Angel Oak Mortgage REIT, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Angel Oak Mortgage, Inc. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except for share data) As of: June 30, 2022 December 31, 2021 ASSETS Residential mortgage loans - at fair value $ 1,279,341 $ 1,061,912 Residential mortgage loans in securitization trusts - at fair value 982,579 667,365 Commercial mortgage loans - at fair value 20,196 18,664 RMBS - at fair value 922,859 485,634 CMBS - at fair value 8,982 10,756 U.S. Treasury securities - at fair value — 249,999 Cash and cash equivalents 16,100 40,801 Restricted cash 5,776 11,508 Principal and interest receivable 43,030 25,984 Deferred tax asset 3,457 — Unrealized appreciation on TBAs and interest rate futures contracts - at fair value 594 2,428 Other assets 1,732 2,878 Total assets $ 3,284,646 $ 2,577,929 LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES Notes payable $ 1,102,101 $ 853,408 Non-recourse securitization obligation, collateralized by residential mortgage loans in securitization trusts (see Note 2) 949,442 616,557 Securities sold under agreements to repurchase 128,365 609,251 Unrealized depreciation on TBAs and interest rate futures contracts - at fair value 8,258 728 Due to broker 720,405 — Accrued expenses 2,584 442 Accrued expenses payable to affiliate 1,539 1,425 Interest payable 2,663 1,283 Income taxes payable — 1,600 Management fee payable to affiliate 2,005 1,845 Total liabilities $ 2,917,362 $ 2,086,539 Commitments and contingencies STOCKHOLDERS’ EQUITY Series A preferred stock, $ 0.01 par value, 12 % cumulative, non-voting, 125 shares issued and outstanding as of June 30, 2022 and December 31, 2021 101 101 Common stock, $ 0.01 par value. As of June 30, 2022: 350,000,000 shares authorized, 24,925,930 shares issued and outstanding. As of December 31, 2021: 350,000,000 shares authorized, 25,227,328 shares issued and outstanding. 249 252 Additional paid-in capital 472,356 476,510 Accumulated other comprehensive income 1,248 3,000 Retained (deficit) earnings ( 106,670 ) 11,527 Total stockholders’ equity $ 367,284 $ 491,390 Total liabilities and stockholders’ equity $ 3,284,646 $ 2,577,929 The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 2 Angel Oak Mortgage, Inc. Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) (in thousands, except for share and per share data) Three Months Ended Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 INTEREST INCOME, NET Interest income $ 29,702 $ 12,143 $ 56,811 $ 22,177 Interest expense 13,271 1,846 23,441 2,678 NET INTEREST INCOME 16,431 10,297 33,370 19,499 REALIZED AND UNREALIZED GAINS (LOSSES), NET Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS 12,718 ( 10,224 ) 39,133 ( 12,512 ) Net unrealized gain (loss) on mortgage loans, debt at fair value option (see Note 2), and derivative contracts ( 73,985 ) 4,813 ( 154,166 ) 9,330 TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET ( 61,267 ) ( 5,411 ) ( 115,033 ) ( 3,182 ) EXPENSES Operating expenses 2,977 609 6,723 1,130 Operating expenses incurred with affiliate 838 533 1,838 972 Due diligence and transaction costs 519 177 1,182 242 Stock compensation 968 90 1,839 90 Securitization costs — — 2,019 — Management fee incurred with affiliate 2,006 1,250 3,879 2,169 Total operating expenses 7,308 2,659 17,480 4,603 INCOME BEFORE INCOME TAXES ( 52,144 ) 2,227 ( 99,143 ) 11,714 Income tax benefit — — ( 3,457 ) — NET INCOME (LOSS) $ ( 52,144 ) $ 2,227 $ ( 95,686 ) $ 11,714 Preferred dividends ( 4 ) ( 4 ) ( 8 ) ( 8 ) NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDER(S) $ ( 52,148 ) $ 2,223 $ ( 95,694 ) $ 11,706 Other comprehensive income (loss) 11,235 3,085 ( 1,752 ) 3,615 TOTAL COMPREHENSIVE INCOME (LOSS) $ ( 40,913 ) $ 5,308 $ ( 97,446 ) $ 15,321 Basic earnings (loss) per common share $ ( 2.13 ) $ 0.13 $ ( 3.90 ) $ 0.72 Diluted earnings (loss) per common share $ ( 2.13 ) $ 0.13 $ ( 3.90 ) $ 0.72 Weighted average number of common shares outstanding: Basic 24,458,015 16,746,606 24,549,977 16,238,153 Diluted 24,458,015 16,798,660 24,549,977 16,264,323 The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 3 Angel Oak Mortgage, Inc. Condensed Consolidated Statements of Changes in Stockholder(s)’ Equity (Unaudited) (in thousands) Three Months Ended June 30, 2022 Preferred Stock Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Deficit Total Stockholders’ Equity Stockholders’ equity as of March 31, 2022 $ 101 $ 252 $ 474,377 $ ( 9,987 ) $ ( 43,306 ) $ 421,437 Repurchase of common stock — ( 3 ) ( 2,989 ) — — ( 2,992 ) Non-cash equity compensation — — 968 — — 968 Dividends declared - preferred — — — — ( 4 ) ( 4 ) Unrealized gain on RMBS and CMBS — — — 11,235 — 11,235 Dividends paid on common stock — — — — ( 11,216 ) ( 11,216 ) Net loss — — — — ( 52,144 ) ( 52,144 ) Stockholders’ equity as of June 30, 2022 $ 101 $ 249 $ 472,356 $ 1,248 $ ( 106,670 ) $ 367,284 Three Months Ended June 30, 2021 Preferred Stock Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive (Loss) Income Retained Earnings Total Stockholder(s)’ Equity Stockholder’s equity as of March 31, 2021 $ 101 $ 157 $ 302,750 $ ( 509 ) $ 12,084 $ 314,583 Private placement concurrent with IPO — 21 39,979 — — 40,000 Common stock issued in IPO — 72 136,728 — — 136,800 Non-cash equity compensation — 5 85 — — 90 Dividends declared - preferred — — — — ( 4 ) ( 4 ) Unrealized gain on RMBS and CMBS — — — 3,085 — 3,085 Net income — — — — 2,227 2,227 Stockholders’ equity as of June 30, 2021 $ 101 $ 255 $ 479,542 $ 2,576 $ 14,307 $ 496,781 The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 4 Angel Oak