital Advisors, LLC (“Angel Oak Capital”) and its affiliates, including Falcons I, LLC, our external manager (our “Manager”), Angel Oak Companies, LP (“Angel Oak Companies”), and the proprietary mortgage lending platform of affiliates, Angel Oak Mortgage Solutions LLC and Angel Oak Home Loans LLC (together, “Angel Oak Mortgage Lending”) and Angel Oak Commercial Lending, LLC.

Cautionary Note Regarding Forward-Looking Statements

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• changes in the availability of attractive loan and other investment opportunities, including non-QM loans sourced from Angel Oak Mortgage Lending platforms;

• the ability of our Falcons I, LLC (the “Manager”) to locate suitable investments for us, manage our portfolio, and implement our strategy;

• the ability of our Manager to locate suitable investments for us, manage our portfolio, and implement our strategy;

• our ability to obtain and maintain financing arrangements on favorable terms, or at all;

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• conflicts with Angel Oak, including our Manager and its personnel, including our officers, and entities managed by Angel Oak;

• events, contemplated or otherwise, such as acts of God, including hurricanes earthquakes, and other natural disasters, including those resulting from global climate change, pandemics, acts of war or terrorism, escalation of military conflicts (such as the recent Russian invasion of Ukraine), and others that may cause unanticipated and uninsured performance declines, disruptions in markets, and/or losses to us or the owners and operators of the real estate securing our investments;

• events, contemplated or otherwise, such as acts of God, including hurricanes earthquakes, and other natural disasters, including those resulting from global climate change, pandemics, acts of war or terrorism, escalation of military conflicts (such as the Russian invasion of Ukraine), and others that may cause unanticipated and uninsured performance declines, disruptions in markets, and/or losses to us or the owners and operators of the real estate securing our investments;

• impact of and changes in governmental regulations, tax laws and rates, accounting principles and policies and similar matters;

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We are externally managed and advised by the Manager, a registered investment adviser under the Investment Advisers Act of 1940 and an affiliate of Angel Oak Capital, a leading alternative credit manager with market leadership in mortgage credit that includes asset management, lending and capital markets.

Angel Oak Capital was established in 2009 and had approximately $13.4 billion in assets under management as of March 31, 2022 across its private credit strategies, public funds, and separately managed accounts, including approximately $9.1 billion of mortgage‑related assets.

Angel Oak Mortgage Lending is a market leader in non‑QM loan production and, as of March 31, 2022, had originated over $14.4 billion in total non‑QM loan volume since its inception in 2011.

Angel Oak Capital was established in 2009 and had approximately $11.4 billion in assets under management as of June 30, 2022 across its private credit strategies, public funds, and separately managed accounts, including approximately $7.8 billion of mortgage‑related assets.

Angel Oak Mortgage Lending is a market leader in non‑QM loan production and, as of June 30, 2022, had originated over $15.7 billion in total non‑QM loan volume since its inception in 2011.

Angel Oak is headquartered in Atlanta and has over 900 employees across its enterprise.

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We believe that we have been organized and operated, and we intend to continue to operate in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).

the composition and values of our assets, our distribution levels and the concentration of ownership of our stock.

Our qualification as a REIT, and maintenance of such qualification, will depend on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our stock.

We also intend to operate our business in a manner that will allow us to maintain our exclusion from regulation as an investment company under the Investment Company Act.

Our common stock commenced trading on the New York Stock Exchange of June 17, 2021.

Our common stock commenced trading on the New York Stock Exchange on June 17, 2021.

We expect to derive our returns primarily from the difference between the interest we earn on loans we make and our cost of capital, as well as the returns from bonds, including risk retention securities, that are retained after securitizing the underlying loan collateral.

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Overall macroeconomic environment and its effect on us

The 2022 macroeconomic environment for the first three months of the year appeared more challenging than that of the 2021 full-year macroeconomic environment.

The 2022 macroeconomic environment for the three and six months ended June 30, 2022 was significantly more challenging than that of the 2021 comparative period.

Major challenges to the U.S.

economy in 2022 involved continued supply chain issues, labor shortages, and an inflationary environment exacerbated by the military conflict between Ukraine and Russia and the economic sanctions related thereto.

Interest rates have increased in 2022, which has resulted in a slowdown of mortgage originations and refinancing activity, as the 30-year mortgage rate average exceeded 5% by the end of March 2022, up from approximately 3% in December 2021.

The availability of housing stock in many areas of the U.S.

has remained low, and supply chain issues continue to constrain home building in many areas of the U.S., as raw materials are, in some cases, unavailable for extended periods of time.

A slowdown in homeowner prepayment activities (including refinancing existing mortgages, as referred to above) may have a positive impact on some of the bonds that we hold from older securitization transactions, as we typically hold the lower junior and XS (interest only) tranches of bonds from a securitization transaction, and the lack of prepayment activity within a securitization transaction results in more interest income available to be allocated to the XS bonds.

On March 16, 2022, the Federal Reserve Bank of the U.S.

(the “Fed”) approved a 25 basis point increase to the federal funds rate, the first increase to the rate in nearly three years.

In addition, the Fed approved a 50 basis point increase to the federal funds rate on May 5, 2022.

economy in the first half of 2022 included heightened recessionary risks, with economic activity simultaneously impacted by both a sharp increase in interest rates discussed further below, along with a 40-year record high year-over-year increase in inflation of 9.1% in June 2022.

Sharply rising interest rates have resulted in a slowdown of mortgage origination and refinancing activity, as the average conforming 30-year mortgage rate average exceeded 5% by the end of March 2022 (remaining relatively stable through June 2022), up from approximately 3% in December 2021.

The availability of housing inventory in many areas of the U.S.

has remained low, and supply chain issues continued to constrain home building in many areas of the U.S., as raw materials are, in some regions, unavailable for extended periods of time.

The combination of sustained high mortgage rates and low housing supply has created a troublesome situation for homebuyers, now facing constraints in both affordability and availability, while high interest rates alone have curtailed refinancing and some purchase activity.

Additionally, ongoing and worsening worldwide supply chain issues, exacerbated by the protracted military conflict between Ukraine and Russia, and domestic labor shortages, continued to drag on the overall U.S.

economic environment.

The Federal Reserve Bank of the U.S.

(the “Fed”) has approved several increases to the federal funds rate over 2022, including on March 16, 2022 a 25 basis point increase as the first increase to the rate in nearly three years, a 50 basis point increase on May 5, 2022, a 75 basis point increase on June 15, 2022, and a 75 basis point increase on July 27, 2022.

The June 2022 rate increase represented the largest interest rate increase by the Fed since 1994, and the July 2022 rate increase represents the first time in modern history that the Fed has raised interest rates by 75 basis points twice in a row.

An increase in the federal funds rate generally has the effect of increasing borrowing rates for all types of consumer credit, including mortgages.

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We believe that a further increase in interest rates from the previous historically low levels is unlikely to significantly affect demand for non-QM mortgages;

however, an increase in interest rates generally causes interest rate spreads to widen, which may negatively impact the valuation of our whole loan portfolio, as wider interest rate spreads generally cause a decrease in the value of whole loans originated at lower interest rates.

Our whole loan portfolio was affected in this manner during the first quarter of 2022, with unrealized losses incurred on our whole loan portfolio, with the size of the portfolio magnifying the unrealized loss effect.

These unrealized losses were partially offset by our economic hedges in interest rate futures contracts and “To be Announced” forward-settling of mortgage-backed securities trades (“TBAs”).

Although we currently have unrealized losses in our whole loan portfolio, which may continue as interest rate spreads widen, given the Fed’s planned further interest rate increases, holding whole loans originated at higher interest rates generally has the effect of increasing our net interest income, resulting in prepayment speeds likely slowing for existing securitization transactions, which will also increase our net interest income as we primarily hold junior and interest only tranches of the securitized bonds that we have issued.

however, the current increase in interest rates over the past six months has generally caused interest rate spreads to widen, which has negatively impacted the valuation of our whole loan portfolio.

Our whole loan portfolio was affected in this manner during the first and second quarters of 2022, with unrealized losses incurred on our whole loan portfolio, with the unrealized loss effect magnified by the size of the whole loan portfolio.

