ANGEL OAK MORTGAGE REIT, INC. Management's discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition ofAngel Oak Mortgage, Inc. The following should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto. References herein to our "Company," "we," "us," or "our" refer toAngel Oak Mortgage, Inc. and its subsidiaries unless the context requires otherwise. Unless otherwise indicated, the term "Angel Oak" refers collectively toAngel Oak Capital Advisors, LLC ("Angel Oak Capital ") and its affiliates, includingFalcons 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 andAngel Oak Home Loans LLC (together, "Angel Oak Mortgage Lending") andAngel Oak Commercial Lending, LLC .
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as "anticipate," "estimate," "will," "should," "expect," "believe," "intend," "seek," "plan" and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described under Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "Annual Report on Form 10-K"). Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in other reports we file with theSecurities and Exchange Commission (the "SEC"). We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Factors that could have a material adverse effect on future results and performance relative to those set forth in or implied by the related forward-looking statements, as well as on our business, financial condition, liquidity, results of operations and prospects, include, but are not limited to:
•the impact of the ongoing COVID-19 pandemic;
•the effects of adverse conditions or developments in the financial markets and
the economy upon our ability to acquire non-qualified residential mortgage
("non-QM") loans sourced from Angel Oak's proprietary mortgage lending platform,
Angel Oak Mortgage Lending, and other target assets;
•the level and volatility of prevailing interest rates and credit spreads;
•changes in our industry, inflation, interest rates, the debt or equity markets, the general economy (or in specific regions) or the residential real estate finance and real estate markets specifically;
•changes in our business strategies or target assets;
•general volatility of the markets in which we invest;
•changes in the availability of attractive loan and other investment opportunities, including non-QM loans sourced from Angel Oak Mortgage Lending platforms;
•the ability of our Manager to locate suitable investments for us, manage our portfolio, and implement our strategy;
•our ability to obtain and maintain financing arrangements on favorable terms, or at all;
•the adequacy of collateral securing our investments and a decline in the fair value of our investments;
•the timing of cash flows, if any, from our investments;
•our ability to profitably execute securitization transactions;
•the operating performance, liquidity, and financial condition of borrowers;
•increased rates of default and/or decreased recovery rates on our investments;
•changes in prepayment rates on our investments;
•the departure of any of the members of senior management of our Company, our Manager, or Angel Oak;
24
--------------------------------------------------------------------------------•the availability of qualified personnel;
•conflicts with Angel Oak, including our Manager and its personnel, including our officers, and entities managed by Angel Oak;
•events, contemplated or otherwise, such as acts of God, including hurricanes, earthquakes, and other natural disasters, including those resulting from global climate change, pandemics, acts of war or terrorism, escalation of military conflicts (such as the Russian invasion ofUkraine ), and others that may cause unanticipated and uninsured performance declines, disruptions in markets, and/or losses to us or the owners and operators of the real estate securing our investments;
•impact of and changes in governmental regulations, tax laws and rates, accounting principles and policies and similar matters;
•the level of governmental involvement in the
•future changes with respect to the Federal National Mortgage Association
("Fannie Mae") or Federal Home Loan Mortgage Corporation ("Freddie Mac" and
collectively with Fannie Mae, the "GSEs") in the mortgage market and related
events, including the lack of certainty as to the future roles of these entities
and the U.S. Government in the mortgage market and changes to legislation and
regulations affecting these entities;
•effects of hedging instruments on our target assets and our returns, and the
degree to which our hedging strategies may or may not protect us from interest
rate volatility;
•our ability to make distributions to our stockholders in the future at the level contemplated by our stockholders or the market generally, or at all;
•our ability to continue to qualify as a real estate investment trust (a "REIT")
for
•our ability to maintain our exclusion from regulation as an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"). When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report and in the Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management's views only as of the date such statements are made. The risks summarized under Item 1A. "Risk Factors" in the Annual Report on Form 10-K could cause actual results and performance to differ materially from those set forth in or implied by our forward-looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us.
General
Angel Oak Mortgage, Inc. is a publicly-traded REIT focused on acquiring and investing in first lien non-QM loans and other mortgage-related assets in theU.S. mortgage market. Our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily made to higher-quality non-QM loan borrowers and primarily sourced from Angel Oak's proprietary mortgage lending platform, Angel Oak Mortgage Lending, which operates through wholesale and retail channels and has a national origination footprint. Further, we also may identify and acquire our target assets through the secondary market when market conditions and asset prices are conducive to making attractive purchases. Our objective is to generate attractive risk-adjusted returns for our stockholders, through cash distributions and capital appreciation, across interest rate and credit cycles. We are externally managed and advised by our Manager, a registered investment adviser under the Investment Advisers Act of 1940 and an affiliate ofAngel Oak Capital . Angel Oak Capital is 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$9.8 billion in assets under management as ofSeptember 30, 2022 across its private credit strategies, public funds, and separately managed accounts, including approximately$7.5 billion of mortgagerelated assets. Angel Oak Mortgage Lending is a market leader in nonQM loan production and, as ofSeptember 30, 2022 , had originated over$16.7 billion in total nonQM loan volume since its inception in 2011. Angel Oak is headquartered inAtlanta and had approximately 800 employees across its enterprise as ofSeptember 30, 2022 . Through our relationship with our Manager, we benefit from Angel Oak's vertically integrated platform and inhouse expertise, providing us with the resources that we believe are necessary to generate attractive riskadjusted returns for our stockholders. Angel Oak Mortgage Lending provides us with proprietary access to nonQM loans, as well as transparency over the underwriting process and the ability to acquire loans with our desired credit and return profile. We believe our ability to identify and acquire target assets through the secondary market is bolstered by Angel Oak's experience in the mortgage industry and expertise in structured credit investments. In addition, we believe we have significant competitive advantages due to Angel Oak's analytical investment tools, extensive relationships in the financial community, financing and capital structuring skills, investment surveillance capabilities, and operational expertise. 25 -------------------------------------------------------------------------------- We have elected to be taxed as a REIT forU.S. federal income tax purposes. We believe that we have been organized and operated, and we intend to continue to operate in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Our qualification as a REIT, and maintenance of such qualification, will depend on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our stock. We also intend to operate our business in a manner that will allow us to maintain our exclusion from regulation as an investment company under the Investment Company Act. Our common stock commenced trading on theNew York Stock Exchange onJune 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.
SEC Order Regarding an Affiliate of Our Manager
OnAugust 10, 2022 , theSEC accepted offers of settlement fromAngel Oak Capital , an affiliate of our Manager, andAshish Negandhi , a former portfolio manager atAngel Oak Capital , and entered an administrative order against bothAngel Oak Capital andMr. Negandhi . The settlement and administrative order relate to AOMT 2018-PB1, a securitization issued in 2018. AOMT 2018-PB1 was a one-off, first-of-its-kind,$90 million securitization with fix-and-flip loans as the underlying collateral. Fix-and-flip loans are loans made to borrowers for the purpose of purchasing, renovating, and selling residential properties. These loans were originated by an affiliate ofAngel Oak Capital ,Angel Oak Prime Bridge , which ceased originating loans in 2019. Angel Oak Capital and its affiliates have not issued another securitization solely backed by this type of collateral. TheSEC's order concluded thatAngel Oak Capital andMr. Negandhi made inaccurate disclosure of mortgage delinquency rates when reporting on the performance of AOMT 2018-PB1 in violation of the Securities Act and the Advisers Act. The inaccuracies related to the use of funds held in escrow accounts (funds held to reimburse borrowers for renovations to the properties) to cure loan delinquencies. Angel Oak Capital andMr. Negandhi did not admit or deny these findings. The order does not allege thatAngel Oak Capital orMr. Negandhi acted with fraudulent intent. TheSEC acceptedAngel Oak Capital's andMr. Negandhi's offers to settle the case. Angel Oak Capital andMr. Negandhi paid fines of$1,750,000 and$75,000 , respectively, were censured, and agreed to cease and desist from future violations.
Trends and Recent Developments
Overall macroeconomic environment and its effect on us
The 2022 macroeconomic environment for the three and nine months endedSeptember 30, 2022 was significantly more challenging than that of the 2021 comparative periods, and has been defined by volatility and uncertainty in the financial markets. Heightened recessionary risks continued to challenge theU.S. economy throughout the third quarter of 2022, with economic activity simultaneously beset by both a sharp increase in interest rates along with persistent inflation, both further discussed below. The inflationary environment decreased slightly over the third quarter of 2022 from its 40-year record high mark of 9.1% year-over-year inJune 2022 ; however, inflation remains elevated from a historical standpoint at 8.2% year-over-year as ofSeptember 30, 2022 .The Federal Reserve Bank of the U.S . (the "Fed") has indicated that it remains committed to increasing interest rates over the coming months in an effort to promote price stability and decrease inflation.The Fed has approved historic increases to the federal funds rate over 2022, comprised of six interest rate increases to date, beginning onMarch 16, 2022 , with a 25 basis point increase as the first increase to the rate in nearly three years, a 50 basis point increase onMay 5, 2022 , a 75 basis point increase onJune 15, 2022 , a 75 basis point increase onJuly 27, 2022 , a 75 basis point increase onSeptember 21, 2022 , and a 75 basis point increase onNovember 2, 2022 . TheNovember 2022 rate increase represented the first time in modern history that the Fed has raised interest rates by 75 basis points four times 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.The Fed has indicated that it plans to continue to increase interest rates in the near term. We believe that a further increase in interest rates from the previous historically low levels is unlikely to significantly affect demand for non-QM mortgages; however, the increase in interest rates over the past nine months has generally caused interest rate spreads to widen, which has negatively affected the valuation of our whole loan portfolio. Our whole loan portfolio incurred unrealized losses in 2022, with the unrealized loss effect magnified by the size of the portfolio. Additionally, the 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. Sharply rising interest rates have resulted in a slowdown of mortgage origination and refinancing activity, as the average conforming 30-year mortgage rate with no points averaged approximately 7% by the end ofSeptember 2022 , more than double that same metric as ofDecember 2021 . The availability of housing inventory in many areas of theU.S. has remained low, limiting the original purchase mortgage market. Previously in 2022, housing inventories were depressed as supply chain and labor availability issues resulting from the economic effects of the COVID-19 pandemic constrained home building in many areas of theU.S. , with raw materials unavailable for extended periods of time and labor shortages causing construction delays. The constraint on housing inventory has shifted from that of supply chains and labor availability affecting home builders to that of a lack of existing homes being placed on the market, as homeowners paying mortgage debt originated at low rates are hesitant to sell and incur mortgage debt originated at significantly higher rates. The combination of sustained high mortgage rates and low housing inventory has created a troublesome situation for homebuyers, who continue to face constraints in both affordability and availability, while high interest rates alone have curtailed refinancing activity. 26 -------------------------------------------------------------------------------- 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. Our investment performance Our non-QM whole loan portfolio experienced unrealized losses on the portfolio during the three and nine months endedSeptember 30, 2022 , which were driven by mark-to-market losses due to interest rate spreads widening and market volatility. 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 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 nine months endedSeptember 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 (loss).