Mortgage, Inc. Condensed Consolidated Statements of Changes in Stockholder(s)’ Equity (Unaudited) (in thousands) Six Months Ended June 30, 2022 Preferred Stock Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Deficit) Total Stockholders’ Equity Stockholders’ equity as of December 31, 2021 $ 101 $ 252 $ 476,510 $ 3,000 $ 11,527 $ 491,390 Repurchase of common stock — ( 3 ) ( 5,993 ) — — ( 5,996 ) Non-cash equity compensation — — 1,839 — — 1,839 Dividends declared - preferred — — — — ( 8 ) ( 8 ) Unrealized loss on RMBS and CMBS — — — ( 1,752 ) — ( 1,752 ) Dividends paid on common stock — — — — ( 22,503 ) ( 22,503 ) Net loss — — — — ( 95,686 ) ( 95,686 ) Stockholders’ equity as of June 30, 2022 $ 101 $ 249 $ 472,356 $ 1,248 $ ( 106,670 ) $ 367,284 Six Months Ended June 30, 2021 Preferred Stock Common Stock at Par Additional Paid-in Capital Accumulated Other Comprehensive (Loss) Income Retained Earnings Total Stockholder(s)’ Equity 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 Non-cash equity compensation — 5 85 — — 90 Dividends declared - preferred — — — — ( 8 ) ( 8 ) Unrealized gain on RMBS and CMBS — — — 3,615 — 3,615 Net income — — — — 11,714 11,714 Stockholders’ equity as of June 30, 2021 $ 101 $ 255 $ 479,542 $ 2,576 $ 14,307 $ 496,781 The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 5 Angel Oak Mortgage, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) Six Months Ended June 30, 2022 Six Months Ended June 30, 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $ ( 95,686 ) $ 11,714 Adjustments to reconcile net (loss) income to net cash used in operating activities: Net realized loss (gain) on mortgage loans, derivative contracts, RMBS, and CMBS ( 39,133 ) 12,512 Net unrealized loss (gain) on mortgage loans and derivative contracts 154,166 ( 9,330 ) Accretion of and amortization 8,315 151 Non-cash equity compensation 1,839 90 Net change in: Purchases of residential mortgage loans from non-affiliates ( 390,956 ) ( 73,546 ) Purchases of residential mortgage loans from affiliates ( 541,875 ) ( 335,233 ) Principal payments on residential mortgage loans 205,260 27,481 Margin received from interest rate futures contracts and TBAs 73,171 471 Principal and interest receivable on residential motgage loans ( 10,975 ) ( 13,387 ) Income tax benefit ( 3,457 ) — Other assets ( 296 ) ( 3,642 ) Management fee payable to affiliate 160 — Accrued expenses 2,143 519 Accrued expenses payable to affiliate 114 ( 158 ) Interest payable 1,380 267 NET CASH USED IN OPERATING ACTIVITIES ( 635,830 ) ( 382,091 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments in RMBS and CMBS ( 419,748 ) ( 881,011 ) Purchases of investments in U.S. Treasury Bills ( 349,992 ) ( 1,000 ) Maturity of U.S. Treasury Bills 600,000 149,993 Sale of RMBS 669,913 19,688 Principal payments on RMBS 4,936 5,178 Purchases of commercial mortgage loans ( 3,180 ) — Sale of commercial mortgage loans 578 — Principal payments on commercial mortgage loans 34 1,255 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 502,541 ( 705,897 ) The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 6 Angel Oak Mortgage, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid to common stockholders ( 22,503 ) — Dividends paid to preferred shareholders ( 8 ) — Repurchase of common stock ( 5,996 ) — Contributions from prior common stockholder — 56,261 Proceeds from IPO — 136,800 Proceeds from private placement concurrent with IPO — 40,000 Principal payments on loans held in securitization trusts ( 156,031 ) — Cash paid for debt issuance costs ( 457 ) ( 77 ) Proceeds from securitization 520,044 — Net proceeds from (payments on) securities sold under agreements to repurchase ( 480,886 ) 608,885 Net proceeds from notes payable 248,693 233,174 NET CASH PROVIDED BY FINANCING ACTIVITIES 102,856 1,075,043 CHANGE IN CASH AND RESTRICTED CASH ( 30,433 ) ( 12,945 ) CASH AND RESTRICTED CASH, beginning of period (1) 52,309 45,973 CASH AND RESTRICTED CASH, end of period (1) $ 21,876 $ 33,028 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for interest $ 22,061 $ 647 (1) Cash, cash equivalents, and restricted cash as of June 30, 2022 included cash and cash equivalents of $ 16.1 million and restricted cash of $ 5.8 million, and as of June 30, 2021 included cash and cash equivalents of $ 28.9 million and restricted cash of $ 4.1 million. The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of this statement. 7 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 1. Organization and Basis of Presentation Angel Oak Mortgage, Inc. (together with its subsidiaries the “Company”), is a real estate finance company focused on acquiring and investing in first lien non-qualified residential mortgage (“non-QM”) loans and other mortgage‑related assets in the U.S. mortgage market. The Company’s strategy is to make investments in first lien non‑QM loans that are primarily made to higher‑quality non‑QM loan borrowers and primarily sourced from the proprietary mortgage lending platform of affiliates, Angel Oak Mortgage Solutions LLC and Angel Oak Home Loans LLC (together, “Angel Oak 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 taxable 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 common stock of the Company trades on the New York Stock Exchange under the ticker symbol “AOMR”. Concurrently with the completion of the IPO, the Company sold an additional 2,105,263 shares of common stock to CPPIB Credit Investments Inc. in a private placement at $ 19.00 per share, for total proceeds of approximately $ 40.0 million. The Operating Partnership On February 5, 2020, the Company formed Angel Oak