Additionally, a sharp increase in interest rates over a short period of time has resulted in a challenging environment for securitizing loans originated at lower interest rates, and our securitization volume may be lower than usual until interest rates and securitization markets stabilize.

A slowdown in homeowner prepayment activities (including a slowdown in refinancing existing mortgages, as referred to above) has had a positive impact on some of the bonds that we hold from older securitization transactions, as we typically hold the lower junior and XS (interest only) tranches of bonds from a securitization transaction, and the lack of prepayment activity within a securitization transaction results in more interest income available to be allocated to the XS bonds;

however, the positive impact of increased interest income and lowered realized losses as a result of slower prepayment speeds only partially offsets the unrealized losses reflected in other comprehensive income (loss) on bond valuation.

Although we currently have unrealized losses in our whole loan portfolio, which may continue in an elevated interest rate environment, given the Fed’s planned further interest rate increases, holding whole loans originated in the future at higher interest rates (or “coupon”) generally has the effect of increasing our net interest income, resulting in prepayment speeds likely slowing for existing securitization transactions, which will also increase our net interest income as we primarily hold junior and interest only tranches of the securitized bonds that we have issued.

There is a time lag of approximately three months between the origination of a loan and our purchase of that loan;

therefore, we currently have a limited number of higher coupon loans in our portfolio.

Our investment performance

Our non-QM whole loan portfolio experienced unrealized losses on the portfolio during the first three months of 2022, which were driven by mark-to-market losses due to yield spreads widening.

Our non-QM whole loan portfolio experienced unrealized losses on the portfolio during the three and six months ended June 30, 2022, which were driven by mark-to-market losses due to interest rate spreads widening.

The residential mortgage-backed securities (“RMBS”) portfolio and commercial mortgage-backed securities (“CMBS”) portfolio results also included mark-to-market losses on the valuation of this asset class.

Realized gains on our TBA investments and interest rate futures partially offset these unrealized mark-to-market losses.

The non-QM portfolio unrealized losses and the realized gains of the TBAs and interest rate futures are reflected in net income, while the RMBS and CMBS portfolios’ unrealized losses are reflected in other comprehensive income.

Purchases of whole loans in the first quarter of 2022 and our 2022 securitizations

During the quarter ended March 31, 2022, we purchased $675.6 million in residential whole loans.

On February 11, 2022, we issued one new securitization, AOMT 2022-1, securitizing a total of $537.6 million of unpaid principal balance of seasoned residential non-QM mortgage loans.

The issuance of AOMT 2022-1, along with our 2021 issuances of AOMT 2021-4 and AOMT 2021-7, securitized a total of $1.2 billion of unpaid principal balance of seasoned residential non-QM mortgage loans.

Realized gains on our TBA investments and interest rate futures partially offset the aforementioned unrealized losses on whole loans for the year to date period, though for the quarter to date period, we experienced a realized loss in TBA investments and

a realized gain on interest rate futures.

Realized losses on our RMBS and CMBS XS and interest only bonds decreased for the three and six months ended June 30, 2022 as prepayment activities slowed.

The non-QM whole loan portfolio unrealized losses are reflected in net income, while the RMBS and CMBS portfolios’ unrealized losses are reflected in other comprehensive income.

All realized losses are reflected in net income.

Purchases of whole loans in the three and six months ended June 30, 2022 and our 2022 securitizations to date

During the three and six months ended June 30, 2022, we purchased $257.2 million and $932.8 million, respectively, in residential whole loans.

On February 11, 2022, we issued AOMT 2022-1, securitizing a total of $537.6 million of unpaid principal balance of seasoned residential non-QM mortgage loans.

Subsequent to June 30, 2022, on July 13, 2022, we issued AOMT 2022-4, securitizing a total of $184.7 million of unpaid principal balance of seasoned residential non-QM mortgage loans.

The issuance of AOMT 2022-1 and AOMT 2022-4, along with our 2021 issuances of AOMT 2021-4 and AOMT 2021-7, securitized a total of approximately $1.4 billion of unpaid principal balance of seasoned residential non-QM mortgage loans.

We issued these securitizations as the sole participant in the securitization.

We own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds.

Given the accounting rules surrounding these types of transactions, we have consolidated these securitizations on our condensed consolidated balance sheets, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheets for the period and year ended March 31, 2022 and December 31, 2021.

Our securitizations prior to 2021 were securitization transactions for which we did not meet the accounting rules to be considered a “primary beneficiary” of the applicable securitization vehicle, and therefore, for these prior securitizations, the bonds retained in the securitization are held on our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021.

New whole loan financing facilities

On April 13, 2022, we entered into a new financing facility, which afforded us $340.0 million of additional borrowing capacity, for a total capacity of $1.6 billion with which to execute our core strategy of purchasing whole loans and retaining them until securitized.

We own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds, and are the sole member of the Depositor entity in these securitizations.

Given the accounting rules surrounding these types of transactions, we have consolidated these securitizations, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheets as of the applicable balance sheet dates.

Our securitizations prior to 2021 were securitization transactions entered into with other Angel Oak entities, for which we did not meet the accounting rules to be considered a “primary beneficiary” of the applicable securitization vehicle, and therefore, for these prior securitizations, the bonds retained in the securitization are held on our condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021.

We may strategically enter into similar securitizations in the future.

New and extended whole loan financing facilities

On April 13, 2022, we entered into a new financing facility with Royal Bank of Canada (“RBC”), which afforded us $340.0 million of additional borrowing capacity.

On July 21, 2022, the RBC financing facility was extended as per the terms of the original agreement through January 20, 2023.

On August 4, 2022, the facility limit under the RBC master repurchase agreement was increased by $260.0 million to $600.0 million, bringing our total maximum financing facility availability to $1.9 billion subsequent to June 30, 2022, with which to execute our core strategy of purchasing whole loans and retaining them until securitized.

On August 8, 2022, the Nomura facility was extended through October 5, 2022.

Key Financial Metrics

As a real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, Distributable Earnings Return on Average Equity and book value per share.

Distributable Earnings

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We also will use Distributable Earnings to determine the incentive fee payable to the Manager pursuant to the management agreement (the “Management Agreement”) that we and Angel Oak Mortgage Operating Partnership, LP (the “Operating Partnership”) entered into with the Manager upon the completion of our initial public offering (“IPO”) on June 21, 2021.

For information on the fees that are payable to the Manager under the Management Agreement, see the Annual Report on Form 10-K.

Distributable Earnings were approximately $37.3 million and $4.8 million for the three months ended March 31, 2022 and 2021, respectively.

The table below sets forth a reconciliation of net (loss) income allocable to common stockholder(s), calculated in accordance with GAAP, to Distributable Earnings for the three months ended March 31, 2022 and 2021:

Three Months Ended

March 31, 2022 March 31, 2021

For information on the fees that are payable to the Manager under the Management Agreement, see “Note 10 – Related Party Transactions” in our unaudited condensed consolidated financial statements included in this report.

Distributable Earnings were approximately $22.8 million and $2.0 million for the three months ended June 30, 2022 and 2021, respectively, and $60.1 million and $6.9 million for the six months ended June 30, 2022 and 2021, respectively.

The table below sets forth a reconciliation of net (loss) income allocable to common stockholders, calculated in accordance with GAAP, to Distributable Earnings for the three and six months ended June 30, 2022 and 2021:

Three Months Ended Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

(in thousands)

Net (loss) income allocable to common stockholder(s) $ (43,545) $ 9,483

Net income (loss) allocable to common stockholders $ (52,148) $ 2,223 $ (95,694) $ 11,706

Net other-than-temporary credit impairment losses — — — —

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Our methodology for calculating Distributable Earnings Return on Average Equity may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Distributable Earnings Return on Average Equity may not be comparable to similar measures presented by other REITs.