Purchases of whole loans in the three and nine months ended
During the three and nine months endedSeptember 30, 2022 , we purchased$62.4 million and$995.2 million , respectively, in residential whole loans. OnFebruary 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. OnJuly 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, 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 ofSeptember 30, 2022 andDecember 31, 2021 . We may strategically enter into similar securitizations in the future.
Whole loan financing facilities activity
Our lender base is fluid and we intend to enter into new agreements and / or exit agreements as we deem prudent, and in accordance with our core financial strategy of purchasing whole loans and retaining them until securitized. Our whole loan financing activity during the third quarter of 2022 and subsequent toSeptember 30, 2022 was as follows: •OnAugust 4, 2022 , the facility limit under a master repurchase agreement with a multinational bank ("Multinational Bank 1") was increased by$260.0 million to$600.0 million . •OnAugust 23, 2022 , we extended a$400.0 million line of credit with a multinational bank ("Multinational Bank 2") fromSeptember 26, 2022 toSeptember 30, 2022 , which onSeptember 27, 2022 , was further extended toOctober 14, 2022 , at which 27 --------------------------------------------------------------------------------
time, the line of credit expired by its terms. Loans that had been financed with this line of credit were subsequently financed with other lines of credit.
•OnOctober 4, 2022 , we entered into short-term master repurchase agreements with two affiliated institutional investors ("Institutional Investors A and B") for a pool of loans with financing of approximately$168.7 million . •OnOctober 5, 2022 , a$300.0 million line of credit with a global investment bank ("Global Investment Bank 1") expired by its terms. This line of credit had not been substantially utilized in 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, Book Value per Share of Common Stock, and Economic Book Value per Share of Common Stock.
Distributable Earnings
Distributable Earnings is a nonGAAP measure and is defined as net income (loss) allocable to common stockholders as calculated in accordance with generally accepted accounting principles inthe United States of America ("GAAP"), excluding (1) unrealized gains and losses on our aggregate portfolio, (2) impairment losses, (3) extinguishment of debt, (4) non-cash equity compensation expense, (5) the incentive fee earned by our Manager, (6) realized gains or losses on swap terminations and (7) certain other nonrecurring gains or losses. We believe that the presentation of Distributable Earnings provides investors with a useful measure to facilitate comparisons of financial performance among our REIT peers, but has important limitations. We believe Distributable Earnings as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. As a REIT, we are required to distribute at least 90% of our annual REIT taxable income and to pay tax at regular corporate rates to the extent that we annually distribute less than 100% of such taxable income. Given these requirements and our belief that dividends are generally one of the principal reasons that stockholders invest in our common stock, generally we intend to attempt to pay dividends to our stockholders in an amount equal to our REIT taxable income, if and to the extent authorized by our Board of Directors. Distributable Earnings is one of a number of factors considered by our Board of Directors in declaring dividends and, while not a direct measure of REIT taxable income, over time, the measure can be considered a useful indicator of our dividends. Distributable Earnings should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating Distributable Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Distributable Earnings may not be comparable to similar measures presented by other REITs. We also will use Distributable Earnings to determine the incentive fee payable to our Manager pursuant to the management agreement (the "Management Agreement") that we andAngel Oak Mortgage Operating Partnership, LP (the "Operating Partnership") entered into with our Manager upon the completion of our initial public offering ("IPO") onJune 21, 2021 . For information on the fees that are payable to our Manager under the Management Agreement, see "Note 11 - Related Party Transactions" in our unaudited condensed consolidated financial statements included in this report. 28 -------------------------------------------------------------------------------- Distributable Earnings were approximately$20.8 million and$4.9 million for the three months endedSeptember 30, 2022 and 2021, respectively, and approximately$80.9 million and$11.8 million for the nine months endedSeptember 30, 2022 and 2021, respectively.
The table below sets forth a reconciliation of net income (loss) allocable to
common stockholders, calculated in accordance with GAAP, to Distributable
Earnings for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2022 2021 2022 2021
(in thousands)
Net income (loss) allocable to common stockholders
- - - -
Net unrealized (gains) losses on derivatives (10,936) 3,837 (1,570) 6,130
Net unrealized (gains) losses on residential loans in securitization trusts and non-recourse securitization obligation
38,822 - 79,298 -
Net unrealized (gains) losses on residential loans 73,195 (6,157) 176,320 (13,112)
Net unrealized (gains) losses on commercial loans (226) 43 759 (221)
Net unrealized (gains) losses on financial instruments at fair value
- - - -
(Gains) losses on extinguishment of debt - - - -
Non-cash equity compensation expense 3,340 833 5,179 924
Incentive fee earned by the Manager - - - -
Realized gains (losses) on terminations of interest rate swaps
- - - -
Total other non-recurring (gains) losses - - - -
Distributable Earnings $ 20,842 $ 4,896 $ 80,940 $ 11,766 Distributable Earnings Return on Average Equity
Distributable Earnings Return on Average Equity is a non-GAAP measure and is defined as annual or annualized Distributable Earnings divided by average total stockholders' equity. We believe that the presentation of Distributable Earnings Return on Average Equity provides investors with a useful measure to facilitate comparisons of financial performance among our REIT peers, but has important limitations. Additionally, we believe Distributable Earnings Return on Average Equity provides investors with additional detail on the Distributable Earnings generated by our invested equity capital. We believe Distributable Earnings Return on Average Equity as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. Therefore, Distributable Earnings Return on Average Equity should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating Distributable Earnings Return on Average Equity may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Distributable Earnings Return on Average Equity may not be comparable to similar measures presented by other REITs. Set forth below is our computation of Distributable Earnings Return on Average Equity for the three and nine months endedSeptember 30, 2022 and 2021: Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2022 2021 2022 2021 ($ in thousands) Annualized Distributable Earnings$ 83,368 $ 19,584 $ 107,920 $ 15,688 Average total stockholders' equity$ 316,070 $ 498,895 $ 386,191 $ 361,673 Distributable Earnings Return on Average Equity 26.38 % 3.93 % 27.94 % 4.34 %
Book Value per Share of Common Stock
The following table sets forth the calculation of our book value per share of
common stock as of
29
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September 30, June 30, March 31, December 31,
2022 2022 2022 2021
(in thousands except for share and per share data)
Total stockholders' equity $ 264,957 $
367,284
(101) (101) (101) (101)
Common stockholders' equity $ 264,856 $
367,183
24,925,357 24,925,930 25,085,796 25,227,328
Book value per share of common stock
Economic Book Value per Share of Common Stock
"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 share of common stock 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 total stockholders' equity and book value per share of common stock to economic book value and economic book value per share of common stock as ofSeptember 30, 2022 ,June 30, 2022 ,March 31, 2022 , andDecember 31, 2021 : September 30, June 30, March 31, December 31, 2022 2022 2022 2021 (in thousands except for share and per share amounts presented) GAAP total stockholders' equity$ 264,957 $
367,284
(101) (101) (101) (101)
GAAP total common stockholders' equity for
book value per share of common stock $ 264,856 $ 367,183 $ 421,335 $ 491,289
Adjustments:
Fair value adjustment for securitized debt
held at amortized cost 57,596 32,863 20,443 1,079
Stockholders' equity including economic
book value adjustments $ 322,452 $
400,046
Number of shares of common stock outstanding at period end 24,925,357 24,925,930 25,085,796 25,227,328 Book value per share of common stock$ 10.63 $ 14.73 $ 16.80 $ 19.47 Economic book value per share of common stock$ 12.94 $ 16.05 $ 17.61 $ 19.52 30
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Results of Operations
Three Months Ended
The following table sets forth a summary of our results of operations for the
three months ended
Three Months Ended
September 30, 2022 September 30, 2021
(in thousands)
INTEREST INCOME, NET
Interest income $ 30,148 $ 15,587
Interest expense 18,408 2,599
NET INTEREST INCOME 11,740 12,988
REALIZED AND UNREALIZED GAINS (LOSSES), NET Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS
17,290 (7,144)
Net unrealized gain (loss) on mortgage loans, debt at fair value option (see Note 2), and derivative contracts
(100,855) 6,821
TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET (83,565) (323)
EXPENSES
Operating expenses 2,764 2,545
Operating expenses incurred with affiliate 2,141 645
Due diligence and transaction costs 213 452
Stock compensation 3,340 833
Securitization costs 1,115 -
Management fee incurred with affiliate 1,951 1,846
Total operating expenses 11,524 6,321
NET INCOME (LOSS) (83,349) 6,344
Preferred dividends (4) (4)
NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDERS $ (83,353) $ 6,340
Other comprehensive income (10,227) 1,818
TOTAL COMPREHENSIVE INCOME (LOSS) $ (93,580) $ 8,158
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Net Interest Income
The following table sets forth the components of net interest income for the
three months ended
Three Months Ended
September 30, 2022 September 30, 2021
(in thousands)
Interest income Interest income Average
Interest income / expense Average balance / expense balance
Residential mortgage loans $ 13,162 $
1,106,402
12,759 1,123,361 2,592 106,604
Commercial mortgage loans 309 11,412 112 6,930
RMBS 3,418 402,899 5,684 289,975
CMBS 423 9,051 595 11,589
U.S. Treasury Bills - - - 26,667
Other interest income 77 27,636 3 37,418
Total interest income 30,148 15,587
Interest expense
Notes payable 10,364 948,845 1,873 396,357
Non-recourse securitization obligation,
collateralized by residential mortgage
loans 7,467 1,082,841 642 96,843
Repurchase facilities 577 50,988 84 272,840
Total interest expense 18,408
2,599
Net interest income $ 11,740 $ 12,988
Net interest income for the three months ended September 30, 2022 and 2021 was
$11.7 million and $13.0 million , respectively. Net interest income increased due
to the additional average portfolio balance in the three months ended
September 30, 2022 as compared to the same period in 2021, primarily due to the
composition of the portfolio during September 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 September 30, 2022 as compared to the same period in 2021, which resulted
in a commensurately 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
Three Months Ended
September 30, 2022 September 30, 2021 (in thousands) Unrealized loss on securitization, net of unrealized gain on non-recourse securitization obligation $ (39,567)
$ -
Realized gain (loss) on RMBS, net 10,972 353
Realized gain (loss) on CMBS 280 (250)
Realized gain (loss) on interest rate futures 17,692 39
Realized and unrealized loss on TBAs (5,229) (4,074)
Realized and unrealized (loss) gain on residential mortgage loans
(73,526) 3,454
Realized and unrealized (loss) gain on commercial
mortgage loans (204) (43)
Unrealized appreciation on interest rate futures 6,017 198
Total realized and unrealized gains (losses), net $ (83,565)
$ (323)
For the three months ended September 30, 2022 and 2021, total realized and
unrealized gains and (losses), net resulted in a net loss of $83.6 million and
$0.3 million , respectively. During the three months ended September 30, 2022 ,
market volatility resulting in widening
32
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interest rate spreads caused the valuation of our portfolio of mortgage loans to
decrease, which resulted in an unrealized loss. This net unrealized loss was
partially offset by realized and unrealized gains on interest rate futures and
RMBS (primarily in our whole pool loan portfolio). During the three months ended
September 30, 2021 , the unrealized and realized losses on TBAs was partially
offset by realized and unrealized gains on residential mortgage loans.