Mortgage Operating Partnership, LP, a Delaware limited partnership (the “Operating Partnership”), through which substantially all of its assets are held and substantially all of its operations are conducted, either directly or through subsidiaries. The Company holds all of the limited partnership interests in the Operating Partnership and indirectly holds the sole general partnership interest in the Operating Partnership through the general partner, which is the Company’s wholly-owned subsidiary. The Company’s Manager and REIT status The Company is externally managed and advised by Falcons I, LLC (the “Manager”), a registered investment adviser with the SEC. The Company has elected to be taxed as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2019 and will operate in conformity with the requirements for qualification as a REIT under the Code. Interim Financial Statements The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report on Form 10-K”). In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim periods or the entire year. The condensed consolidated financial statements include the accounts of the Company and its wholly‑owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements requires the Company to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amounts and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of certain 8 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 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. Reclassifications Certain amounts reported in prior periods in the financial statements have been reclassified to conform to the current year’s presentation. “Other assets” on the condensed consolidated balance sheet as of December 31, 2021 in the amount of $ 5.3 million has been reclassified to $ 2.4 million of unrealized appreciation on “To be Announced” forward-settling of mortgage-backed securities trades (“TBAs”) and interest rate futures contracts - at fair value and $ 2.9 million of other assets, to enhance transparency of the Company’s balance sheet. The Company also reclassified the dividend paid in the first quarter of 2022 in the amount of $ 11.3 million from additional paid-in capital to retained earnings, as reflected in the balances of additional paid-in capital and retained earnings on the condensed consolidated balance sheet as of June 30, 2022 and the statements of stockholders’ equity beginning balances of additional paid-in capital and retained earnings as of March 31, 2022. This reclassification was a result of a review of industry standards resulting from diversity in practice noted in interpretive accounting guidance regarding dividend classification. Recent Accounting Standards - Recently Issued In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard was issued to ease the accounting effects of reform to the London Interbank Offered Rate (“LIBOR”) and other reference rates. The standard provides optional expedients and exceptions for applying GAAP to debt, derivatives, and other contracts affected by reference rate reform. The standard is effective for all entities as of March 12, 2020 through December 31, 2022 and may be elected over time as reference rate reform activities occur. The Company does not believe that this ASU will have a material impact upon its consolidated financial statements. Amortized Cost and Fair Value for Certain Non-Recourse Securitization Obligations of Angel Oak Mortgage Trust (“AOMT”) The Company had previously elected the fair value option for many of its assets and liabilities as provided for under Accounting Standards Codification 825, Financial Instruments, with certain exceptions. The Company has recorded the issuances of non-recourse securitization obligations of AOMT 2021-7 and 2021-4 at amortized cost, and the subsequent issuance of AOMT 2022-1 at fair value (See Note 2 - Variable Interest Entities and Note 10 - Fair Value Measurements ). The valuation methodology used to measure the fair value of the Company’s non-recourse securitization obligations, collateralized by residential mortgage loans, uses the prices of the underlying bonds securing the related residential mortgage loans in securitization trusts. The Company utilizes Price Serve , Bank of America’s independent fixed income pricing service, as the primary valuation source for these bonds. 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. We believe that these quotes are most reflective of the price that would be achieved if the bonds were sold to an independent third party on the date of the condensed consolidated financial statements. This liability is categorized as Level 2 in the fair value hierarchy. Debt issuance costs for non-recourse securitization obligations electing the fair value option are recorded to expense upon issuance of the securitization. Debt issuance costs incurred with the issuances of non-recourse securitization obligations for which the fair value option was not elected are presented at amortized cost. 2. Variable Interest Entities Since its inception, the Company has utilized Variable Interest Entities (“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 The Company has entered into securitization transactions where it was determined that the Company was the primary beneficiary, as, with respect to each securitization vehicle, 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 each of these securitization vehicles, AOMT 2021-4, AOMT 2021-7 and AOMT 2022-1, respectively. During the six months ended June 30, 2022, in the AOMT 2022-1 transaction, the Company securitized and consolidated approximately $ 537.6 million unpaid principal balance of seasoned residential non-QM mortgage loans. 