Set forth below is our computation of Distributable Earnings Return on Average Equity for the three months ended March 31, 2022 and 2021:

Three Months Ended

March 31, 2022 March 31, 2021

Set forth below is our computation of Distributable Earnings Return on Average Equity for the three and six months ended June 30, 2022 and 2021:

Three Months Ended Six Months Ended

June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021

($ in thousands)

Annualized Distributable Earnings $ 91,220 $ 8,124 $ 120,194 $ 13,742

Average total stockholder(s)’ equity $ 456,415 $ 281,481

Average total stockholders’ equity $ 394,362 $ 334,503 $ 426,703 $ 289,130

Distributable Earnings Return on Average Equity 23.13 % 2.43 % 28.17 % 4.75 %

Book Value per Share

The following table sets forth the calculation of our book value per share as of March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

Book Value per Common Share of Common Stock

The following table sets forth the calculation of our book value per share of common stock as of June 30, 2022, March 31, 2022, and December 31, 2021:

June 30, 2022 March 31, 2022 December 31, 2021

(in thousands except for share and per share data)

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Preferred stock (101) (101) (101)

Stockholders’ equity, net of preferred stock $ 421,335 $ 491,289

Number of shares outstanding at period end 25,085,796 25,227,328

Book value per share $ 16.80 $ 19.47

Common stockholders’ equity $ 367,183 $ 421,335 $ 491,289

Number of shares of common stock outstanding at period end 24,925,930 25,085,796 25,227,328

Book value per share of common stock $ 14.73 $ 16.80 $ 19.47

Economic Book Value per Common Share

“Economic book value” is a non-GAAP financial measure of our financial position.

To calculate our economic book value, the portions of our non-recourse financing obligation held at amortized cost are adjusted to fair value.

These adjustments are also reflected in the table below in our end of period common stockholders’ equity.

Management considers economic book value to provide investors with a useful supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for our legally held retained bonds, irrespective of the accounting model applied for GAAP reporting purposes.

Economic book value does not represent and should not be considered as a substitute for book value per common share or Stockholders’ Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The following table sets forth a reconciliation from GAAP stockholders equity and Book Value per Share of Common Stock to Economic Book Value and Economic Book Value per Share of Common Stock as of June 30, 2022, March 31, 2022, and December 31, 2021:

June 30, 2022 March 31, 2022 December 31, 2021

(in thousands except for share and per share amounts presented)

GAAP total stockholders’ equity $ 367,284 $ 421,436 $ 491,390

Preferred stock (101) (101) (101)

GAAP total common stockholders’ equity for book value per share of common stock $ 367,183 $ 421,335 $ 491,289

Fair value adjustment for securitized debt held at amortized cost 32,863 20,443 1,079

Stockholders’ equity including economic book value adjustments $ 400,046 $ 441,778 $ 492,368

Number of shares of common stock outstanding at period end 24,925,930 25,085,796 25,227,328

Book value per share of common stock $ 14.73 $ 16.80 $ 19.47

Economic book value per share of common stock $ 16.05 $ 17.61 $ 19.52

Results of Operations

Our results of operations presented herein for the three months ended March 31, 2021 do not reflect the expenses typically associated with being a public company for the reporting period, including increased insurance, legal, and accounting fees, full periods of equity compensation expense, expenses incurred in complying with the reporting and other requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), and increased expense of the base management fee to our Manager as a result of differences in the way fees and expense reimbursements are calculated under the Management Agreement as compared to the pre-IPO management agreement as among us, our Manager and Angel Oak Mortgage Fund, LP (“Angel Oak Mortgage Fund”), our sole common stockholder prior the IPO (the “pre-IPO management agreement”).

Our results of operations presented herein for the three and six months ended June 30, 2021 do not reflect the expenses typically associated with being a public company for the reporting period, including increased insurance, legal, and accounting fees, full periods of equity compensation expense, expenses incurred in complying with the reporting and other requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), and increased expense of the base management fee to our Manager as a result of differences in the way fees and expense reimbursements are calculated under the Management Agreement as compared to the pre-IPO management agreement (the “pre-IPO management agreement”) as among us, our Manager and Angel Oak Mortgage Fund, LP (“Angel Oak Mortgage Fund”), our sole common stockholder prior the IPO.

Additionally, pursuant to the Management Agreement, we are required to reimburse our Manager for its operating expenses, including third‑party expenses, incurred on our behalf;

and our Manager is entitled to reimbursement for costs of the wages, salaries, and benefits incurred by our Manager for our dedicated Chief Financial Officer and Treasurer and a proportionate amount of the costs of the wages, salaries, and benefits of our Chief Executive Officer and President (who, after the completion of the IPO, has dedicated a substantial majority of his business time to us) based on the percentage of his business time spent on our matters, and any other dedicated or partially dedicated employees based on the percentage of each such person’s working time spent on matters related to us.

Three Months Ended March 31, 2022 and 2021

The following table sets forth a summary of our results of operations for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31, 2022 Three Months Ended March 31, 2021

Three Months Ended June 30, 2022 and 2021

The following table sets forth a summary of our results of operations for the three months ended June 30, 2022 and 2021:

Three Months Ended June 30, 2022 Three Months Ended June 30, 2021

(in thousands)

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NET INTEREST INCOME 16,431 10,297

REALIZED AND UNREALIZED (LOSSES) GAINS, NET

REALIZED AND UNREALIZED GAINS (LOSSES), NET

Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS 12,718 (10,224)

Net unrealized (loss) gain on mortgage loans and derivative contracts (80,181) 4,518

TOTAL REALIZED AND UNREALIZED (LOSSES) GAINS, NET (53,765) 2,230

Net unrealized gain (loss) on mortgage loans, debt at fair value option (see Note 2), and derivative contracts (73,985) 4,813

TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET (61,267) (5,411)

Operating expenses 2,977 609

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INCOME BEFORE INCOME TAXES (52,144) 2,227

Income tax benefit (3,457) —

NET (LOSS) INCOME (43,541) 9,487

Income tax provision — —

NET INCOME (LOSS) (52,144) 2,227

Preferred dividends (4) (4)

NET (LOSS) INCOME ALLOCABLE TO COMMON STOCKHOLDER(S) $ (43,545) $ 9,483

Other comprehensive (loss) income (12,987) 529

TOTAL COMPREHENSIVE (LOSS) INCOME $ (56,532) $ 10,012

NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDER(S) $ (52,148) $ 2,223

Other comprehensive income 11,235 3,085

TOTAL COMPREHENSIVE INCOME (LOSS) $ (40,913) $ 5,308

Net Interest Income

The following table sets forth the components of net interest income for the three months ended March 31, 2022 and 2021:

The following table sets forth the components of net interest income for the three months ended June 30, 2022 and 2021:

Three Months Ended

March 31, 2022 March 31, 2021

June 30, 2022 June 30, 2021

(in thousands)

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Net interest income $ 16,431 $ 10,297

Net interest income for the three months ended March 31, 2022 and 2021 was $16.9 million and $9.2 million, respectively.

Net interest income increased due to the additional average portfolio balance in the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to the composition of the portfolio during March 31, 2022 having a higher average balance of residential mortgage loans and residential mortgage loans in securitization trusts, along with a higher RMBS average balance, which increased net interest income.

These average asset balances were partially offset by higher average balances in related liabilities in the three months ended March 31, 2022 as compared to the same period in 2021, which resulted in increased interest expense during the comparative period.

Total Realized and Unrealized (Losses) Gains

The components of total realized and unrealized (losses) gains, net for the three months ended March 31, 2022 and 2021 are set forth as follows:

Three Months Ended March 31, 2022 Three Months Ended March 31, 2021

Net interest income for the three months ended June 30, 2022 and 2021 was $16.4 million and $10.3 million, respectively.

Net interest income increased due to the additional average portfolio balance in the three months ended June 30, 2022 as compared to the same period in 2021, primarily due to the composition of the portfolio during June 30, 2022 having a higher average balance of residential mortgage loans and residential mortgage loans in securitization trusts, along with a higher RMBS average balance, which increased net interest income.

These average asset balances were partially offset by higher average balances in notes payable and non-recourse securitization obligation, collateralized by residential mortgage loans, in the three months ended June 30, 2022 as compared to the same period in 2021, which resulted in increased interest expense during the comparative period.