Expenses
Operating Expenses
For the three months endedSeptember 30, 2022 and 2021, our operating expenses increased overall at$2.8 million and$2.5 million , respectively, primarily due to legal expense, audit, and administration fees.
Operating Expenses Incurred with Affiliate
For the three months endedSeptember 30, 2022 and 2021, our operating expenses incurred with affiliate were$2.1 million and$0.6 million , respectively. These expenses increased during the three months endedSeptember 30, 2022 primarily due to a$1.4 million severance accrual in accordance with theAngel Oak Mortgage, Inc. Executive Severance and Change in Control Plan (the "Executive Severance Agreement") relating to the separation of our former Chief Executive Officer and President. This accrued severance is expected to be paid in 2023. These expenses also include 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 endedSeptember 30, 2022 and 2021, our due diligence and transaction costs were$0.2 million and$0.5 million , respectively. The decrease in these costs was due to whole loan acquisition diligence costs, which decreased over the comparative period as we purchased fewer whole loans during the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . Stock Compensation For the three months endedSeptember 30, 2022 and 2021, our stock compensation expense was$3.3 million and$0.8 million , respectively. Our stock compensation expense increased for the three months endedSeptember 30, 2022 primarily due to a$2.6 million one-time expense resulting from the expected accelerated vesting of stock awards for our former Chief Executive Officer and President, as per the Executive Severance Agreement. Other 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
We incurred$1.1 million of securitization expense for the three months endedSeptember 30, 2022 due to the AOMT 2022-4 transaction. There were no securitization costs incurred in the three months endedSeptember 30, 2021 as the non-recourse securitization debt of the AOMT 2021-4 and AOMT 2021-7 securitizations is held at amortized cost, and thus, the debt issuance costs involved in those securitizations were capitalized and amortize to interest expense over time.
Management Fee Incurred with Affiliate
For the three months endedSeptember 30, 2022 and 2021, our management fee incurred with affiliate was$2.0 million and$1.8 million , respectively. The increase is due to the increase in our average Equity as defined in the Management Agreement for the three months endedSeptember 30, 2022 as compared to the same period in 2021. The Management Agreement includes an addition of Distributable Earnings to "Equity" as defined in the agreement, which is the primary departure from equity as calculated in accordance with GAAP, which has caused Equity as defined per the Management Agreement to increase despite a decrease in our equity calculated in accordance with GAAP. 33 --------------------------------------------------------------------------------
Nine Months Ended
Our results of operations presented herein for the nine months endedSeptember 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, ourManager 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 thirdparty 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 former Chief Executive Officer and President (who dedicated a substantial majority of his business time to us after the completion of the IPO and through his separation date ofSeptember 28, 2022 ) 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.
The following table sets forth a summary of our results of operations for the
nine months ended
Nine Months Ended
September 30, 2022 September 30, 2021
(in thousands)
INTEREST INCOME, NET
Interest income $ 86,959 $ 37,763
Interest expense 41,849 5,277
NET INTEREST INCOME 45,110 32,486
REALIZED AND UNREALIZED GAINS (LOSSES), NET Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS
56,423 (19,656)
Net unrealized gain (loss) on mortgage loans, debt at fair value option (see Note 2), and derivative contracts
(255,021) 16,151
TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET (198,598) (3,505)
EXPENSES
Operating expenses 9,525 3,423
Operating expenses incurred with affiliate 3,834 1,617
Due diligence and transaction costs 1,502 946
Stock compensation 5,179 924
Securitization costs 3,134 -
Management fee incurred with affiliate 5,830 4,015
Total operating expenses 29,004 10,925
INCOME (LOSS) BEFORE INCOME TAXES (182,492) 18,056
Income tax benefit (3,457) -
NET INCOME (LOSS) (179,035) 18,056
Preferred dividends (11) (11)
NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDERS $ (179,046) $ 18,045
Other comprehensive income (loss) (11,979) 5,433
TOTAL COMPREHENSIVE INCOME (LOSS) $ (191,025) $ 23,478
34--------------------------------------------------------------------------------
Net Interest Income
The following table sets forth the components of net interest income for the
nine months ended
Nine Months Ended
September 30, 2022 September 30, 2021
(in thousands)
Interest income Interest income Average
Interest income / expense Average balance / expense balance
Residential mortgage loans $ 39,171 $
1,148,332
33,599 995,000 2,592 31,981
Commercial mortgage loans 951 17,164 469 7,036
RMBS 12,692 381,085 18,941 271,458
CMBS 423 9,663 1,785 11,169
U.S. Treasury Bills 8 59,999 7 50,499
Other interest income 115 46,157 7 28,799
Total interest income 86,959 37,763
Interest expense
Notes payable 23,022 975,913 4,332 244,917
Non-recourse securitization obligation,
collateralized by residential mortgage
loans 17,729 954,344 642 29,053
Repurchase facilities 953 185,685 303 210,283
Total interest expense 41,704
5,277
Net interest income $ 45,255 $ 32,486
Net interest income for the nine months ended September 30, 2022 and 2021 was
$45.3 million and $32.5 million , respectively. Net interest income increased due
to the additional average portfolio balance in the nine months ended
September 30, 2022 as compared to the same period in 2021, primarily due to the
composition of the portfolio during September 30, 2022 having a higher average
balance of residential mortgage loans and residential mortgage loans in
securitization trusts, 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 nine months
ended September 30, 2022 as compared to the same period in 2021, which resulted
in commensurately 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 nine
months ended
Nine Months Ended
September 30, 2022 September 30, 2021
(in thousands)
Unrealized loss on securitization, net of unrealized gain on non-recourse securitization obligation $ (82,642) $
-
Realized loss on RMBS, net (16,884) (8,455)
Realized gain (loss) on CMBS 34 (630)
Realized gain (loss) on interest rate futures 60,745 (431)
Realized and unrealized gain (loss) on TBAs 14,171 (6,693)
Realized and unrealized (loss) gain on residential mortgage loans
(180,152) 9,780
Realized and unrealized (loss) gain on commercial
mortgage loans (1,209) 315
Realized and unrealized loss on U.S. Treasury bills - (8)
Unrealized appreciation on interest rate futures 7,339 2,617
Total realized and unrealized gains (losses), net $ (198,598) $
(3,505)
35
--------------------------------------------------------------------------------
For the nine months ended September 30, 2022 and 2021, total realized and
unrealized gains (losses), net resulted in a net loss position of $198.6 million
and $3.5 million , respectively. During the nine months ended September 30, 2022 ,
market volatility resulting in widening interest rate spreads caused the
valuation of our portfolio of mortgage loans to decrease significantly, which
resulted in an unrealized loss. All of our unrealized losses were partially
offset by realized and unrealized .gains on interest rate futures and TBAs. In
the nine months ended September 30, 2021 , the net realized loss was primarily
due to realized loss on RMBS, which was primarily due to prepayment speeds on
the junior and interest only bonds that we held, and realized and unrealized
loss on TBAs, partially offset by realized and unrealized gains on residential
mortgage loans.
Expenses
Operating Expenses
For the nine months ended September 30, 2022 and 2021, our operating expenses
were $9.5 million and $3.4 million , respectively. The increase in operating
expenses in the nine month period ended September 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 nine months endedSeptember 30, 2022 and 2021, our operating expenses incurred with affiliate were$3.8 million and$1.6 million , respectively. These expenses increased during the nine months endedSeptember 30, 2022 primarily due to a$1.4 million severance accrual in accordance with the Executive Severance Agreement relating to the separation of our former Chief Executive Officer and President. This accrued severance is expected to be paid in 2023. These expenses also include 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 nine months endedSeptember 30, 2022 and 2021, our due diligence and transaction costs were$1.5 million and$0.9 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 nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . Stock Compensation For the nine months endedSeptember 30, 2022 , our stock compensation expense was$5.2 million . Our stock compensation expense increased for the nine months endedSeptember 30, 2022 due to a$2.6 million one-time expense resulting from the expected accelerated vesting of stock awards for our former Chief Executive Officer and President, as per the Executive Severance Agreement. Our stock compensation expense of$0.9 million for the nine months endedSeptember 30, 2021 was substantially incurred in connection with our IPO inJune 2021 . We issued additional restricted stock awards onJanuary 1, 2022 ,March 10 andMarch 11, 2022 , andMay 18, 2022 . Restricted stock awards other than those accelerated by the Executive Severance Agreement 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$3.1 million were incurred for the nine months endedSeptember 30, 2022 in the securitizations of AOMT 2022-1 and AOMT 2022-4. There were no securitization costs incurred in the three months endedSeptember 30, 2021 as the non-recourse securitization debt of the AOMT 2021-4 and AOMT 2021-7 securitizations is held at amortized cost, and thus, the debt issuance costs involved in those securitizations were capitalized and amortize to interest expense over time.