9 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) The retained beneficial interest in VIEs for which the Company is the primary beneficiary 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 June 30, 2022 and December 31, 2021: June 30, 2022 December 31, 2021 Assets: (in thousands) Residential mortgage loans in securitization trusts - cost $ 1,061,973 $ 665,510 Fair value adjustment ( 79,394 ) 1,855 Residential mortgage loans in securitization trusts - at fair value $ 982,579 $ 667,365 Accrued interest receivable $ 1,902 $ 1,728 Liabilities (1) : Non-recourse securitization obligations, collateralized by residential mortgage loans - principal balance, amortized cost $ 507,051 $ 619,108 Less: debt issuance costs capitalized ( 1,898 ) ( 2,551 ) Non-recourse securitization obligations, collateralized by residential mortgage loans, amortized cost, net $ 505,153 $ 616,557 Non-recourse securitization obligations, collateralized by residential mortgage loans - principal balance, subject to fair value adjustment $ 476,962 $ — Fair value adjustment ( 32,673 ) — Non-recourse securitization obligations, collateralized by residential mortgage loans - at fair value, net $ 444,289 $ — Total non-recourse securitization obligations, collateralized by residential mortgage loans, net $ 949,442 $ 616,557 (1) Debt issuance costs for non-recourse securitization obligations electing the fair value option are recorded to expense upon issuance of the securitization. Debt issuance costs incurred with the issuances of non-recourse securitization obligations for which the fair value option was not elected are presented at amortized cost. Income and expense amounts related to the consolidated VIEs recorded in the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2022 (1) is set forth as follows: Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 (in thousands) Interest income $ 11,469 $ 21,887 Interest expense, non-recourse liabilities (2) ( 5,679 ) ( 10,262 ) Net interest income $ 5,790 $ 11,625 Net unrealized loss on mortgage loans in securitization trusts - at fair value ( 24,578 ) ( 79,752 ) Unrealized gain on mark-to-market of non-recourse securitization obligation - at fair value 14,361 32,673 Securitization expenses incurred in issuance of AOMT 2022-1 — ( 2,019 ) Operating expenses ( 252 ) ( 448 ) Net loss from consolidated VIEs $ ( 4,679 ) $ ( 37,921 ) (1) The Company had no consolidated VIEs during the three and six months ended June 30, 2021. (2) Includes amortization of debt issuance costs for AOMT 2021-7 and AOMT 2021-4. 10 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 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 and/or small balance commercial loans contributed to securitization trusts. These securities were issued as a result of the unconsolidated securitizations where the Company retained bonds from the issuances of AOMT 2019-2, AOMT 2019-4, AOMT 2019-6, AOMT 2020-3, and AOMT 2020-SBC1. The Company determined that it was not then and is not now the primary beneficiary of any of these entities, and thus has not consolidated the operating results or statements of financial position of any of these entities. The Company performs ongoing reassessments of all VIEs in which the Company has participated since its inception as to whether changes in the facts and circumstances regarding the Company’s involvement with a VIE would cause the Company’s consolidation conclusion to change, and the Company’s assessment of the VIEs in which the Company participated during the years 2019 and 2020 remains unchanged. The securities received in the aforementioned 2019 and 2020 securitization transactions are included in “RMBS - at fair value” and “CMBS - at fair value” on the consolidated balance sheets as of June 30, 2022 and December 31, 2021, and details on the accounting treatment and fair value methodology of the securities can be found in Note 9, Fair Value Measurements . See Note 5, Investment Securities , for the fair value of AOMT securities held by the Company as of June 30, 2022 and December 31, 2021 that were retained by the Company as a result of the securitization transactions in 2020 and 2019. 3. Residential Mortgage Loans Residential mortgage loans are measured at fair value. The following table sets forth the cost, fair value, weighted average interest rate, and weighted average remaining maturity of the Company’s residential mortgage loan portfolio as of June 30, 2022 and December 31, 2021: June 30, 2022 December 31, 2021 ($ in thousands) Cost $ 1,374,605 $ 1,063,146 Unpaid principal balance $ 1,333,995 $ 1,022,461 Net premium on mortgage loans purchased 40,610 40,685 Change in fair value ( 95,264 ) ( 1,234 ) Fair value $ 1,279,341 $ 1,061,912 Weighted average interest rate 4.68 % 4.49 % Weighted average remaining maturity (years) 31 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 June 30, 2022 and December 31, 2021: As of: June 30, 2022 December 31, 2021 ($ in thousands) Number of mortgage loans 90 or more days past due 4 8 Recorded investment in mortgage loans 90 or more days past due $ 1,530 $ 3,241 Unpaid principal balance of loans 90 or more days past due $ 1,683 $ 3,100 Number of mortgage loans in foreclosure 8 7 Recorded investment in mortgage loans in foreclosure $ 3,291 $ 2,125 Unpaid principal balance of loans in foreclosure $ 3,232 $ 2,113 11 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 4. Commercial Mortgage Loans Commercial mortgage loans are measured at fair value. The following table sets forth the cost, fair