Total Realized and Unrealized Gains (Losses)

The components of total realized and unrealized gains (losses), net for the three months ended June 30, 2022 and 2021 are set forth as follows:

Three Months Ended June 30, 2022 Three Months Ended June 30, 2021

(in thousands)

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Realized loss on CMBS (205) (153)

Realized gain on interest rate futures 19,684 2,076

Realized gain (loss) on interest rate futures 23,368 (2,546)

Realized and unrealized gain (loss) on TBAs 3,937 (2,187)

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Realized and unrealized (loss) gain on commercial mortgage loans (522) 74

Unrealized appreciation on interest rate futures 14,007 1,676

Total realized and unrealized (losses) gains, net $ (53,765) $ 2,230

For the three months ended March 31, 2022 and 2021, total realized and unrealized gains (losses), net were $(53.8) million and $2.2 million, respectively.

During the three months ended March 31, 2022, widening interest rate spreads caused the valuation of residential mortgage loans to decrease, which resulted in an unrealized loss in residential mortgage loans, the losses of which were partially offset by the mark to market of the liability associated with securitized loans held in residential mortgage trusts and realized and unrealized gains on

interest rate futures and TBAs.

In the three months ended March 31, 2021, realized and unrealized gains on residential mortgage loans and interest rate futures were partially offset by realized loss on RMBS, which was primarily due to prepayment speeds on the junior and interest only bonds that we held.

Unrealized (depreciation) appreciation on interest rate futures (12,686) 746

Total realized and unrealized gains (losses), net $ (61,267) $ (5,411)

For the three months ended June 30, 2022 and 2021, total realized and unrealized gains (losses), net were $(61.3) million and $(5.4) million, respectively.

During the three months ended June 30, 2022, market volatility resulting in widening interest rate spreads caused the valuation of our portfolio of all of our mortgage loans to decrease, which resulted in an unrealized loss.

Additionally, we experienced

unrealized losses on our interest rate futures, as this economic hedge became less effective during the three months ended June 30, 2022.

All of our unrealized losses were partially offset by realized gains on interest rate futures and TBAs.

During the three months ended June 30, 2021, the realized loss on RMBS, which was primarily due to prepayment speeds on the junior and interest only bonds that we held, along with realized losses on interest rate futures and unrealized and realized losses on TBAs was partially offset by realized and unrealized gains on residential mortgage loans.

Operating Expenses

For the three months ended March 31, 2022 and 2021, our operating expenses were $3.8 million and $0.5 million, respectively.

The increase in operating expenses in the three month period ended March 31, 2022 was due to an increase in costs due to being a public company, including increased insurance, audit, and legal fees.

For the three months ended June 30, 2022 and 2021, our operating expenses were $3.0 million and $0.6 million, respectively.

The increase in operating expenses in the three month period ended June 30, 2022 was due to an increase in costs due to being a public company, including increased insurance, audit, and legal fees.

We also experienced an increase in loan administration costs, commensurate with an increase in the number of loans in our portfolio during the comparative period.

Operating Expenses Incurred with Affiliate

For the three months ended March 31, 2022 and 2021, our operating expenses incurred with affiliate were $0.9 million and $0.4 million, respectively.

These expenses were primarily due to the allocated time of partially dedicated employees’ compensation being reimbursed by us, which time allocated to us increased during the comparative periods.

For the three months ended June 30, 2022 and 2021, our operating expenses incurred with affiliate were $0.8 million and $0.5 million, respectively.

These expenses were primarily due to the allocated time of partially dedicated employees’ compensation being reimbursed by us, which time allocated to us increased during the comparative period.

Due Diligence and Transaction Costs

For the three months ended March 31, 2022 and 2021, our due diligence and transaction costs were $0.8 million and $0.1 million, respectively.

The increase in these costs was due to whole loan acquisition diligence costs, which increased over the comparative period as we purchased more whole loans during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

For the three months ended June 30, 2022 and 2021, our due diligence and transaction costs were $0.5 million and $0.2 million, respectively.

The increase in these costs was due to whole loan acquisition diligence costs, which increased over the comparative period as we purchased more whole loans during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Stock Compensation

For the three months ended March 31, 2022, our stock compensation expense was $0.9 million.

We did not have any stock compensation expense for the three months ended March 31, 2021 as no grants were made during that period.

For the three months ended June 30, 2022, our stock compensation expense was $1.0 million.

In connection with the IPO in June 2021, we issued restricted stock awards to key employees of Angel Oak, including our Manager, as well as the independent directors on our Board of Directors.

We issued additional restricted stock awards to other key employees on January 1, 2022.

Restricted stock awards vest in over one to three years, commencing on the one year anniversary of the grant date.

Our stock compensation expense for the three months ended June 30, 2021 was de minimis, as expense was incurred during a nine day period as the grant date of the restricted stock was June 21, 2021.

We issued additional restricted stock awards on January 1, 2022, March 10 and March 11, 2022, and May 18, 2022.

Restricted stock awards vest over one, three, or four years (depending on the tranche of award), commencing on the one year anniversary of the grant date.

Securitization Costs

Securitization costs of $2.0 million were incurred for the three months ended March 31, 2022 in the securitization of AOMT 2022-1.

During the comparative period of the three months ended March 31, 2021, we incurred no securitization expense as we did not enter into any securitizations during that period.

We incurred no securitization expense for the three months ended June 30, 2022 and 2021 as we did not enter into any securitizations during those periods.

Management Fee Incurred with Affiliate

Prior to the completion of the IPO, we were required to pay the Manager, in cash, a management fee pursuant to a pre-IPO management agreement among us, the Manager and Angel Oak Mortgage Fund, our sole common stockholder prior the IPO (the “pre-IPO management agreement”).

The management fee payable under the pre-IPO management agreement was calculated based on the Actively Invested Capital (as defined in the pre-IPO management agreement) of the limited partners in Angel Oak Mortgage Fund, which we believe is reflective of a typical management fee payable by a private investment vehicle.

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Pursuant to the Management Agreement, the Manager is entitled to a base management fee, which is calculated based on our Equity (as defined in the Management Agreement), and an incentive fee based on certain performance criteria, as well as a termination fee in certain cases and reimbursement of certain expenses as described in the Management Agreement.

For the three months ended March 31, 2022 and 2021, our management fee incurred with affiliate was $1.9 million and $0.9 million, respectively.

The increase is due to the increase in our average equity for the three months ended March 31, 2022 as compared to the same period in 2021.

For the three months ended June 30, 2022 and 2021, our management fee incurred with affiliate was $2.0 million and $1.3 million, respectively.

The increase is due to the increase in our average equity for the three months ended June 30, 2022 as compared to the same period in 2021.

Six Months Ended June 30, 2022 and 2021

The following table sets forth a summary of our results of operations for the six months ended June 30, 2022 and 2021:

Six Months Ended

June 30, 2022 Six Months Ended June 30, 2021

(in thousands)

INTEREST INCOME, NET

Interest income $ 56,811 $ 22,177

Interest expense 23,441 2,678

NET INTEREST INCOME 33,370 19,499

REALIZED AND UNREALIZED GAINS (LOSSES), NET

Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS 39,133 (12,512)

Net unrealized gain (loss) on mortgage loans, debt at fair value option (see Note 2), and derivative contracts (154,166) 9,330

TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET (115,033) (3,182)

Operating expenses 6,723 1,130

Operating expenses incurred with affiliate 1,838 972

Due diligence and transaction costs 1,182 242

Stock compensation 1,839 90

Securitization costs 2,019 —

Management fee incurred with affiliate 3,879 2,169

Total operating expenses 17,480 4,603

INCOME BEFORE INCOME TAXES (99,143) 11,714

Income tax (benefit) (3,457) —

NET INCOME (LOSS) (95,686) 11,714

Preferred dividends (8) (8)

NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDER(S) $ (95,694) $ 11,706

Other comprehensive income (loss) (1,752) 3,615

TOTAL COMPREHENSIVE INCOME (LOSS) $ (97,446) $ 15,321

Net Interest Income

The following table sets forth the components of net interest income for the six months ended June 30, 2022 and 2021:

Six Months Ended

June 30, 2022 June 30, 2021

(in thousands)

Interest income Interest income / expense Average balance Interest income / expense Average balance

Residential mortgage loans $ 25,424 $ 1,167,990 $ 7,361 $ 297,218

Residential mortgage loans in securitization trusts 21,887 941,145 — —

Commercial mortgage loans 648 19,632 357 7,081

RMBS 8,299 371,736 13,259 263,522

CMBS 472 9,925 1,189 10,989

Treasury Bills 8 85,713 7 60,712

Other interest income 73 54,094 4 25,105

Total interest income 56,811 22,177

Interest expense

Notes payable 12,803 987,513 2,460 180,014

Non-recourse securitization obligation, collateralized by residential mortgage loans 10,262 898,104 — —

Repurchase facilities 376 243,413 218 183,473

Total interest expense 23,441 2,678

Net interest income $ 33,370 $ 19,499

Net interest income for the six months ended June 30, 2022 and 2021 was $33.4 million and $19.5 million, respectively.