Management Fee Incurred with Affiliate
Prior to the completion of the IPO, we were required to pay our Manager, in cash, a management fee pursuant to a pre-IPO management agreement among us, ourManager and Angel Oak Mortgage Fund , our sole common stockholder prior the IPO. The management fee payable under the pre-IPO management agreement was calculated based on theActively Invested Capital (as defined in the pre-IPO management agreement) of the limited partners inAngel Oak Mortgage Fund , which we believe is reflective of a typical management fee payable by a private investment vehicle. The pre-IPO management agreement terminated on the completion of the IPO, and we and theOperating Partnership subsequently entered into the Management Agreement with our Manager effective as of the completion of the IPO. Pursuant to the Management Agreement, our 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. The Management Agreement includes an addition of Distributable Earnings to "Equity" as defined in the agreement, which is the primary departure from equity as calculated in accordance with GAAP, which has caused Equity as defined per the Management Agreement to increase despite a decrease in our equity calculated in accordance with GAAP. 36 -------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2022 and 2021, our management fee incurred with affiliate was$5.8 million and$4.0 million , respectively. The increase is due to the increase in our average Equity as defined by the Management Agreement for the nine months endedSeptember 30, 2022 as compared to the same period in 2021. 37 --------------------------------------------------------------------------------
Our Portfolio
As ofSeptember 30, 2022 , our portfolio consisted of approximately$3.2 billion of residential mortgage loans, RMBS, and other target assets. Certain of these portfolio assets are located in the state ofFlorida , which was affected by Hurricane Ian in the third quarter of 2022. We require all of our collateral to be adequately insured. The graphs in the subsequent detail of residential mortgage loans, residential mortgage loans held in securitization trusts, and residential mortgage loans underlying RMBS issuances show the percentage of residential mortgage loans held in each state where there is a concentration of loans, includingFlorida . The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as ofSeptember 30, 2022 : Allocated Fair Value Collateralized Debt Capital % of Total Capital Portfolio: ($ in thousands) Residential mortgage loans$ 1,069,476 $ 906,321$ 163,155 61.6 % Residential mortgage loans in securitization trust 1,062,585 1,048,953$ 13,632 5.1 % Commercial mortgage loans 9,554 - 9,554 3.6 % Total whole loan portfolio$ 2,141,615 $ 1,955,274$ 186,341 70.3 % Investment securities RMBS$ 1,068,672 $ 67,454$ 1,001,218 377.9 % CMBS 8,857 - 8,857 3.3 % Total investment securities$ 1,077,529 $ 67,454$ 1,010,075 381.2 % Total investment portfolio$ 3,219,144 $
2,022,728$ 1,196,416 451.6 % Target assets (1)$ 3,219,144 $ 2,022,728$ 1,196,416 451.6 % Cash$ 20,549 $ -$ 20,549 7.8 % Other assets and liabilities (2) (952,008) - (952,008) (359.3) % Total$ 2,287,685 $ 2,022,728$ 264,957 100.1 %
(1) "Target assets" as presented above comprises the total investment portfolio,
as there were no
(2) Other assets and liabilities presented is calculated as a net liability
substantially comprised of
38
--------------------------------------------------------------------------------
As of December 31, 2021 , our portfolio consisted of approximately $2.2 billion
of residential mortgage loans, RMBS, and other target assets. The following
table sets forth additional information regarding our portfolio including the
manner in which our equity capital was allocated among investment types, as of
December 31, 2021 :
Allocated
Fair Value Collateralized Debt Capital % of Total Capital
Portfolio: ($ in thousands)
Residential mortgage loans $ 1,061,912 $ 852,961 $ 208,951 42.5 %
Residential mortgage loans in
securitization trust 667,365 616,557 50,808 10.3 %
Commercial mortgage loans 18,664 447 18,217 3.7 %
Total whole loan portfolio $ 1,747,941 $ 1,469,965 $ 277,976 56.5 %
Investment securities
RMBS $ 485,634 $ 360,501 $ 125,133 25.5 %
CMBS 10,756 - 10,756 2.2 %
U.S. Treasury Bills 249,999 248,750 1,249 0.3 %
Total investment securities $ 746,389 $ 609,251 $ 137,138 28.0 %
Total investment portfolio $ 2,494,330 $ 2,079,216 $ 415,114 84.5 %
Target assets (1) $ 2,244,331 $ 1,830,466 $ 413,865 84.2 %
Cash $ 40,801 $ - $ 40,801 8.3 %
Other assets and liabilities 35,475 - 35,475 7.2 %
Total $ 2,570,606 $ 2,079,216 $ 491,390 100.0 %
(1) "Target assets" as presented above includes the total investment portfolio
excluding
Residential Mortgage Loans
The following table sets forth additional information on the residential
mortgage loans in our portfolio as of
Portfolio Range
Portfolio Weighted Average
($ in thousands)
Unpaid principal balance ("UPB") $60 - $3,457 $511
Interest rate 2.88% - 9.99% 4.72%
Maturity date 7/8/2036 - 12/10/2061 8/07/2052
FICO score at loan origination 521 - 823 739
LTV at loan origination 8% - 95% 70%
DTI at loan origination 1.20% - 59.06% 24%
Percentage of first lien loans N/A 100%
Percentage of loans 90+ days delinquent
(based on UPB) N/A 0.4%
39--------------------------------------------------------------------------------
The following table sets forth additional information on the residential
mortgage loans in our portfolio as of
Portfolio Range
Portfolio Weighted Average
($ in thousands)
UPB $48 - $3,410 $506
Interest rate 2.75% - 9.25% 4.49%
Maturity date 10/1/2036 - 12/1/2061 4/20/2053
FICO score at loan origination 521 - 823 740
LTV at loan origination 12% - 95% 70%
DTI at loan origination 1.60% - 59.06% 27%
Percentage of first lien loans N/A 100%
Percentage of loans 90+ days delinquent
(based on UPB) N/A 0.30%
The following table sets forth the information regarding the underlying
collateral of our residential mortgage loans held in securitization trusts as of
September 30, 2022 :
($ in thousands)
UPB $1,175,828
Number of loans 2,711
Weighted average loan coupon 4.74%
Average loan amount
435
Weighted average LTV at loan origination and deal date
70%
Weighted average credit score at loan origination and deal date
743
Current 3-month constant prepayment rate ("CPR") (1) 9.1%
Percentage of loans 90+ days delinquent (based on UPB)
0.3%
(1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year.
The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as ofSeptember 30, 2022 : [[Image Removed: aomr-20220930_g1.jpg]]
(1) No state in "Other" represents more than a 3% concentration of the
underlying collateral of our residential mortgage loans held in securitization
trusts as of September 30, 2022 .
40
--------------------------------------------------------------------------------
The following table sets forth the information regarding the underlying
collateral of our residential mortgage loans held in securitization trusts as of
December 31, 2021 :
($ in thousands)
UPB $642,951
Number of loans 1,494
Weighted average loan coupon 4.98%
Average loan amount
433
Weighted average LTV at loan origination and deal date
72%
Weighted average credit score at loan origination and deal date
741
Current 3-month CPR
35.1%
Percentage of loans 90+ days delinquent (based on UPB)
0.13%
The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as ofDecember 31, 2021 : [[Image Removed: aomr-20220930_g2.jpg]]
(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 .