value, weighted average interest rate, and weighted average remaining maturity of the Company’s commercial mortgage loan portfolio as of June 30, 2022 and December 31, 2021: June 30, 2022 December 31, 2021 ($ in thousands) Cost $ 21,172 $ 18,641 Unpaid principal balance $ 21,187 $ 18,698 Net discount on commercial mortgage loans purchased ( 15 ) ( 51 ) Change in fair value ( 976 ) 17 Fair value $ 20,196 $ 18,664 Weighted average interest rate 6.12 % 6.25 % Weighted average remaining maturity (years) 8 8 There were no commercial mortgage loans more than 90 days overdue as of June 30, 2022, and there was one commercial mortgage loan more than 90 days overdue as of December 31, 2021 which loan was also in foreclosure. Subsequent to December 31, 2021, the commercial mortgage loan that had been more than 90 days overdue and in foreclosure as of December 31, 2021 was sold to a third party. 12 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 5. Investment Securities As of June 30, 2022, investment securities were comprised of non‑agency RMBS and Freddie Mac and Fannie Mae “whole pool agency RMBS,” and commercial mortgage backed securities (“CMBS”). As of December 31, 2021, investment securities also included U.S. Treasury securities. The U.S. Treasury securities held by the Company as of December 31, 2021 matured on January 6, 2022. The following table sets forth a summary of RMBS and CMBS at cost as of June 30, 2022 and December 31, 2021: June 30, 2022 December 31, 2021 (in thousands) RMBS $ 919,776 $ 482,824 CMBS $ 10,637 $ 10,875 The following table sets forth certain information about the Company’s investments in RMBS and CMBS as of June 30, 2022 and December 31, 2021: Real Estate Securities at Fair Value Securities Sold Under Agreement to Repurchase Allocated Capital June 30, 2022: (in thousands) AOMT RMBS (1) Senior $ 975 $ ( 1,049 ) $ ( 74 ) Mezzanine 2,145 ( 1,596 ) 549 Subordinate 55,414 ( 12,615 ) 42,799 Interest Only/Excess 10,133 — 10,133 Total AOMT RMBS $ 68,667 $ ( 15,260 ) $ 53,407 Other Non-Agency RMBS Subordinate $ 3,354 $ — $ 3,354 Interest Only/Excess 2,634 — 2,634 Total Other Non-Agency RMBS $ 5,988 $ — $ 5,988 Whole Pool Agency RMBS Fannie Mae $ 820,101 $ ( 113,105 ) $ 706,996 Freddie Mac 28,103 — 28,103 Whole Pool Total Agency RMBS $ 848,204 $ ( 113,105 ) $ 735,099 Total RMBS $ 922,859 $ ( 128,365 ) $ 794,494 AOMT CMBS Subordinate $ 6,573 $ — $ 6,573 Interest Only/Excess 2,409 — 2,409 Total AOMT CMBS $ 8,982 $ — $ 8,982 (1) AOMT RMBS held as of June 30, 2022 included both retained tranches of securitizations in which the Company participated within the purview of AOMT, and additional AOMT securities purchased in secondary market transactions. 13 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 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 securitizations in which the Company participated within the purview of AOMT and additional AOMT securities purchased in secondary market transactions. The following table sets forth certain information about the Company’s investments in U.S. Treasury Bills as of December 31, 2021 (1) : Date Face Value Unamortized Discount, net Amortized Cost (2) Unrealized Loss Fair Value Net Effective Yield ($ in thousands) December 31, 2021 $ 250,000 $ — $ 250,000 $ ( 1 ) $ 249,999 2.30 basis points (1) There were no U.S. Treasury Bills held as of June 30, 2022. (2) Cost and amortized cost of U.S. Treasury Bills is substantially equal, due to the short length of time until maturity on these financial instruments. 6. Notes Payable The Company has the ability to finance residential and commercial whole loans, utilizing lines of credit (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 upfront fees, fees on unused balances, covenants and concentration limits on types of collateral pledged; all vary based on the counterparty. 14 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) The following table sets forth the details of all the lines of credit available to the Company and drawn amounts for whole loan purchases as of June 30, 2022 and December 31, 2021: Drawn Amount Line of Credit Facility Limit Base Interest Rate (A) Interest Rate Spread (A) June 30, 2022 December 31, 2021 ($ in thousands) Barclays Bank PLC (1) $ 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) $ 300,000 1 month or 3 month LIBOR 1.70 % - 3.50 % $ 18,799 103,149 Deutsche Bank, AG (4) $ 250,000 1 month SOFR 2.20 % - 3.45 % $ 217,875 231,981 Goldman Sachs Bank USA (5) $ 200,000 Compound SOFR 2.45 % $ 175,291 109,283 Banc of California, National Association (6) $ 75,000 1 month SOFR 2.50 % - 3.50 % $ 55,410 34,838 Veritex Community Bank (7) $ 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 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 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 . (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 . (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; 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 %. 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, 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. 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 plus an additional spread. 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) 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 %. 