Net interest income increased due to the additional average portfolio balance in the six months ended June 30, 2022 as compared to the same period in 2021, primarily due to the composition of the portfolio during June 30, 2022 having a higher average balance of residential mortgage loans and residential mortgage loans in securitization trusts, along with a higher RMBS average balance, which increased net interest income.

These average asset balances were partially offset by higher average balances in notes payable;

notes payable, non-recourse securitization obligation, collateralized by residential mortgage loans;

and repurchase facilities during the six months ended June 30, 2022 as compared to the same period in 2021, which resulted in increased interest expense during the comparative period.

Total Realized and Unrealized Gains (Losses)

The components of total realized and unrealized gains (losses), net for the six months ended June 30, 2022 and 2021 are set forth as follows:

Six Months Ended June 30, 2022 Six Months Ended June 30, 2021

(in thousands)

Unrealized loss on securitization, net of unrealized gain on non-recourse securitization obligation $ (43,074) $ —

Realized loss on RMBS, net (27,855) (8,808)

Realized loss on CMBS (246) (380)

Realized gain (loss) on interest rate futures 43,052 (471)

Realized and unrealized gain on TBAs 19,399 (2,620)

Realized and unrealized (loss) gain on residential mortgage loans (106,625) 6,326

Realized and unrealized (loss) gain on commercial mortgage loans (1,006) 358

Realized and unrealized loss on U.S.

Treasury bills — (8)

Unrealized appreciation on interest rate futures 1,322 2,421

Total realized and unrealized gains (losses), net $ (115,033) $ (3,182)

For the six months ended June 30, 2022 and 2021, total realized and unrealized gains (losses), net were $(115.0) million and $(3.2) million, respectively.

During the six months ended June 30, 2022, market volatility resulting in widening interest rate spreads caused the valuation of our portfolio of all of our mortgage loans to decrease, which resulted in an unrealized loss.

All of our unrealized losses were partially offset by realized gains on interest rate futures and TBAs.

In the six months ended June 30, 2021, realized and unrealized gains on residential mortgage loans and unrealized gains on interest rate futures were partially offset by realized loss on RMBS, which was primarily due to prepayment speeds on the junior and interest only bonds that we held.

Operating Expenses

For the six months ended June 30, 2022 and 2021, our operating expenses were $6.7 million and $1.1 million, respectively.

The increase in operating expenses in the six month period ended June 30, 2022 was due to an increase in costs due to being a public company, including increased insurance, audit, and legal fees.

We also experienced an increase in loan administration costs, commensurate with an increase in the number of loans in our portfolio during the comparative period.

Operating Expenses Incurred with Affiliate

For the six months ended June 30, 2022 and 2021, our operating expenses incurred with affiliate were $1.8 million and $1.0 million, respectively.

These expenses were primarily due to the allocated time of partially dedicated employees’ compensation being reimbursed by us, which time allocated to us increased during the comparative period.

Due Diligence and Transaction Costs

For the six months ended June 30, 2022 and 2021, our due diligence and transaction costs were $1.2 million and $0.2 million, respectively.

The increase in these costs was due to whole loan acquisition diligence costs, which increased over the comparative period as we purchased more whole loans during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

Stock Compensation

For the six months ended June 30, 2022, our stock compensation expense was $1.8 million.

In connection with the IPO in June 2021, we issued restricted stock awards to key employees of Angel Oak, including our Manager, as well as the independent directors on our Board of Directors.

Our stock compensation expense for the three months ended June 30, 2021 was de minimis, as expense was incurred during a nine day period as the grant date of the restricted stock was June 21, 2021.

We issued additional restricted stock awards on January 1, 2022, March 10 and March 11, 2022, and May 18, 2022.

Restricted stock awards vest over one, three, or four years (depending on the tranche of award), commencing on the one year anniversary of the grant date.

Securitization Costs

Securitization costs of $2.0 million were incurred for the six months ended June 30, 2022 in the securitization of AOMT 2022-1.

During the comparative period of the six months ended June 30, 2021, we incurred no securitization expense as we did not enter into any securitizations during that period.

Management Fee Incurred with Affiliate

For the six months ended June 30, 2022 and 2021, our management fee incurred with affiliate was $3.9 million and $2.2 million, respectively.

The increase is due to the increase in our average equity for the six months ended June 30, 2022 as compared to the same period in 2021.

Our Portfolio

As of March 31, 2022, our portfolio consisted of approximately $2.7 billion of residential mortgage loans, RMBS, and other target assets.

The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as of March 31, 2022:

As of June 30, 2022, our portfolio consisted of approximately $3.2 billion of residential mortgage loans, RMBS, and other target assets.

The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as of June 30, 2022:

Fair Value Collateralized Debt Allocated Capital % of Total Capital

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CMBS 8,982 — 8,982 2.4 %

Treasury Bills 349,992 348,867 1,125 0.3 %

Total investment securities $ 931,841 $ 128,365 $ 803,476 218.7 %

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Total $ 2,547,192 $ 2,179,908 $ 367,284 100.0 %

(1) “Target assets” as presented above includes the total investment portfolio excluding U.S.

Treasury Bills.

(2) Substantially comprised of $298.7 million due to broker.

(1) “Target assets” as presented above comprises the total investment portfolio, as there were no U.S.

Treasury Bills held as of June 30, 2022.

(2) Other assets and liabilities presented is calculated as a net liability substantially comprised of $720.4 million due to broker for our quarter-end purchase of certain whole pool RMBS.

As of December 31, 2021, our portfolio consisted of approximately $2.2 billion of residential mortgage loans, RMBS, and other target assets.

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Residential Mortgage Loans

The following table sets forth additional information on the residential mortgage loans in our portfolio as of March 31, 2022:

The following table sets forth additional information on the residential mortgage loans in our portfolio as of June 30, 2022:

Portfolio Range Portfolio Weighted Average

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Percentage of loans 90+ days delinquent (based on UPB) N/A 0.30%

The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of March 31, 2022:

The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of June 30, 2022:

($ in thousands)

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(1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year.

The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of March 31, 2022:

(1) No state in “Other” represents more than a 3% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of March 31, 2022 .

The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of June 30, 2022:

(1) No state in “Other” represents more than a 3% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of June 30, 2022 .

The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2021:

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(1) No state in “Other” represents more than a 3% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2021 .

The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of March 31, 2022:

The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of June 30, 2022:

The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of December 31, 2021:

The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as of March 31, 2022, based on the product profile, borrower profile, and geographic location (percentages are based on the aggregate unpaid principal balance of such loans):

Characteristics of Our Residential Mortgage Loans as of March 31, 2022:

(1) No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of March 31, 2022 .

The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as of June 30, 2022, based on the product profile, borrower profile, and geographic location (percentages are based on the aggregate unpaid principal balance of such loans):

Characteristics of Our Residential Mortgage Loans as of June 30, 2022:

(1) No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of June 30, 2022 .