41--------------------------------------------------------------------------------
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
[[Image Removed: aomr-20220930_g3.jpg]]
[[Image Removed: aomr-20220930_g4.jpg]]
42--------------------------------------------------------------------------------
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
[[Image Removed: aomr-20220930_g5.jpg]][[Image Removed: aomr-20220930_g6.jpg]]
43
--------------------------------------------------------------------------------
The following charts illustrate additional characteristics of our residential
mortgage loans in our portfolio that we owned directly as of September 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 September 30, 2022 :
[[Image Removed: aomr-20220930_g7.jpg]]
[[Image Removed: aomr-20220930_g8.jpg]]
[[Image Removed: aomr-20220930_g9.jpg]]
(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
44
--------------------------------------------------------------------------------
The following charts illustrate additional characteristics of the residential
mortgage loans in our portfolio that we owned directly as of December 31, 2021 ,
based on the product profile, borrower profile, and geographic location
(percentages are based on the aggregate unpaid principal balance of such loans):
Characteristics of Our Residential Mortgage Loans as of December 31, 2021 :
[[Image Removed: aomr-20220930_g10.jpg]]
[[Image Removed: aomr-20220930_g11.jpg]]
[[Image Removed: aomr-20220930_g12.jpg]]
(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
45
--------------------------------------------------------------------------------Commercial Mortgage Loans
The following table provides additional information on the commercial mortgage
loans in our portfolio as of
Portfolio Range Portfolio Weighted Average
($ in thousands)
UPB $242 - $4,300 $1,656
Interest rate 5.50% - 8.38% 7.03%
Loan term 0.67 - 27.44 years 7.94 years
LTV at loan origination 46.7% - 75.0% 33.4%
The following table provides additional information on the commercial mortgage
loans in our portfolio as of
Portfolio Range Portfolio Weighted Average
($ in thousands)
UPB $244 - $4,300 $1,700
Interest rate 5.75% - 8.38% 6.25%
Loan term 1.42 - 28.18 years 8.36 years
LTV at loan origination 46.7% - 75.0% 59.8%
46-------------------------------------------------------------------------------- The following charts illustrate the geographic location of the commercial mortgage loans in our portfolio that we owned directly as ofSeptember 30, 2022 andDecember 31, 2021 (percentages are based on the aggregate unpaid principal balance of such loans): Geographic Diversification of Our Commercial Mortgage Loans as ofSeptember 30, 2022 : [[Image Removed: aomr-20220930_g13.jpg]] Geographic Diversification of Our Commercial Mortgage Loans as ofDecember 31, 2021 : [[Image Removed: aomr-20220930_g14.jpg]] 47
--------------------------------------------------------------------------------
RMBS
InMarch 2019 , we participated in our first securitization transaction pursuant to which we contributed to AOMT 20192 nonQM loans with a carrying value of approximately$255.7 million that we had accumulated and held on our balance sheet. The remaining nonQM loans that we contributed to AOMT 20192 were purchased from affiliated and unaffiliated entities. We received bonds from AOMT 20192 with a fair value of approximately$55.8 million , including approximately$33.0 million in risk retention securities (representing 5% of each class of the bonds issued as part of the transaction). Additionally, inJuly 2019 , we participated in a second securitization transaction pursuant to which we contributed to AOMT 20194 nonQM loans with a carrying value of approximately$147.4 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 20194 with a fair value of approximately$16.8 million . Furthermore, inNovember 2019 , we participated in a third securitization transaction pursuant to which we contributed to AOMT 20196 nonQM loans with a carrying value of approximately$104.3 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 20196 with a fair value of approximately$10.7 million . InJune 2020 , we participated in a fourth securitization transaction pursuant to which we contributed to AOMT 20203 nonQM loans with a carrying value of approximately$482.9 million that we had accumulated and held on our balance sheet. The remaining nonQM loans that we contributed to AOMT 20203 were purchased from an affiliated entity. We received bonds from AOMT 20203 with a fair value of approximately$66.5 million , including approximately$23.0 million in horizontal risk retention securities (representing 5% of the fair value of the securities and other interests issued as part of the transaction). Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in Angel Oak Mortgage Trust I ("AOMT") securitization transactions is set forth below as ofSeptember 30, 2022 , unless otherwise stated: AOMT 2019-2 AOMT 2019-4 AOMT 2019-6 AOMT 2020-3 ($ in thousands) UPB of loans$123,588 $126,927 $153,658 $193,216 Number of loans 420 436 572 588 Weighted average loan coupon 7.0 % 7.1 % 6.4 % 5.8 % Average loan amount$294 $291 $269 $329 Weighted average LTV at loan origination and deal date 73 % 72 % 70 % 74 % Weighted average credit score at loan origination and deal date 696 699 717 719 Current 3-month CPR 35.3 % 26.9 % 21.0 % 18.1 % 90+ day delinquency (as a % of UPB) 13.0 % 10.4 % 5.8 % 4.5 % Fair value of first loss piece (1)$13,350 $3,883 $2,245 $23,965 Investment thickness (2) 28.14 % 12.54 % 8.33 % 16.06 % (1) Represents the fair value of the securities we hold in the first loss tranche in each securitization. (2) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization. 48 --------------------------------------------------------------------------------
Certain information regarding the mortgage loans underlying our portfolio of
RMBS issued in AOMT securitization transactions is set forth below as of
AOMT 2019-2 AOMT 2019-4 AOMT 2019-6 AOMT 2020-3
($ in thousands)
UPB of loans $183,489 $184,793 $206,392 $262,383
Number of loans 586 604 743 757
Weighted average loan coupon 7.082 % 7.066 % 6.441 % 5.905 %
Average loan amount $313 $306 $278 $347
Weighted average LTV at loan origination
and deal date 75 % 73 % 71 % 74 %
Weighted average credit score at loan
origination and deal date 695 703 716 717
Current 3-month CPR 44.89 % 50.89 % 45.08 % 43.61 %
90+ day delinquency (as a % of UPB) 12.33 % 8.86 % 5.31 % 3.82 %
Fair value of first loss piece $13,634 $4,019 $2,334 $26,447
Investment thickness 18.95 % 8.61 % 6.20 % 11.82 %
The following table provides certain information with respect to our RMBS
portfolio received in AOMT securitization transactions and acquired from other
third parties as of
RMBS Repurchase Debt Allocated Capital
AOMT Third Party RMBS Total AOMT Third Party RMBS Total AOMT Third Party RMBS Total
(in thousands)
Senior $ 47 $ - $ 47 $ 180 $ - 180 $ (133) $ - $ (133)
Mezzanine 2,150 - 2,150 7,616 - 7,616 (5,466) - $ (5,466)
Subordinate 53,173 - 53,173 50,232 - 50,232 2,941 - $ 2,941
Interest only / excess 9,144 - 9,144 9,426 - 9,426 (282) - $ (282)
Whole pool - 1,004,158 1,004,158 - - - - 1,004,158 $ 1,004,158
Total $ 64,514 $ 1,004,158 $ 1,068,672 $ 67,454 $ - $ 67,454 $ (2,940) $ 1,004,158 $ 1,001,218 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
RMBS Repurchase Debt Allocated Capital
Third Party Third Party Third Party
AOMT RMBS Total AOMT RMBS Total AOMT RMBS Total
(in thousands)
Senior $ 3,076 $ - $ 3,076 $ 4,089 $ - $ 4,089 $ (1,013) $ - $ (1,013)
Mezzanine 2,178 - 2,178 1,631 - 1,631 547 - $ 547
Subordinate 80,058 10,292 90,350 - - - 80,058 10,292 $ 90,350
Interest only / excess 15,052 2,923 17,975 - - - 15,052 2,923 $ 17,975
Whole pool - 372,055 372,055 - 354,781 354,781 - 17,274 $ 17,274
Total $ 100,364 $ 385,270 $ 485,634 $ 5,720 $ 354,781 $ 360,501 $ 94,644 $ 30,489 $ 125,133
49--------------------------------------------------------------------------------
The following table sets forth information with respect to our RMBS ending
balances, at fair value, as of
Senior Mezzanine Subordinate Interest Only Whole Pool Total
(in thousands)
Beginning fair value $ 975 $ 2,145 $ 58,768 $ 12,767 $ 848,204 $ 922,859
Acquisitions:
Secondary market purchases of
AOMT securities - - - - - -
Third party securities - - - - 1,005,231 1,005,231
Effect of principal payments /
called deals (735) - (2,044) (169) (854,909) (857,857)
IO and excess servicing
prepayments - - - (1,232) - (1,232)
Changes in fair value, net (193) 5 (3,551) (2,222) 5,632 (329)
Ending fair value $ 47 $ 2,150 $ 53,173 $ 9,144 $ 1,004,158 $ 1,068,672 The following table sets forth information with respect to our RMBS ending
balances, at fair value, as of
Senior Mezzanine Subordinate Interest Only Whole Pool Total
(in thousands)
Beginning fair value $ 18,297 $ 2,207 $ 97,614 $ 31,818 $ - $ 149,936
Acquisitions:
Secondary market purchases of
AOMT securities - - 2,209 - - 2,209
Third party securities - - 5,122 7,485 1,466,854 1,479,461
Effect of principal payments /
called deals (15,029) - (19,576) (3,781) (1,096,112) (1,134,498)
IO and excess servicing
prepayments - - - (17,355) - (17,355)
Changes in fair value, net (192) (29) 4,981 (192) 1,313 5,881
Ending fair value $ 3,076 $ 2,178 $ 90,350 $ 17,975 $ 372,055 $ 485,634
50-------------------------------------------------------------------------------- The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as ofSeptember 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 ofSeptember 30, 2022 ) [[Image Removed: aomr-20220930_g1.jpg]]
(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 September 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):
Geographic Diversification of Loans Underlying Our Portfolio
of RMBS Issued in AOMT Securitization Transactions
(as of December 31, 2021 )
[[Image Removed: aomr-20220930_g15.jpg]](1) No state in "Other" represents more than a 4% concentration of the loans
underlying our portfolio of RMBS issued in AOMT securitization transactions as
of December 31, 2021 .
CMBS
In November 2020 , we participated in a securitization transaction of a pool of
small balance commercial mortgage loans consisting of mortgage loans secured by
commercial properties pursuant to which we contributed to AOMT 2020-SBC1
commercial mortgage loans with a carrying value of approximately $31.2 million
that we had accumulated and held on our balance sheet, and we received bonds
from AOMT 2020-SBC1 with a fair value of approximately $8.9 million .
51
--------------------------------------------------------------------------------
Certain information regarding the commercial mortgage loans underlying our
portfolio of CMBS issued in the AOMT 2020-SBC1 securitization transaction is
shown below as of
September 30, 2022 December 31, 2021
($ in thousands)
UPB of loans $124,230 $140,360
Number of loans 162 189
Weighted average loan coupon 7.4 % 7.4 %
Average loan amount $767 $743
Weighted average LTV at loan origination and deal
date 61.6 % 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
September 30, 2022 and December 31, 2021 :
September 30, 2022 December 31, 2021
Allocated Allocated
CMBS Repurchase Debt Capital CMBS Repurchase Debt Capital
(in thousands)
Senior $ - $ - $ - $ - $ - $ -
Mezzanine - - - - - -
Subordinate 6,307 - 6,307 7,993 - 7,993
Interest only / excess 2,550 - 2,550 2,763 - 2,763
Total $ 8,857 $ - $ 8,857 $ 10,756 $ - $ 10,756 Liquidity and Capital Resources
Overview
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund our investments and operating costs, make distributions to our stockholders, and satisfy other general business needs. Our financing sources currently include payments of principal and interest we receive on our investment portfolio, unused borrowing capacity under our inplace 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 inplace loan financing lines and repurchase facilities, and securitizations of our whole loans. Going forward, we may also utilize other types of borrowings, including bank credit facilities and warehouse lines of credit, among others. We may also seek to raise additional capital through public or private offerings of equity, equity-related, or debt securities, depending upon market conditions. The use of any particular source of capital and funds will depend on market conditions, availability of these sources, and the investment opportunities available to us. We have used and expect to continue to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgagerelated assets pending their eventual securitization. Upon accumulating an appropriate amount of assets, we have financed and expect to continue to finance a substantial portion of our mortgage loans utilizing fixed rate term securitization funding that provides longterm financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements. Securitizations may either take the form of the issuance of securitized bonds or the sale of "real estate mortgage investment conduit" securities backed by mortgage loans or other assets, with the securitization proceeds being used in part to repay pre-existing loan financing lines and repurchase facilities. We have sponsored and participated in securitization transactions with other entities that are managed by Angel Oak, and may continue to do so in the future, along with sponsoring sole securitization transactions. We believe these identified sources of financing will be adequate for purposes of meeting our shortterm (within one year) and our longerterm liquidity needs. We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due. We will adjust our plans as appropriate in response to changes in our expectations and any potential changes in market conditions.