15 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 7. Due to Broker The “Due to broker” account on the condensed consolidated balance sheets as of June 30, 2022 in the amount of $ 720.4 million relates to the purchase of whole pool RMBS at quarter-end in the second quarter of 2022. Purchases are accounted for on a trade date basis; and, at times, there may be a timing difference between the trade date and the settlement date of a trade. The trade date of this purchase was prior to June 30, 2022. For the six months ended June 30, 2022, this transaction is excluded from the condensed consolidated statements of cash flows as it is a noncash transaction. The cash for these whole pool RMBS settled on July 14, 2022, at which time these assets were simultaneously sold. 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. Restricted cash included margin collateral for securities sold under agreements to repurchase (along with margin collateral for TBAs and interest rate futures) as of each of June 30, 2022 and December 31, 2021. The following table summarizes certain characteristics of the Company’s repurchase agreements 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) RMBS $ 128,365 1.51 % 15 Total $ 128,365 1.51 % 15 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 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 whole loan investments. The derivatives in which the Company invests, and the market risk that the economic hedge is intended to mitigate are further discussed below. Derivative instruments as of June 30, 2022 and December 31, 2021 included both TBAs and interest rate futures contracts. Restricted cash included margin collateral for TBAs and interest rate futures (as well as for securities sold under agreements to repurchase) as of each of June 30, 2022 and December 31, 2021. 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. 16 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 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 gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS” for realized losses, and “net unrealized (loss) gain on mortgage loans and derivative contracts” for unrealized gains and losses. The Company considers the notional amounts, categorized by primary underlying risk, to be representative of the volume of its derivative activities. The following table sets forth the derivative instruments presented on the condensed consolidated balance sheets and notional amounts as of June 30, 2022 and December 31, 2021: Notional Amounts As of: Derivatives Not Designated as Hedging Instruments Number of Contracts Assets Liabilities Long Exposure Short Exposure ($ in thousands) June 30, 2022 Interest rate futures 12,902 $ 594 $ — $ — $ 1,290,200 June 30, 2022 TBAs N/A $ — $ ( 8,258 ) $ — $ 876,000 December 31, 2021 Interest rate futures 10,438 $ — $ ( 728 ) $ — $ 1,043,800 December 31, 2021 TBAs N/A $ 2,428 $ — $ — $ 523,938 The gains and losses arising from these derivative instruments in the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2022 and June 30, 2021 are set forth as follows: Derivatives Not Designated as Hedging Instruments Net Realized Gains (Losses) on Derivative Instruments Net Change in Unrealized Appreciation (Depreciation) on Derivative Instruments (in thousands) Three Months Ended June 30, 2022 Interest rate futures $ 29,429 $ ( 13,413 ) Three Months Ended June 30, 2022 TBAs $ ( 964 ) $ ( 9,577 ) Three Months Ended June 30, 2021 Interest rate futures $ ( 2,546 ) $ 746 Three Months Ended June 30, 2021 TBAs $ ( 2,070 ) $ ( 118 ) Derivatives Not Designated as Hedging Instruments Net Realized Gains (Losses) on Derivative Instruments Net Change in Unrealized Appreciation (Depreciation) on Derivative Instruments (in thousands) Six Months Ended June 30, 2022 Interest rate futures $ 49,113 $ 1,322 Six Months Ended June 30, 2022 TBAs $ 13,179 $ ( 10,686 ) Six Months Ended June 30, 2021 Interest rate futures $ ( 2,443 ) $ 2,481 Six Months Ended June 30, 2021 TBAs $ ( 471 ) $ ( 185 ) 10. Fair Value Measurements For financial reporting purposes, we follow a fair value hierarchy established under GAAP that is used to determine the fair value of financial instruments. This hierarchy prioritizes relevant market inputs in order to determine an “exit price” at the measurement date, or the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2 inputs are observable inputs other than quoted prices for an asset or liability that are obtained through corroboration with observable market data. Level 3 inputs are unobservable inputs (e.g., our own data or assumptions) that are used when there is little, if any, relevant market activity for the asset or liability required to be measured at fair value. In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured. 17 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) As of June 30, 2022, our valuation policy and processes had not changed from those described in our consolidated financial statements for the year ended December 31, 2021 included in the Annual Report on Form 10-K, with the exception of electing the fair value option for a new non-recourse securitization obligation added in 2022, collateralized by residential mortgage loans, as described in Note 1. Included in Note 10 to the Consolidated Financial Statements for the year ended December 31, 2021 included in the Annual Report on Form 10-K is a detailed description of our other financial instruments measured at fair value and their significant inputs, as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy. The following table sets forth information about the Company’s financial assets and liabilities measured at fair value as of June 30, 2022: Level 1 Level 2 Level 3 Total Assets, at fair value (in thousands) Residential mortgage loans $ — $ 1,274,520 $ 4,821 $ 1,279,341 Residential mortgage loans in securitization trust — 975,680 6,899 982,579 Commercial mortgage loans — 20,196 — 20,196 Investments in