The following charts illustrate additional characteristics of the residential mortgage loans in our portfolio that we owned directly as of December 31, 2021, based on the product profile, borrower profile, and geographic location (percentages are based on the aggregate unpaid principal balance of such loans):

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Commercial Mortgage Loans

The following table provides additional information on the commercial mortgage loans in our portfolio as of March 31, 2022:

The following table provides additional information on the commercial mortgage loans in our portfolio as of June 30, 2022:

Portfolio Range Portfolio Weighted Average

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LTV at loan origination 46.7% - 75.0% 59.8%

The following charts illustrate the geographic location of the commercial mortgage loans in our portfolio that we owned directly as of March 31, 2022 and December 31, 2021 (percentages are based on the aggregate unpaid principal balance of such loans):

Geographic Diversification of Our Commercial Mortgage Loans as of March 31, 2022:

The following charts illustrate the geographic location of the commercial mortgage loans in our portfolio that we owned directly as of June 30, 2022 and December 31, 2021 (percentages are based on the aggregate unpaid principal balance of such loans):

Geographic Diversification of Our Commercial Mortgage Loans as of June 30, 2022:

Geographic Diversification of Our Commercial Mortgage Loans as of December 31, 2021:

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We received bonds from AOMT 2020‑3 with a fair value of approximately $66.5 million, including approximately $23.0 million in horizontal risk retention securities (representing 5% of the fair value of the securities and other interests issued as part of the transaction).

Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in Angel Oak Mortgage Trust I (“AOMT”) securitization transactions is set forth below as of March 31, 2022, unless otherwise stated:

AOMT 2019-2 AOMT 2019-4 AOMT 2019-6 AOMT 2020-3

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Investment thickness 18.95 % 8.61 % 6.20 % 11.82 %

The following table provides certain information with respect to our RMBS portfolio received in AOMT securitization transactions and acquired from other third parties as of March 31, 2022:

The following table provides certain information with respect to our RMBS portfolio received in AOMT securitization transactions and acquired from other third parties as of June 30, 2022:

RMBS Repurchase Debt Allocated Capital

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Total $ 100,364 $ 385,270 $ 485,634 $ 5,720 $ 354,781 $ 360,501 $ 94,644 $ 30,489 $ 125,133

The following table sets forth information with respect to our RMBS ending balances, at fair value, as of March 31, 2022:

The following table sets forth information with respect to our RMBS ending balances, at fair value, as of June 30, 2022:

Senior Mezzanine Subordinate Interest Only Whole Pool Total

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Ending fair value $ 3,076 $ 2,178 $ 90,350 $ 17,975 $ 372,055 $ 485,634

The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of March 31, 2022 (percentages are based on the aggregate unpaid principal balance of such loans):

The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of June 30, 2022 (percentages are based on the aggregate unpaid principal balance of such loans):

Geographic Diversification of Loans Underlying Our Portfolio

of RMBS Issued in AOMT Securitization Transactions

(as of March 31, 2022)

(1) No state in “Other” represents more than a 4% concentration of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of March 31, 2022.

(as of June 30, 2022)

(1) No state in “Other” represents more than a 4% concentration of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of June 30, 2022.

The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of December 31, 2021 (percentages are based on the aggregate unpaid principal balance of such loans):

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In November 2020, we participated in a securitization transaction of a pool of small balance commercial mortgage loans consisting of mortgage loans secured by commercial properties pursuant to which we contributed to AOMT 2020-SBC1 commercial mortgage loans with a carrying value of approximately $31.2 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 2020-SBC1 with a fair value of approximately $8.9 million.

Certain information regarding the commercial mortgage loans underlying our portfolio of CMBS issued in the AOMT 2020-SBC1 securitization transaction is shown below as of March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

Certain information regarding the commercial mortgage loans underlying our portfolio of CMBS issued in the AOMT 2020-SBC1 securitization transaction is shown below as of June 30, 2022 and December 31, 2021:

June 30, 2022 December 31, 2021

($ in thousands)

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Weighted average LTV at loan origination and deal date 58.4 % 58.4 %

The following table provides certain information with respect to the CMBS we received in connection with the AOMT 2020-SBC1 securitization transactions as of March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

The following table provides certain information with respect to the CMBS we received in connection with the AOMT 2020-SBC1 securitization transactions as of June 30, 2022 and December 31, 2021:

June 30, 2022 December 31, 2021

CMBS Repurchase Debt Allocated Capital CMBS Repurchase Debt Allocated Capital

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Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund our investments and operating costs, make distributions to our stockholders, and satisfy other general business needs.

Our financing sources currently include capital contributions from our investors prior to our IPO, the proceeds from our IPO and concurrent private placement, payments of principal and interest we receive on our investment portfolio, unused borrowing capacity under our in‑place loan financing lines and repurchase facilities, and securitizations of our whole loans.

Our financing sources currently include payments of principal and interest we receive on our investment portfolio, unused borrowing capacity under our in‑place loan financing lines and repurchase facilities, and securitizations of our whole loans.

Our financing sources historically have also included capital contributions from our investors prior to our IPO, the proceeds from our IPO and concurrent private placement (which capital has all been deployed), as well as payments of principal and interest we receive on our investment portfolio, unused borrowing capacity under our in‑place loan financing lines and repurchase facilities, and securitizations of our whole loans.

Going forward, we may also utilize other types of borrowings, including bank credit facilities and warehouse lines of credit, among others.

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Description of Existing Financing Arrangements

As of March 31, 2022, we were a party to six loan financing lines, which permitted borrowings in an aggregate amount of up to $1.3 billion.

As of June 30, 2022, we were a party to seven loan financing lines, which permitted borrowings in an aggregate amount of up to $1.6 billion, which availability increased to $1.9 billion subsequent to June 30, 2022 with the $260.0 million increase to the RBC financing line.

Borrowings under these agreements may be used to purchase whole loans for securitization or loans purchased for long‑term investment purposes.

A description of each loan financing line is set forth as follows:

RBC Loan Financing Line.

On April 13, 2022, we and two of our subsidiaries entered into a master repurchase agreement with RBC.

Our subsidiaries are each considered a “Seller” under this agreement.

From time to time and pursuant to the initial agreement, either of our subsidiaries may sell to RBC, and later repurchase, up to $340.0 million aggregate borrowings on mortgage loans, which was increased to $600.0 million subsequent to June 30, 2022.

The master repurchase agreement was initially set to terminate on October 13, 2022, and on July 21, 2022, was extended as per the terms of the original agreement through January 20, 2023, unless terminated earlier pursuant to the terms of the master repurchase agreement.

The principal amount expected to be paid by RBC for each eligible mortgage loan is based on a percentage of the outstanding principal balance of the mortgage loan or the market value of the mortgage loan (generally ranging from 80% to 90%, depending on the type of loan), whichever is less.

Pursuant to the agreement, RBC retains the right to determine the market value of the mortgage loan collateral in its sole commercially reasonable discretion.

The loan financing line is marked‑to‑market.

Additionally, RBC is under no obligation to purchase the eligible mortgage loans we offer to sell to them.

The interest rate on any outstanding balance under the master repurchase agreement that the applicable Subsidiary is required to pay RBC is generally in line with other similar agreements that the Company or one or more of its subsidiaries has entered into, where the interest rate is equal to the sum of (1) a pricing spread of 1.95% and (2) the average SOFR for each U.S.

Government Securities Business Day (as defined in the Master Repurchase Agreement) beginning on April 11, 2022 and ending on the day that is two U.S.

Government Securities Business Days prior to the date the applicable loan is repurchased by the applicable subsidiary.

The obligations of the subsidiaries under the master repurchase agreement are guaranteed by the Company pursuant to a Guaranty executed contemporaneously with the master repurchase agreement.

In addition, and similar to other repurchase agreements that the Company has entered into, the Company is subject to various financial and other covenants, including those relating to (1) maintenance of a minimum tangible net worth;

(2) a maximum ratio of indebtedness to tangible net worth;

and (3) minimum liquidity.

The agreement contains margin call provisions that provide RBC with certain rights in the event of a decline in the market value of the purchased mortgage loans.

Under these provisions, RBC may require us or our subsidiaries to transfer cash sufficient to eliminate any margin deficit resulting from such a decline.

In addition, the agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross‑defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction.

The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement and RBC’s right to liquidate the mortgage loans then subject to the agreement.