Description of Existing Financing Arrangements
As ofSeptember 30, 2022 , we were a party to seven warehouse loan financing lines, which permitted borrowings in an aggregate amount of up to$1.9 billion . Subsequent toSeptember 30, 2022 , two warehouse loan financing lines expired in accordance with their terms, 52 -------------------------------------------------------------------------------- and we placed certain asset financings on other warehouse financing lines. Borrowings under warehouse loan financing lines or placed with institutional investors (in general, each a "loan financing facility") may be used to purchase whole loans for securitization or loans purchased for longterm investment purposes. A description of each loan financing facility in place as ofSeptember 30, 2022 is set forth as follows:Multinational Bank 1 Loan Financing Facility. OnApril 13, 2022 , we and two of our subsidiaries entered into a master repurchase agreement with a multinational bank ("Multinational Bank 1"). 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 toMultinational Bank 1, and later repurchase, up to$340.0 million aggregate borrowings on mortgage loans, which was increased to$600.0 million in the third quarter of 2022. The master repurchase agreement was initially set to terminate onOctober 13, 2022 , and onJuly 21, 2022 , was extended as per the terms of the original agreement throughJanuary 20, 2023 , unless terminated earlier pursuant to the terms of the master repurchase agreement. The principal amount expected to be paid byMultinational Bank 1 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,Multinational Bank 1 retains the right to determine the market value of the mortgage loan collateral in its sole commercially reasonable discretion. The loan financing line is markedtomarket. Additionally,Multinational Bank 1 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 payMultinational Bank 1 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 eachU.S. Government Securities Business Day (as defined in the master repurchase agreement) beginning onApril 11, 2022 and ending on the day that is twoU.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
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, crossdefaults, 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 andMultinational Bank 1'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
Global Investment Bank 1 Loan Financing Facility. OnDecember 6, 2018 , we and one of our subsidiaries entered into a master repurchase agreement with a global investment bank ("Global Investment Bank 1"). We were considered the "Seller" under this agreement. From time to time, we and one of our subsidiaries amended such master repurchase agreement withGlobal Investment Bank 1. Pursuant to the agreement, we and our subsidiary could sell toGlobal Investment Bank 1, and later repurchase, up to$300.0 million aggregate borrowings on mortgage loans. This agreement was set to terminate onAugust 5, 2022 . OnAugust 8, 2022 , this agreement was extended throughOctober 5, 2022 , and interest accrued on any borrowings at a rate based on Term SOFR plus an additional spread of 1.70% - 3.50%. This agreement expired in accordance with its terms onOctober 5, 2022 . The principal amount paid byGlobal Investment Bank 1 for each eligible mortgage loan was based on a percentage of both the market value, unpaid principal balance, and acquisition price of the mortgage loan (generally ranging from 65% to 92%, depending on the type of loan and certain other factors and subject to certain other adjustments). Pursuant to the agreement,Global Investment Bank 1 retained the right to determine the market value of the mortgage loan collateral for certain mortgage loans in its sole and absolute discretion. Additionally,Global Investment Bank 1 was under no obligation to purchase the eligible mortgage loans we offered to sell to them. Prior to the amendment effectiveAugust 5, 2022 , upon our or our subsidiary's repurchase of the mortgage loan, we were, or our subsidiary was, required to repayGlobal Investment Bank 1 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 threemonth 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 theAugust 5, 2022 amendment, "LIBOR" was replaced with "Term SOFR". The agreement required us to maintain various financial and other covenants, such as that: (1) adjusted tangible net worth on an aggregate basis must not be less than the sum of 50% of our adjusted tangible net worth as of the date of the agreement plus 50% of any future capital raised by us; (2) adjusted tangible net worth must not decline more than 25% in any rolling three month period or 35% in any rolling twelve month period; (3) the ratio of indebtedness to adjusted tangible net worth must not exceed 7:1; and (4) liquidity, on an aggregate basis, must exceed the greater of 5% of the aggregate purchase price and$2.0 million . 53 -------------------------------------------------------------------------------- The agreement contained margin call provisions that providedGlobal Investment Bank 1 with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions,Global Investment Bank 1 could require us or our subsidiary to transfer cash and/or additional eligible mortgage loans with an aggregate market value sufficient to eliminate any margin deficit resulting from such a decline. In addition, the agreement contained events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, crossdefaults, material adverse effects, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default were also customary for this type of transaction and included the acceleration of the principal amount outstanding under the agreement andGlobal Investment Bank 1's right to liquidate the mortgage loans then subject to the agreement. We and our subsidiary were also required to pay certain customary fees toGlobal Investment Bank 1 and to reimburseGlobal Investment Bank 1 for certain costs and expenses incurred in connection withGlobal Investment Bank 1's structuring, management and administration of the agreement while the agreement was in place.Regional Bank 1 Loan Financing Facility. OnDecember 21, 2018 , we and our subsidiary entered into a master repurchase agreement with a regional bank ("Regional Bank 1"). We are considered a "Seller" under this agreement. From time to time, we and one of our subsidiaries have amended such master repurchase agreement withRegional Bank 1. Pursuant to the agreement, we or our subsidiary may sell toRegional Bank 1, and later repurchase, up to$50.0 million aggregate borrowings on mortgage loans. The agreement was amended onMarch 7, 2022 to extend the term toMarch 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 beginningMarch 8, 2022 , provided that interest will accrue on any new transactions under the loan financing line at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) plus an additional spread. The principal amount paid byRegional Bank 1 for each mortgage loan is based on the lesser of (1) a percentage of the original principal amount of the mortgage loan (ranging from 75% to 97%) and (2) a percentage of its takeout commitment (97%) or$4.0 million , depending on the loan type. Pursuant to the agreement,Regional Bank 1 retains the right to determine the market value of the mortgage loan collateral in its sole discretion. Upon our or our subsidiary's repurchase of the mortgage loan, we are, or our subsidiary is, required to repayRegional Bank 1 the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (1) the greater of (A) a specified minimum rate (ranging from 3.50% to 4.13%) and (B) onemonth LIBOR plus a spread ranging from 2.50% to 3.13%, and (2) in the case of loans with maturities over 364 days, the seasoned spread of 1.0%. As discussed above, the LIBOR reference rate was changed to SOFR beginningMarch 8, 2022 and going forward. The agreement requires us to maintain various financial and other covenants, which include: (1) a minimum tangible net worth of$40.0 million consolidated; (2) minimum liquidity of$5.0 million ; (3) a maximum ratio of total liabilities to tangible net worth of 10:1; and (4) we must attain positive net income, determined in accordance with GAAP, as of the last day of each calendar quarter, commencing with the quarter endedJune 30, 2021 , for the prior four (4) consecutive fiscal quarters then ending. The agreement contains margin call provisions that provideRegional Bank 1 with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions,Regional Bank 1 may require us or our subsidiary to transfer cash and/or additional eligible mortgage loans with an aggregate market value sufficient to eliminate any margin deficit resulting from such a decline. In addition, the agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, crossdefaults, material adverse effects, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the agreement andRegional Bank 1's right to liquidate the mortgage loans then subject to the agreement.
We and our subsidiary are also required to pay certain customary fees to
Global Investment Bank 2 Loan Financing Facility. OnFebruary 13, 2020 , we and our subsidiary entered into a master repurchase agreement with a global investment bank ("Global Investment Bank 2"). We are considered a "Seller" under this agreement. From time to time, we and one of our subsidiaries have amended such master repurchase agreement withGlobal Investment Bank 2. Pursuant to the agreement, we or our subsidiary may sell toGlobal Investment Bank 2, and later repurchase, up to$250.0 million aggregate borrowings on mortgage loans. The agreement, as amended previously, was set to terminate onFebruary 11, 2022 . OnFebruary 4, 2022 , the agreement was amended to terminate onFebruary 2, 2024 , unless terminated earlier pursuant to the terms of the agreement. Prior to the amendment executed onFebruary 4, 2022 , the principal amount paid byGlobal Investment Bank 2 for each mortgage loan was based on a percentage of the market value, costbasis value or unpaid principal balance of the mortgage loan (generally ranging from 60% to 92%, depending on the type of loan and certain other factors and subject to certain other adjustments). Pursuant to the agreement,Global Investment Bank 2 retained the right to determine the market value of the mortgage loan collateral in its sole good faith discretion. Additionally,Global Investment Bank 2 was under no obligation to purchase the eligible mortgage loans we offered to sell to them. Prior to theFebruary 4, 2022 amendment, upon our or our subsidiary's repurchase of the mortgage loan, we or our subsidiary were required to repayGlobal Investment Bank 2 the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on 54 --------------------------------------------------------------------------------
the type of loan) equal to the sum of (1) the greater of (A) 0.00% and (B) onemonth LIBOR and (2) a spread generally ranging from 2.00% to 3.25%.