securities Non-Agency RMBS (1) — 74,655 — 74,655 Agency whole pool loan securities — 848,204 — 848,204 AOMT CMBS (2) — 8,982 — 8,982 Unrealized appreciation on futures contracts 594 — — 594 Total assets at fair value $ 594 $ 3,202,237 $ 11,720 $ 3,214,551 Liabilities, at fair value Non-recourse securitization obligation, collateralized by residential mortgage loans (3) $ — $ 444,289 $ — $ 444,289 Unrealized depreciation on TBAs 8,258 — — 8,258 Total liabilities at fair value $ 8,258 $ 444,289 $ — $ 452,547 (1) Non‑Agency RMBS held as of June 30, 2022 included both retained tranches of securitizations in which the Company participated, additional AOMT securities purchased in secondary market transactions, and other RMBS purchased in secondary market transactions. (2) All AOMT CMBS held as of June 30, 2022 were comprised of a small-balance commercial loan securitization issuance in which the Company participated. (3) Only the portion subject to fair value measurement, as adjusted for fair value, is presented above. See below for the disclosure of the full debt at fair value. Transfers from Level 2 to Level 3 were comprised of residential loans more than 90 days overdue (including those in foreclosure). Transfers between Levels are deemed to take place on the first day of the reporting period in which the transfer has taken place. These transfers were not material. All unrealized gains and losses arising from valuation changes in residential and commercial mortgage loans, TBAs, and futures contracts are recognized in net income for the periods presented. We use third‑party valuation firms who utilize proprietary methodologies to value our residential and commercial loans. These firms generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets. Use of these techniques requires determination of relevant input and assumptions, some of which represent significant unobservable inputs such as anticipated credit losses, prepayment rates, default rates, or other valuation assumptions. Accordingly, a significant increase or decrease in any of these inputs in isolation may result in a significantly lower or higher fair value measurement. The following table sets forth information regarding the Company’s significant Level 3 inputs as of June 30, 2022: 18 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) Input Values Asset Fair Value Unobservable Input Range Average ($ in thousands) Residential mortgage loans, at fair value $ 4,821 Prepayment rate (annual CPR) — % - 16.60 % 7.16 % Default rate 3.19 % - 31.56 % 15.18 % Loss severity ( 20.10 )% - 12.54 % ( 0.01 )% Expected remaining life 1.17 - 3.59 years 2.04 years Residential mortgage loans in securitization trust, at fair value $ 6,899 Prepayment rate (annual CPR) — % - 16.60 % 7.16 % Default rate 3.19 % - 31.56 % 15.18 % Loss severity ( 20.10 )% - 12.54 % ( 0.01 )% Expected remaining life 1.17 - 3.59 years 2.04 years Fair Value Disclosure - Non-Recourse Securitization Obligations, Collateralized by Residential Mortgage Loans - Fair Value for Disclosure Purposes Only To determine the fair value of the Company’s non-recourse securitization obligations, collateralized by residential mortgage loans, net, in full, the Company used the prices of the underlying bonds securing the related residential mortgage loans in securitization trusts. The Company utilizes Price Serve , Bank of America’s independent fixed income pricing service, as the primary valuation source for these bonds. 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 bonds were sold to an independent third party on the date of the condensed consolidated financial statements. This liability is categorized as Level 2 in the fair value hierarchy, as the valuation model has inputs that are observable for substantially the full term of the liability. As of June 30, 2022, the total amortized cost basis and fair value of our non-recourse securitization obligations was $ 981.2 million and $ 916.6 million, respectively, a difference of approximately $ 64.6 million (which includes AOMT 2022-1, which is marked to fair value; and AOMT 2021-7, and AOMT 2021-4, which are carried at amortized cost, as further described). The difference between the amortized cost and fair value solely attributable to AOMT 2021-4 and 2021-7 is approximately $ 32.8 million. The difference between the amortized cost basis value and the fair value is derived from the difference between the period-end market pricing of the underlying bonds, as referred to above, and the amortized cost of the obligation. The fair value of the non-recourse securitization debt is not indicative of the amounts at which we could settle this debt. 19 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) The following table sets forth information about the Company’s financial assets and liabilities 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 (2) — 10,756 — 10,756 U.S. Treasury Bills 249,999 — — 249,999 Unrealized appreciation on TBAs 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. (2) All AOMT CMBS held as of December 31, 2021 were comprised of a small-balance commercial loan securitization issuance in which the Company participated. Transfers from Level 2 to Level 3 were comprised of residential loans more than 90 days overdue (including those in foreclosure) and commercial mortgage loans in special servicing or otherwise considered “non‑performing” by the Company’s third‑party valuation providers. Transfers between Levels are deemed to take place on the first day of the reporting period in which the transfer has taken place. These transfers were not material. All unrealized gains and losses arising from valuation changes in residential and commercial mortgage loans, TBAs, and futures contracts are recognized in net income for the periods presented. 20 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 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: Input Values Asset Fair Value Unobservable Input Range Average ($ in thousands) 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 11. 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 market conditions. The Company purchases the mortgage loans on a servicing retained basis. The residential mortgage loans are mortgage loans 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 period and year ended and as of June 30, 2022 and December 31, 2021: As of and for the Year-to-Date/Year Ended: Amount of Loans Purchased from Affiliates during the Year-to-Date/Year Number of Loans Purchased from Affiliates during the Year-to-Date/Year Number of Loans Purchased from Affiliates, Owned and Held as of Year-to-Date/Year End (1) : ($ in thousands) June 30, 2022 $ 541,875 1,088 1,304 December 31, 2021 $ 909,442 1,959 754 (1) Excludes loans held in consolidated securitizations. 21 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) 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 mortgage loans on commercial properties, primarily multifamily and retail properties, located in various states with concentrations in California and Maine. The following table sets forth certain financial information pertaining to whole loan activity purchased from affiliates during the period and year ended and as of June 30, 2022 and December 31, 2021: As of and for the Year-to-Date/Year Ended: Amount of Loans Purchased from Affiliates during the Year-to-Date/Year Number of Loans Purchased from Affiliates during the Year-to-Date/Year Number of Loans Purchased from Affiliates Held as of Year-to-Date/Year End: ($ in thousands) June 30, 2022 $ — None 4 December 31, 2021 $ — None 5 Pre-IPO Management Fee A pre-IPO management agreement (the “Pre-IPO Management Agreement”) existed among the Company, the Manager, and Angel Oak Mortgage Fund, LP (“Angel Oak Mortgage Fund”), the Company’s sole common stockholder prior to the IPO. Per the Pre-IPO Management Agreement, on a quarterly basis in advance, the Company paid the Manager an aggregate, fixed management fee equal to 1.5 % per annum of the total Actively Invested Capital (as defined in the Pre-IPO Management Agreement) of the limited partners in Angel Oak Mortgage Fund. The Pre-IPO Management Agreement terminated on June 21, 2021, in connection with the IPO. Post-IPO Management Fee On and after June 21, 2021, the post-IPO management agreement (the “Management Agreement”) took effect among the Company, the Operating Partnership, and the Manager. Per the Management Agreement, on a quarterly basis in arrears, after the IPO, the Company paid the 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, the 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 the 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 the Manager reimbursements for certain general and administrative expenses pursuant to the Management Agreement. Accrued expenses payable to affiliate and operating expenses incurred with affiliate are substantially comprised of payroll reimbursements to an affiliate of the Manager. 12. Commitments and Contingencies The Company, from time to time, may be party to litigation relating to claims arising in the normal course of business. As of June 30, 2022, the Company was not aware of any legal claims that could materially impact its financial condition. As of June 30, 2022, the Company had no unfunded commitments. 13. Equity and Earnings per Share (“EPS”) Basic and Diluted EPS for the three and six months ended June 30, 2022 Basic and diluted earnings per share are equivalent for the three and six months ended June 30, 2022, due to net losses for the periods. Shares of unvested restricted stock totaling 362,536 shares are anti-dilutive and are not included in the calculation of diluted earnings per share. 22 Angel Oak Mortgage, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) Basic and Diluted EPS for the three and six months ended June 30, 2021 The following table sets forth the calculation of basic and diluted earnings per share for the three and six months ended June 30, 2021: Three Months Ended June 30, 2021 Six Months Ended June 30, 2021 (in thousands, except share data) Basic Earnings per Common Share: Net income allocable to common stockholders $ 2,223 $ 11,706 Basic weighted average common shares outstanding 16,746,606 16,238,153 Basic earnings per common share $ 0.13 $ 0.72 Diluted Earnings per Common Share: Net income allocable to common stockholders $ 2,223 $ 11,706 Net effect of dilutive equity awards 52,054 26,170 Diluted weighted average common shares outstanding 16,798,660 16,264,323 Diluted earnings per common share $ 0.13 $ 0.72 14. Subsequent Events On July 13, 2022, the Company securitized residential mortgage loans with an unpaid principal balance of $ 184.7 million in the issuance of AOMT 2022-4. The Company is the Depositor for this securitization and also owns and holds the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds. On July 21, 2022, the RBC 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. On August 8, 2022, the Nomura facility 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 %. On August 9, 2022, the Company declared a dividend of $ 0.45 per share of common stock, to be paid on August 31, 2022 to common stockholders of record as of August 22, 2022. 23