We and our subsidiaries are also required to pay certain customary fees to RBC and to reimburse RBC for certain costs and expenses incurred in connection with RBC’s structuring, management, and ongoing administration of the master repurchase agreement.

Nomura Loan Financing Line.

On December 6, 2018, we and one of our subsidiaries entered into a master repurchase agreement with Nomura Corporate Funding Americas, LLC (“Nomura”).

On December 6, 2018, we and one of our subsidiaries entered into a master repurchase agreement with Nomura.

We are considered the “Seller” under this agreement.

1 unchanged sentence

Pursuant to the agreement, we and our subsidiary may sell to Nomura, and later repurchase, up to $300.0 million aggregate borrowings on mortgage loans.

The agreement terminates on August 5, 2022, unless terminated earlier pursuant to the terms of the agreement.

However, we are permitted to extend the expiration date by up to 364 additional days, subject to certain conditions being satisfied.

This agreement was set to terminate on August 5, 2022.

On August 8, 2022, this agreement was extended through October 5, 2022, and interest will accrue on any borrowings at a rate based on Term SOFR plus an additional spread of 1.70% - 3.50%.

The principal amount paid by Nomura for each eligible mortgage loan is based on a percentage of both the market value, unpaid principal balance and acquisition price of the mortgage loan (generally ranging from 65% to 92%, depending on the type of loan and certain other factors and subject to certain other adjustments).

1 unchanged sentence

Additionally, Nomura is under no obligation to purchase the eligible mortgage loans we offer to sell to them.

Upon our or our subsidiary’s repurchase of the mortgage loan, we are, or our subsidiary is, required to repay Nomura the adjusted principal amount related to such mortgage loan plus accrued and unpaid interest at a rate based on the sum of (1) the greater of (a) one-month LIBOR or three‑month LIBOR (depending on the type of mortgage loan) and (b) the applicable LIBOR floor, and (2) a spread generally ranging from 1.70% to 3.50% depending on the type of loan.

Prior to the amendment effective August 5, 2022, upon our or our subsidiary’s repurchase of the mortgage loan, we are, or our subsidiary is, required to repay Nomura the adjusted principal amount related to such mortgage loan plus accrued and unpaid interest at a rate based on the sum of (1) the greater of (a) one-month LIBOR or three‑month LIBOR (depending on the type of mortgage loan) and (b) the applicable LIBOR floor, and (2) a spread generally ranging from 1.70% to 3.50% depending on the type of loan.

After the August 5, 2022 amendment, “LIBOR” has been replaced with “Term SOFR”.

The agreement requires us to maintain various financial and other covenants, such as that:

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Pursuant to the agreement, we or our subsidiary may sell to Banc of California, and later repurchase, up to $50.0 million aggregate borrowings on mortgage loans.

The agreement was amended on March 7, 2022 to terminate on March 16, 2023, unless terminated earlier pursuant to the terms of the agreement.

The agreement was amended on March 7, 2022 to extend the term to 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.

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The Master Repurchase Agreement terminates on September 20, 2022, unless terminated earlier pursuant to the terms of the Master Repurchase Agreement.

On January 27, 2022, this repurchase facility was amended to to state that interest will accrue on any outstanding balance at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) and increase the maximum purchase price permitted under the Master Repurchase Agreement to $550.0 million from $400.0 million, which is subject to reduction to $400.0 million upon the earlier to occur of (1) the issuance of securities pursuant to a securitization of the assets underlying the Master Repurchase Agreement and (2) March 30, 2022, which triggering event has occurred.

On January 27, 2022, this repurchase facility was amended to to state that interest will accrue on any outstanding balance at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) and increase the maximum purchase price permitted under the Master Repurchase Agreement to $550.0 million from $400.0 million, which was subject to reduction to $400.0 million upon the issuance of securities pursuant to a securitization of the assets underlying the Master Repurchase Agreement which occurred on February 7, 2022.

The amount expected to be advanced by Barclays is generally in line with other similar agreements that the Company or one of its subsidiaries has entered into, which is a percentage of the unpaid principal balance or market value of the asset depending on the type of underlying asset.

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The Subsidiary is also required to pay certain customary fees to Barclays and to reimburse Barclays for certain costs and expenses incurred in connection with Barclays’ management and ongoing administration of the Master Repurchase Agreement.

The following table sets forth the details of our financing lines as of each of March 31, 2022 and December 31, 2021:

The following table sets forth the details of our financing lines as of each of June 30, 2022 and December 31, 2021:

Line of Credit Facility Limit Base Interest Rate (A)

Interest Rate Spread (A)

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

($ in thousands)

Barclays Bank PLC (1)

$ 400,000 1 month LIBOR 1.70% - 3.50% $ 379,333 $ 362,899

$ 400,000 1 month SOFR 1.95% - 2.00% $ 370,572 $ 362,899

Royal Bank of Canada (2)

$ 340,000 Average Daily SOFR 1.95% $ 191,677 N/A

Nomura Corporate Funding Americas, LLC (3)

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Deutsche Bank, AG (4)

$ 250,000 1 month LIBOR 2.00% - 3.25% $ 235,743 231,981

$ 250,000 1 month SOFR 2.20% - 3.45% $ 217,875 231,981

Goldman Sachs Bank USA (5)

$ 200,000 3 month LIBOR 2.25% $ 193,351 109,283

$ 200,000 Compound SOFR 2.45% $ 175,291 109,283

Banc of California, National Association (6)

$ 75,000 1 month LIBOR 2.50% - 3.13% $ 52,869 34,838

$ 75,000 1 month SOFR 2.50% - 3.50% $ 55,410 34,838

Veritex Community Bank (7)

$ 75,000 1 month LIBOR 2.30% $ 74,662 11,258

$ 75,000 1 month SOFR 2.41% $ 72,477 11,258

Total $ 1,640,000 $ 1,102,101 $ 853,408

(A) See below for timing of applicable transitions to SOFR as base interest rate and corresponding applicable interest rate spreads.

(A) See below for timing of applicable transitions from LIBOR to the Secured Overnight Financing Rate (“SOFR”) as base interest rate and corresponding applicable definitions of “Term” and “Average” SOFR, and “SOFR base”.

(1) This agreement terminates on September 20, 2022.

On January 27, 2022, this repurchase facility was amended to to state that interest will accrue on any outstanding balance at a rate based on Term SOFR plus a spread and increase the maximum purchase price permitted under the Master Repurchase Agreement to $550.0 million from $400.0 million, which was subject to reduction to $400.0 million upon the issuance of securities pursuant to a securitization of the assets underlying the Master Repurchase Agreement which occurred on February 7, 2022.

(2) This agreement terminates on August 5, 2022.

On January 27, 2022, this repurchase facility was amended to state that (a) interest will accrue on any outstanding balance at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) plus a spread and (b) increase the maximum purchase price permitted under the master repurchase agreement to $550.0 million from $400.0 million, which was subject to reduction to $400.0 million upon the issuance of securities pursuant to a securitization of the assets underlying the master repurchase agreement.

This securitization occurred on February 7, 2022.

Prior to January 27, 2022, interest was based on 1-month LIBOR plus a spread generally in line with similar agreements that the Company or its subsidiaries have entered into, which is a range of 1.70% - 3.50%.

(2) On April 13, 2022, the Company and two of its subsidiaries entered into a $340.0 million repurchase facility with Royal Bank of Canada (“RBC”) through the execution of a master repurchase agreement between the Company as guarantor, and two of its subsidiaries, as sellers, and RBC as buyer.

The master repurchase agreement was initially set to terminate on October 13, 2022, and on July 21, 2022, was extended as per the terms of the original agreement through January 20, 2023 (see Note 14 - Subsequent Events ), unless such term is extended or terminated earlier pursuant to the terms of the master repurchase agreement.

On August 4, 2022, the RBC maximum line of credit was increased by $260.0 million to a maximum facility limit of $600.0 million.

See Note 14 - Subsequent Events to our unaudited condensed consolidated financial statements include elsewhere in this Quarterly Report on Form 10-Q.

(3) This agreement was set to terminate on August 5, 2022.

On August 8, 2022, this agreement was extended through October 5, 2022, and interest will accrue on any borrowings at a rate based on Term SOFR plus an additional spread of 1.70% - 3.50%.