Pursuant to the amendment executed onFebruary 4, 2022 , interest will now accrue on any outstanding balance under the master repurchase agreement at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month). Previously, interest accrued at a rate based on one-month LIBOR. Additionally, the agreement was also amended to remove any draw fees and adjust the pricing rate whereby upon the Company's or the subsidiary's repurchase of a mortgage loan, the Company or the subsidiary is required to repayGlobal Investment Bank 2 the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (A) the greater of (i) 0.00% and (ii) Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) and (B) a spread generally ranging from 2.20% to 3.45%. The agreement requires us to maintain various financial and other covenants, which include: (1) our adjusted tangible net worth must be an amount at least equal to the greater of (A)$100.0 million and (B) 20% of the maximum aggregate purchase price limit; (2) our adjusted tangible net worth on the last day of any calendar quarter shall not decline by (A) 20% or more from the adjusted tangible net worth as of the last day of the immediately prior calendar quarter or (B) 40% or more from the adjusted tangible net worth as of the last day of the calendar quarter that is twelve months prior to such calendar quarter; (3) our liquidity must at least equal the greater of (A)$5.0 million and (B) 3.0% of the outstanding purchase price for such mortgage loans transferred toGlobal Investment Bank 2; and (4) our indebtedness to our adjusted tangible net worth must not exceed 5.5:1. The agreement contains margin call provisions that provideGlobal Investment Bank 2 with certain rights in the event of a decline in the market value or costbasis value of the purchased mortgage loans. Under these provisions,Global Investment Bank 2 may require us or our subsidiary to transfer cash sufficient to eliminate any margin deficit resulting from such a decline. In addition, the agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, crossdefaults, 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 andGlobal Investment Bank 2's right to liquidate the mortgage loans then subject to the agreement. We and our subsidiary are also required to pay certain customary fees toGlobal Investment Bank 2 and to reimburseGlobal Investment Bank 2 for certain costs and expenses incurred in connection withGlobal Investment Bank 2's structuring, management and ongoing administration of the agreement.Global Investment Bank 3 Loan Financing Facility. OnMarch 5, 2021 , we and our subsidiary entered into a master repurchase agreement with a global investment bank ("Global Investment Bank 3"). We are considered a "Seller" under this agreement. Pursuant to the agreement, we or our subsidiary may sell toGlobal Investment Bank 3, and later repurchase, up to$200.0 million aggregate borrowings on mortgage loans. The agreement was extended onMarch 2, 2022 to terminate onMarch 5, 2023 , unless terminated earlier pursuant to the terms of the agreement. The principal amount paid byGlobal Investment Bank 3 for each eligible mortgage loan is based on a percentage of the outstanding principal balance of the mortgage loan or the market value of the mortgage loan (generally ranging from 75% to 85%, depending on the type of loan), whichever is less. Pursuant to the agreement,Global Investment Bank 3 retains the right to determine the market value of the mortgage loan collateral in its sole good faith discretion and in a commercially reasonable manner. The loan financing line is markedtomarket at fair value. Additionally,Global Investment Bank 3 is under no obligation to purchase the eligible mortgage loans we offer to sell to them. Prior to theJanuary 1, 2022 amendment, upon our or our subsidiary's repurchase of the mortgage loan, we were, or our subsidiary was, required to repayGlobal Investment Bank 3 the principal amount related to such mortgage loan plus accrued interest generally at a rate based on threemonth LIBOR plus 2.25%. OnJanuary 1, 2022 , the LIBOR-based index was replaced by reference to the sum of Compounded SOFR and a SOFR adjustment of 20 basis points. Compounded SOFR is determined on a one-month basis and is defined as a daily rate as determined byGlobal Investment Bank 3 to be the "USD-SOFR-Compound" rate as defined in theInternational Swaps and Derivatives Association, Inc. definitions. The agreement requires us to maintain various financial and other covenants, such as that: (1) our minimum tangible net worth of must not decline 20% or more in the previous 30 days, 25% or more in the previous 90 days, or 35% or more in the previous year, or fall below 50% of our tangible net worth as ofSeptember 30, 2018 plus 50% of any capital contributions made after that date; (2) our minimum liquidity must not fall below the greatest of (x) the product of 5% and the aggregate repurchase price as of such date of determination, (y)$5 million and (z) any other amount of liquidity that we have covenanted to maintain in any other note, indenture, loan agreement, guaranty, swap agreement or any other contract, agreement or transaction (including, without limitation, any repurchase agreement, loan and security agreement, or similar credit facility or agreement for borrowed funds); and (3) the maximum ratio of our and our subsidiaries' total indebtedness to tangible net worth must not be greater than 5:1. The agreement contains margin call provisions that provideGlobal Investment Bank 3 with certain rights in the event of a decline in the market value of the purchased mortgage loans. Under these provisions,Global Investment Bank 3 may require us or our subsidiary to transfer cash sufficient to eliminate any margin deficit resulting from such a decline. 55 -------------------------------------------------------------------------------- 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, crossdefaults, 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 andGlobal Investment Bank 3's right to liquidate the mortgage loans then subject to the agreement. We and our subsidiary are also required to pay certain customary fees toGlobal Investment Bank 3 and to reimburseGlobal Investment Bank 3 for certain costs and expenses incurred in connection withGlobal Investment Bank 3's structuring, management and ongoing administration of the agreement.Regional Bank 2 Loan Financing Facility. OnAugust 16, 2021 , we and our subsidiaries entered into a non-mark-to-market$50.0 million committed financing facility with a regional bank ("Regional Bank 2") through the execution of a Loan and Security Agreement (the "Loan and Security Agreement") and a Promissory Note (the "Promissory Note" and together with the Loan and Security Agreement, the "Facility Documents") among those subsidiaries andRegional Bank 2. Pursuant to the Facility Documents,Regional Bank 2 agreed to make one or more advances to one or more of the subsidiaries of the Company (together, the "Borrowers") secured by mortgage loans, notes and related collateral (the "Regional Bank 2 Financing Line"). OnFebruary 11, 2022 , we amended the financing facility to increase the size of the financing facility to$75.0 million from$50.0 million .The Regional Bank 2 Financing Line terminates, and amounts outstanding under theRegional Bank 2 Financing Line will mature, onAugust 16, 2023 , subject to certain exceptions. The amount advanced byRegional Bank 2 for each eligible loan is based on the unpaid principal balance of the loan, the loan-to-value ratio of the loan and the FICO score of the borrower and ranges from 80.00% to 92.50% depending on the type of loan and the aforementioned criteria. Prior to theFebruary 11, 2022 amendment, the interest rate on any outstanding balance under the Facility Documents is the greater of (1) the sum of (A) one-month LIBOR and (B) 2.30%, and (2) 3.13%. After theFebruary 11, 2022 amendment, interest will accrue on any outstanding balance at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) plus a margin equal to 2.41% per annum; provided that the interest rate may not be less than 3.125% per annum. The obligations of the Borrowers under the Facility Documents are guaranteed by the Company pursuant to a Guaranty Agreement (the "Guaranty") executed contemporaneously with the Facility Documents. In addition, the Company is subject to various financial and other covenants, including, as of the last day of any fiscal quarter: (1) the Company's tangible net worth must be at least equal to$150.0 million ; (2) the Company's ratio of (A) EBITDA to (B) debt service shall be at least equal to 1.25 to 1.0 for such quarter; (3) the Company's ratio of total liabilities to total tangible net worth must not exceed 5.5 to 1.0; and (4) the Company's liquidity must at least equal$5.0 million . In addition, the Facility Documents contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include acceleration of the principal amount outstanding under theFacility Documents and Regional Bank 2's right to liquidate the collateral then subject to the Facility Documents. The Borrowers are also required to pay certain customary fees toRegional Bank 2 and to reimburseRegional Bank 2 for certain costs and expenses incurred in connection withRegional Bank 2's management and ongoing administration of theRegional Bank 2 Financing Line.Multinational Bank 2 Loan Financing Facility. OnSeptember 20, 2021 , we and one of our subsidiaries (the "Subsidiary") entered into a$400.0 million repurchase facility with a multinational bank ("Multinational Bank 2") through the execution of a Master Repurchase Agreement (the "Master Repurchase Agreement") between theSubsidiary and Multinational Bank 2. Pursuant to the Master Repurchase Agreement, the Subsidiary may sell certain securities toMultinational Bank 2 representing whole loan assets and later repurchase such securities fromMultinational Bank 2. This agreement was set to expire onSeptember 20, 2022 . OnAugust 23, 2022 , this agreement was extended toSeptember 30, 2022 , and onSeptember 27, 2022 , this agreement was extended toOctober 14, 2022 , on which date it expired by its terms. The amount that was advanced byMultinational Bank 2 was generally in line with other similar agreements that the Company or one of its subsidiaries has entered into, which was a percentage of the unpaid principal balance or market value of the asset depending on the type of underlying asset. The interest rate on any outstanding balance under the Master Repurchase Agreement that the Subsidiary was required to payMultinational Bank 2 was generally in line with other similar agreements that the Company or one of its subsidiaries has entered into, where the interest rate was equal to the sum of (1) a spread ranging from 1.70% to 3.50%, determined based on the type of underlying asset, and (2) one-month LIBOR. Additionally,Multinational Bank 2 was under no obligation to purchase the securities we offered to sell to them. OnJanuary 27, 2022 , this repurchase facility was amended to state that interest would subsequently 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$400.0 million upon the issuance of securities pursuant to a securitization of the assets underlying the Master Repurchase Agreement which occurred onFebruary 7, 2022 . The obligations of the Subsidiary under the Master Repurchase Agreement were guaranteed by the Company pursuant to a Guaranty (the "Guaranty") executed contemporaneously with the Master Repurchase Agreement. In addition, and similar to other repurchase 56 -------------------------------------------------------------------------------- agreements that the Company has entered into, the Company was subject to various financial and other covenants, including those relating to (1) declines in tangible net worth; (2) a maximum ratio of indebtedness to tangible net worth; and (3) minimum liquidity. In addition, the Master Repurchase Agreement and Guaranty contained events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, insolvency and other events of default customary for this type of transaction. The remedies for such events of default were also customary for this type of transaction and included the acceleration of the amounts outstanding under theMaster Repurchase Agreement and Multinational Bank 2's right to liquidate the purchased securities then subject to the Master Repurchase Agreement.
The Subsidiary was also required to pay certain customary fees to
The following table sets forth the details of our financing lines as of each of
Drawn Amount
September 30, December 31,
Line of Credit Facility Limit Base Interest Rate (A) Interest Rate Spread (A) 2022 2021
($ in thousands)
Multinational Bank 1 (1) $ 600,000 Average Daily SOFR 1.95% $ 464,695 N/A
Multinational Bank 2 (2) $ 400,000 1 month SOFR 1.95% - 2.00% $
147,261
Global Investment Bank 1 (3)$ 300,000 1 month or 3 month LIBOR 1.70% - 3.50% $ - 103,149 Global Investment Bank 2 (4)$ 250,000 1 month SOFR 2.20% - 3.45%$ 98,335 231,981 Global Investment Bank 3 (5)$ 200,000 Compound SOFR 2.45%$ 117,082 109,283 Regional Bank 1 (6)$ 75,000 1 month SOFR 2.50% - 3.50%$ 50,834 34,838 Regional Bank 2 (7)$ 75,000 1 month SOFR 2.41%$ 28,114 11,258 Total$ 1,900,000 $ 906,321 $ 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) OnApril 13, 2022 , the Company and two of its subsidiaries entered into a$340.0 million repurchase facility with a multinational bank ("Multinational Bank 1") through the execution of a master repurchase agreement between the Company as guarantor, and two of its subsidiaries, as sellers, andMultinational Bank 1 as buyer. The master repurchase agreement was initially set to terminate onOctober 13, 2022 , and onJuly 21, 2022 , was extended as per the terms of the original agreement throughJanuary 20, 2023 , unless such term is extended or terminated earlier pursuant to the terms of the master repurchase agreement. OnAugust 4, 2022 , the maximum line of credit under the facility withMultinational Bank 1 was increased by$260.0 million to a maximum facility limit of$600.0 million . (2) This agreement was set to expire onSeptember 20, 2022 . OnAugust 23, 2022 , this agreement was extended toSeptember 30, 2022 , and onSeptember 26, 2022 , this agreement was extended toOctober 14, 2022 , on which date it expired by its terms after being paid in full. (3) This agreement was set to terminate onAugust 5, 2022 . OnAugust 8, 2022 , this agreement was extended throughOctober 5, 2022 , and amended to provide for interest accruing on any borrowings at a rate based on Term SOFR plus an additional spread of 1.70% - 3.50%. OnOctober 5, 2022 , this agreement expired in accordance with its terms after being paid in full. (4) OnFebruary 4, 2022 , this facility was amended to extend the initial termination date of the master repurchase agreement fromFebruary 11, 2022 toFebruary 2, 2024 ; remove any draw fees; and adjust the pricing rate whereby upon the Company's or its subsidiary's repurchase of a mortgage loan, the Company or such subsidiary is required to repayGlobal Investment Bank 2 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 toFebruary 4, 2022 , interest was based on 1-month LIBOR plus a spread of 2.00% - 3.25%. (5) OnMarch 2, 2022 , the agreement was extended to terminate onMarch 5, 2023 , unless terminated earlier pursuant to the terms of the agreement. OnJanuary 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 toJanuary 1, 2022 , interest was based on 3-month LIBOR plus a spread of 2.25%. (6) OnMarch 7, 2022 , the agreement was amended to terminate onMarch 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 57 -------------------------------------------------------------------------------- beginningMarch 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 toMarch 7, 2022 , interest was based on 1-month LIBOR plus a spread of 2.50% - 3.13%. (7) This agreement terminates onAugust 16, 2023 . OnFebruary 11, 2022 , the Company amended the financing facility to (1) increase the size of the financing facility to$75.0 million from$50.0 million , and (2) provide that interest will accrue on any outstanding balance at a rate based on Term SOFR plus a margin equal to 2.41% per annum; provided that the interest rate may not be less than 3.125% per annum. Prior toFebruary 11, 2022 , interest was based on 1-month LIBOR plus a spread of 2.30%. ShortTerm Repurchase Facilities. In addition to our existing loan financing lines, we employ shortterm repurchase facilities to borrow againstU.S. Treasury securities, securities issued by AOMT, Angel Oak's securitization platform, and other securities we may acquire in accordance with our investment guidelines. The following table sets forth certain characteristics of our short-term repurchase facilities as ofSeptember 30, 2022 andDecember 31, 2021 :September 30, 2022 Weighted Average Weighted Average Remaining Maturity Repurchase Agreements Amount Outstanding Interest Rate (Days) ($ in thousands) RMBS $ 67,454 4.50 % 15 Total $ 67,454 4.50 % 15 December 31, 2021 Weighted Average Weighted Average Remaining Maturity Repurchase Agreements Amount Outstanding Interest Rate (Days) ($ in thousands) U.S. Treasury Bills $ 248,750 0.12 % 6 RMBS 360,501 0.16 % 18 Total $ 609,251 0.15 % 13 The following table presents the amount of collateralized borrowings outstanding under repurchase facilities as of the end of each quarter, the average amount of collateralized borrowings outstanding under repurchase facilities during the quarter and the highest balance of any month end during the quarter: Highest Month-End Balance in Quarter End Quarter End Balance Average Balance in Quarter Quarter (in thousands) Q3 2021 489,287 173,265 489,287 Q4 2021 609,251 206,897 609,251 Q1 2022 477,422 272,282 477,422 Q2 2022 128,365 92,598 132,629 Q3 2022 67,454 50,988 67,454 We utilize shortterm repurchase facilities on our RMBS portfolio and to finance assets for REIT asset test purposes. Over time, the need to purchase securities for REIT asset test purposes will be reduced as we obtain and participate in additional securitizations and acquire assets directly for investment purposes. We will continue to use repurchase facilities on our RMBS portfolio to add additional leverage which increases the yield on those assets. Our use of repurchase facilities is generally highest at the end of any particular quarter, as shown in the table above, where the quarter-end balance and the highest month-end balance in each quarter are generally equivalent.
Securitization Transactions
InJuly 2022 , we were the sole participant in a securitization transaction of a pool of residential mortgage loans, approximately 48% of which were mortgage loans originated by third parties and the remainder of which were originated by our affiliated mortgage origination companies, secured primarily by first liens on onetofour family residential properties. In the transaction, AOMT 2022-4 issued approximately$177.6 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately$152.2 million and retained cash of$2.3 million , which was used for operational purposes. 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 2022-4 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 ofSeptember 30, 2022 . 58 -------------------------------------------------------------------------------- InFebruary 2022 , we were the sole participant in a securitization transaction of a pool of residential mortgage loans, approximately 56% of which were mortgage loans originated by third parties and the remainder of which were originated by our affiliated mortgage origination companies, secured primarily by first liens on onetofour family residential properties. In the transaction, AOMT 2022-1 issued approximately$551.8 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately$458.3 million and retained cash of$60.9 million , which was used to acquire additional nonQM 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 ofSeptember 30, 2022 . InNovember 2021 , we were the sole participant in a securitization transaction of a pool of residential mortgage loans, a substantial majority of which were nonQM loans originated by our affiliate mortgage origination companies, secured primarily by first liens on onetofour family residential properties. In the transaction, AOMT 2021-7 issued approximately$386.9 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately$331.8 million and retained cash of$39.8 million , which was used to acquire additional nonQM 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 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 ofSeptember 30, 2022 andDecember 31, 2021 . InAugust 2021 , we were the sole participant in a securitization transaction of a pool of residential mortgage loans, a substantial majority of which were nonQM loans originated by our affiliate mortgage origination companies, secured primarily by first liens on onetofour family residential properties. In the transaction, AOMT 2021-4 issued approximately$316.6 million in face value of bonds. We used the proceeds of the securitization transaction to repay outstanding debt of approximately$249.0 million and retained cash of$55.8 million , which was used to acquire additional nonQM 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 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 ofSeptember 30, 2022 andDecember 31, 2021 .
Leverage and Hedging Strategies
We finance our assets with what we believe to be a prudent amount of leverage, which will vary from time to time based upon the particular characteristics of our portfolio, availability of financing and market conditions. Subject to qualifying and maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act, we expect to utilize various derivative instruments and other hedging instruments to mitigate interest rate risk, credit risk and other risks. For example, we may advantageously enter into hedging transactions with respect to interest rate exposure on one or more of our assets or liabilities. Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, index swap contracts, interest rate cap or floor contracts, futures or forward contracts, and options. Cash Availability Cash and cash equivalents As ofSeptember 30, 2022 , we held an historically lower-than-usual balance of unrestricted cash and cash equivalents. Although the net borrowings on our financing facilities were a net increase during the nine months endedSeptember 30, 2022 , our available cash balance decreased as ofSeptember 30, 2022 primarily due to margin calls on our financing facilities. Our cash balance as ofSeptember 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, some of our cash was restricted, as further described below, by margin maintenance requirements by a whole loan financing counterparty, which restrictions were released subsequent toSeptember 30, 2022 with the expiration of the facility by its terms. We sold certain commercial loans in the third quarter, as we deemed the market for our commercial loans to be advantageous. Our largest commercial loan is expected to be paid in full during the fourth quarter of 2022, which, if repaid as expected, would generate additional cash. We may also participate in upcoming securitizations either solely or with other Angel Oak entities. We also have the ability to leverage currently unleveraged securities or whole loan assets, if we deem those actions advisable. 59 --------------------------------------------------------------------------------
Restricted Cash
Restricted cash of approximately$9.0 million as ofSeptember 30, 2022 was comprised of:$7.6 million in margin collateral required by a lender (as referred to above), all of which cash margin required was fully released subsequent toSeptember 30, 2022 ;$0.3 million in interest rate futures margin collateral; and margin collateral for securities sold under agreements to repurchase of$1.1 million . Restricted cash had historically previously been solely comprised of interest rate futures margin collateral and margin collateral for securities sold under agreements to repurchase. Cash Flows Nine Months EndedSeptember 30, 2022 September 30, 2021 (in
thousands)
Cash flows used in operating activities $ (644,278) $ (883,722) Cash flow provided by (used in) investing activities $ 655,093 $ (408,479) Cash flows provided by (used in) financing activities $ (33,620) $ 1,298,498 Net increase (decrease) in cash and restricted cash $ (22,805) $ 6,297 The decrease in cash flows used in operating activities of$(644.3) million for the nine months endedSeptember 30, 2022 as compared to$(883.7) million for the nine months endedSeptember 30, 2021 was primarily due to the adjustments to reconcile net income to cash for unrealized losses, partially offset by purchase of additional residential mortgage loans during the nine months endedSeptember 30, 2022 . Investing cash flows of$655.1 million for the nine months endedSeptember 30, 2022 as compared to$(408.5) million for the nine months endedSeptember 30, 2021 were primarily due to sales of RMBS and less purchase activity involving RMBS and CMBS during the nine months endedSeptember 30, 2022 , as well as the timing of purchase and maturity activity ofU.S. Treasury securities. Financing cash flows used of$(33.6) million for the nine months endedSeptember 30, 2022 as compared to$1.3 billion provided for the nine months endedSeptember 30, 2021 were primarily due to net repayments on repurchase facilities in the nine months endedSeptember 30, 2022 as compared to net borrowings on repurchase facilities during the 2021 comparative period. The net repayments on repurchase facilities for the nine months endedSeptember 30, 2022 were partially offset by proceeds from the AOMT 2022-1 and AOMT 2022-4 securitizations.
Cash Flows - Residential and Commercial Loan Classification
Residential loan activity is recognized in the statement of cash flows as an operating activity, as our residential mortgage loans are generally held for a short period of time with the intent to securitize these loans. Commercial mortgage loan activity is recognized in the statement of cash flows as an investing activity, as our commercial mortgage loan portfolio is generally deemed to be held for investing purposes.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. A discussion of critical accounting policies and estimates is included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" section in the Annual Report on Form 10-K. Our critical accounting policies and estimates have not materially changed sinceDecember 31, 2021 . Management discusses the ongoing development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors. We expect quarter-to-quarter GAAP earnings volatility from our business activities. This volatility can occur for a variety of reasons, particularly changes in the fair values of consolidated assets and liabilities. In addition, the amount or timing of our reported earnings may be impacted by technical accounting issues and estimates.
Recent Accounting Pronouncements
Refer to the notes to our consolidated financial statements included in this report for a discussion of recent accounting pronouncements and any expected impact on the Company.
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