See Note 14 - Subsequent Events to our unaudited condensed consolidated financial statements include elsewhere in this Quarterly Report on Form 10-Q.

(4) 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;

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and adjust the pricing rate whereby upon the Company’s or the subsidiary’s repurchase of a mortgage loan, the Company or the subsidiary is required to repay Deutsche Bank the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (A) the greater of (i) 0.00% and (ii) Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) and (B) a spread generally ranging from 2.20% to 3.45%.

Prior to February 4, 2022, interest was based on 1-month LIBOR plus a spread of 2.00% - 3.25%.

(5) On March 2, 2022, the agreement was extended to terminate on March 5, 2023, unless terminated earlier pursuant to the terms of the agreement.

On January 1, 2022, the agreement was amended to replace a LIBOR-based index rate with a SOFR-based index rate plus a spread equal to 20 basis points.

On January 1, 2022, the agreement was amended to replace a LIBOR-based index rate with a SOFR-based index rate plus a spread equal to 20 basis points, plus the prior spread.

Prior to January 1, 2022, interest was based on 3-month LIBOR plus a spread of 2.25%.

(6) On March 7, 2022, the agreement was amended to terminate on March 16, 2023, unless terminated earlier pursuant to the terms of the agreement.

Prior to March 7, 2022, interest was based on 1-month LIBOR plus a spread of 2.50% - 3.13%.

(7) This agreement terminates on August 16, 2023.

On February 11, 2022, the Company amended the financing facility to (1) increase the size of the financing facility to $75.0 million from $50.0 million, and (2) interest will accrue on any outstanding balance at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) plus a margin equal to 2.41% per annum;

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) provide that 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.

Prior to February 11, 2022, interest was based on 1-month LIBOR plus a spread of 2.30%.

Short‑Term Repurchase Facilities.

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Treasury securities, securities issued by AOMT, Angel Oak’s securitization platform, and other securities we may acquire in accordance with our investment guidelines.

As of March 31, 2022, there was approximately $477.4 million outstanding under these repurchase facilities, with a weighted average interest rate of 0.32%.

The following table sets forth certain characteristics of our short-term repurchase facilities as of March 31, 2022 and December 31, 2021:

March 31, 2022

The following table sets forth certain characteristics of our short-term repurchase facilities as of June 30, 2022 and December 31, 2021:

June 30, 2022

Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days)

($ in thousands)

Treasury Bills $ 348,867 0.32 % 9

RMBS $ 128,365 1.51 % 15

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We will continue to use repurchase facilities on our RMBS portfolio to add additional leverage which increases the yield on those assets.

Our use of repurchase facilities is generally highest at the end of any particular quarter, as shown in the table above, where the quarter-end balance and the highest month-end balance in each quarter are equivalent.

Securitization Transactions

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In the transaction, AOMT 2022-1 issued approximately $551.8 million in face value of bonds.

We used the proceeds of the securitization transaction to repay outstanding debt of approximately $458.3 million and retained cash of $60.9 million, which was used to acquire additional non‑QM loans, pay down repurchase facilities, and acquire other target assets.

We own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds.

We used the proceeds of the securitization transaction to repay outstanding debt of

approximately $458.3 million and retained cash of $60.9 million, which was used to acquire additional non‑QM loans, pay down repurchase facilities, and acquire other target assets.

We are the sole member of the Depositor and also own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds.

Given the accounting rules surrounding this type of transaction, we have consolidated the AOMT 2022-1 securitization on our condensed consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheet as of March 31, 2022.

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We used the proceeds of the securitization transaction to repay outstanding debt of approximately $331.8 million and retained cash of $39.8 million, which was used to acquire additional non‑QM loans, pay down repurchase facilities, and acquire other target assets.

We own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds.

We are the sole member of the Depositor and also own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds.

Given the accounting rules surrounding this type of transaction, we have consolidated the AOMT 2021-7 securitization on our condensed consolidated balance sheets, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021.

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We used the proceeds of the securitization transaction to repay outstanding debt of approximately $249.0 million and retained cash of $55.8 million, which was used to acquire additional non‑QM loans, pay down repurchase facilities, and acquire other target assets.

We own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds.

We are the sole member of the Depositor and also own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds.

Given the accounting rules surrounding this type of transaction, we have consolidated the securitization on our condensed consolidated balance sheets, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021.

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Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, index swap contracts, interest rate cap or floor contracts, futures or forward contracts, and options.

Three Months Ended

March 31, 2022 March 31, 2021

Six Months Ended

June 30, 2022 June 30, 2021

(in thousands)

Cash flows used in operating activities $ (635,830) $ (382,091)

Cash flow provided by investing activities $ 261,363 $ 64,060

Cash flow provided by (used in) investing activities $ 502,541 $ (705,897)

Cash flows provided by financing activities $ 102,856 $ 1,075,043

Net increase (decrease) in cash and restricted cash $ 43,584 $ (1,956)

Operating cash flows of $(606.4) million for the three months ended March 31, 2022 as compared to $(81.6) million for the three months ended March 31, 2021 were primarily due to the purchase of additional residential mortgage loans during the three months ended March 31, 2022.

Investing cash flows of $261.4 million for the three months ended March 31, 2022 as compared to $64.1 million for the three months ended March 31, 2021 were primarily due to the sale of RMBS during the quarter, partially offset by the purchase and maturity activity of U.S.

Net decrease in cash and restricted cash $ (30,433) $ (12,945)

Operating cash flows of $(635.8) million for the six months ended June 30, 2022 as compared to $(382.1) million for the six months ended June 30, 2021 were primarily due to the purchase of additional residential mortgage loans during the six months ended June 30, 2022.

Investing cash flows of $502.5 million for the six months ended June 30, 2022 as compared to $(705.9) million for the six months ended June 30, 2021 were primarily due to the net sales of RMBS during the quarter, partially offset by the timing of purchase and maturity activity of U.S.

Treasury securities.

Financing cash flows of $388.6 million for the three months ended March 31, 2022 as compared to $15.6 million for the three months ended March 31, 2021 were increased primarily due to proceeds from the AOMT 2022-1 securitization, partially offset by principal payments to bond holders, dividends to common stockholders, and stock repurchase activity.

Financing cash flows used of $102.9 million for the six months ended June 30, 2022 as compared to $1.1 billion provided for the six months ended June 30, 2021 were due primarily due to net repayments on repurchase facilities in the six months ended June 30, 2022 as compared to net borrowings on repurchase facilities during the 2021 comparative period.

The net repayments on repurchase facilities for the six months ended June 30, 2022 were partially offset by proceeds from the AOMT 2022-1 securitization.

Cash Flows - Residential and Commercial Loan Classification

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Commercial mortgage loan activity is recognized in the statement of cash flows as an investing activity, as our commercial mortgage loan portfolio is generally deemed to be held for investing purposes.

Cash Availability

As of June 30, 2022, we held a lower than usual balance of unrestricted cash and cash equivalents.

Although borrowings on our financing facilities were a net increase during the six months ended June 30, 2022, our available cash balance decreased in the month of June 2022 due to margin calls on our financing facilities.

Subsequent to June 30, 2022, and through August 12, 2022, our available unrestricted cash balance increased to more normalized levels due to receipt of interest income on our RMBS, CMBS, and mortgage loan portfolios, as well as a sale of certain of our commercial loans, and the AOMT 2022-4 securitization.

Our cash balance as of June 30, 2022 was sufficient to meet our liquidity covenants under our financing facilities.

We believe that we maintain sufficient cash to continue to meet margin calls on our financing facilities, should such margin calls occur.

Due to market volatility, we exited certain of our economic hedge positions subsequent to June 30, 2022, and therefore would not have any margin requirements to such hedging counterparties unless we were to resume that particular economic hedging, which we may do in the future, should we deem economic conditions to be less volatile or more favorable to us.

We anticipate that our largest commercial loan will be paid in full within the third quarter of 2022, and we may sell additional commercial loans if we deem the market to be advantageous.

We may also participate in an upcoming securitization with other Angel Oak entities.

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis