Notes to the Financial Statements
July 31, 2021 (Unaudited)
NOTE 1. ORGANIZATION
Angel Oak Dynamic Financial Strategies Income Term Trust (DYFN) (the Trust or the Fund) is organized as Delaware statutory
trust under a Declaration of Trust dated October 23, 2019. The Trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a non-diversified closed-end management investment company listed on the New York Stock Exchange (NYSE). Please see the table below for a summary of Fund specific information:
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Ticker
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Investment Objective
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Commencement of
Operations
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DYFN
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Current Income & Total Return
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06/30/20
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The Fund will terminate on or before June 30, 2035 (the Termination Date); provided, that if the Board of Trustees
(the Board) believes that, under then-current market conditions, it is in the best interest of the Fund to do so, the Fund may extend the Termination Date: (i) once for up to one year (i.e., up to June 30, 2036), and (ii) once
for up to an additional six months (i.e., up to December 31, 2036), in each case upon the affirmative vote of a majority of the Board and without Shareholder approval. In determining whether to extend the Termination Date, the Board may consider the
inability to sell the Funds assets in a time frame consistent with termination due to lack of market liquidity or other extenuating circumstances. Additionally, the Board may determine that market conditions are such that it is reasonable to
believe that, with an extension, the Funds remaining assets will appreciate and generate income in an amount that, in the aggregate, is meaningful relative to the cost and expense of continuing the operation of the Fund.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The following is a
summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements in accordance with the accounting principles generally accepted in the United States of America (GAAP). The Fund
follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Codification Topic 946 Financial Services-Investment Companies.
Securities Valuation and Fair Value Measurements: The Fund records its investments at fair value and is in accordance with fair valuation accounting
standards. The Fund has adopted fair valuation accounting standards which establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs
and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. In addition, these standards require expanded disclosure for each major
category of assets. These inputs are summarized in the three broad levels listed below:
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Level 1 : quoted prices in active markets for identical securities
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Level 2 : other significant observable inputs (including, but not limited to, quoted prices for similar securities, interest rates, prepayment
speeds, credit risk, etc.)
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Level 3 : significant unobservable inputs (including the Funds own assumptions in determining fair value of investments based on the best
information available)
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The inputs or methodology used for valuing securities are not an indication of the risks associated with
investing in those securities.
Investments in registered open-end management investment companies, including
money market funds, will be valued based upon the net asset value (NAV) of such investments and are categorized as Level 1 of the fair value hierarchy.
Fair values for long-term debt securities, including asset-backed securities, collateralized loan obligations, corporate obligations and trust preferred securities are normally determined on the basis of valuations
provided by independent pricing services. Vendors typically value such securities based on one or more inputs, including but not limited to, benchmark yields, transactions, bids, offers, quotations from dealers and trading systems, new issues,
spreads and other relationships observed in the markets among comparable securities; and pricing models such as yield measurers calculated using factors such as cash flows, financial or collateral performance and other reference data. In addition to
these inputs, asset-backed obligations may utilize cash flows, prepayment information, default rates, delinquency and loss assumptions, collateral characteristics, credit enhancements and specific deal information. Securities that use similar
valuation techniques and inputs are categorized as Level 2 of the fair value hierarchy. To the extent the significant inputs are unobservable; the values generally would be categorized as Level 3.
13
Angel Oak Dynamic Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2021 (Unaudited)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Equity securities, including preferred stocks, that are traded on a national securities
exchange, except those listed on the Nasdaq Global Market®, Nasdaq Global Select Market®, and the Nasdaq Capital Market® exchanges (collectively, Nasdaq), are valued at the last sale price at the close of that exchange. Securities traded on Nasdaq will be valued at the
Nasdaq Official Closing Price. If, on a particular day, an exchange-listed or Nasdaq security does not trade, then: (i) the security shall be valued at the mean between the most recent quoted bid and asked prices at the close of the exchange;
or (ii) the security shall be valued at the latest sales price on the Composite Market (defined below) for the day such security is being valued. Composite Market means a consolidation of the trade information provided by national
securities and foreign exchanges and over-the-counter markets (OTC) as published by a pricing service. In the event market quotations or Composite Market
pricing are not readily available, Fair Value will be determined in accordance with the procedures adopted by the Board. All equity securities that are not traded on a listed exchange are valued at the last sale price at the close of the over-the counter market. If a non-exchange listed security does not trade on a particular day, then the mean between the last quoted bid and asked price will be used as long
as it continues to reflect the value of the security. If the mean is not available, then bid price can be used as long as the bid price continues to reflect the value of the security. Otherwise Fair Value will be determined in accordance with the
procedures adopted by the Board. These securities will generally be categorized as Level 3 securities. When using the market quotations or close prices provided by the pricing service and when the market is considered active, the security will
be classified as a Level 1 security. Sometimes, an equity security owned by the Fund will be valued by the pricing service with factors other than market quotations or when the market is considered inactive. When this happens, the security will
be classified as a Level 2 security.
Short term debt securities having a maturity of 60 days or less are generally valued at amortized cost, which
approximates fair market value. These investments are categorized as Level 2 of the fair value hierarchy. Reverse repurchase agreements and repurchase agreements are priced at their acquisition cost, and assessed for credit adjustments, which
represents fair value. These securities will generally be categorized as Level 2 securities.
Financial derivative instruments, such as futures
contracts, that are traded on a national securities or commodities exchange are typically valued at the settlement price determined by the relevant exchange. Swaps, such as credit default swaps, interest-rate swaps and currency swaps, are valued by
a pricing service. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized as Level 1 of the fair value hierarchy.
Over-the-counter financial derivative instruments, such as certain futures contracts or swap agreements, derive their values from underlying asset prices, indices,
reference rates, other inputs or a combination of these factors. These instruments are normally valued on the basis of evaluations provided by independent pricing services or broker dealer quotations. Derivatives that use similar valuation
techniques as described above are typically categorized as Level 2 of the fair value hierarchy.
Participation Loans are priced by a third-party
pricing service. These firms primarily obtain their market color from model inputs based on business, economic, market, and other conditions. The principal sources of information used to conduct valuation include historical and projected financial
information, governing legal documents, discussions with related personnel, remittance data and various other documents and schedules available from public or private sources. These securities will be categorized as Level 2 securities.
Securities may be fair valued in accordance with the fair valuation procedures approved by the Board. The Valuation and Risk Management Oversight
Committee is generally responsible for overseeing the Funds valuation processes and reports quarterly to the Board. The Valuation and Risk Management Oversight Committee has delegated to the Valuation Committee of Angel Oak Capital Advisors,
LLC (the Adviser) the day to day responsibilities for making all necessary determinations of the fair value of portfolio securities and other assets for which market quotations are not readily available or if the prices obtained from
brokers and dealers or independent pricing services are deemed to be unreliable indicators of market or fair value. Representatives of the Advisers Valuation Committee report quarterly to the Valuation and Risk Management Oversight Committee.
14
Angel Oak Dynamic Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2021 (Unaudited)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
The following is a summary of the inputs used to value the Funds net assets as of July 31, 2021:
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Assets
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Level 1
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Level 2
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Level 3
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Total
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Corporate Obligations
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$
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$
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103,876,833
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$
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3,048,750
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$
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106,925,583
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Preferred Stocks
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8,499,002
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552,300
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9,051,302
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Short-Term Investments
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1,613,397
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1,613,397
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Total
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$
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10,112,399
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$
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104,429,133
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$
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3,048,750
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$
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117,590,282
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Other Financial Instruments
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Liabilities
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Reverse Repurchase Agreements
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$
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$
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34,178,000
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$
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$
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34,178,000
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See the Schedule of Investments for further disaggregation of investment categories. During the period ended July 31, 2021,
the Fund recognized $3,048,750 of transfer from Level 2 to Level 3 for securities lacking observable market data due to a decrease in relevant market activity. During the period ended July 31, 2021, the Fund recognized $1,920,000 of
transfers from Level 3 to Level 2. See the summary of quantitative information about Level 3 Fair Value Measurements for more information.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:
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Balance as of
1/31/21
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Discounts/
Premiums/
Distributions
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Net
Realized
Gain
(Loss)
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Change in Net
Unrealized
Appreciation
(Depreciation)
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Purchases
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Sales
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Transfers Into
Level 3
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Transfers
Out of
Level 3
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Balance as of
7/31/21
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Corporate Obligation
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$
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1,700,000
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$
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5,587
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$
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$
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214,413
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$
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$
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$
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3,048,750
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$
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(1,920,000
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)
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$
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3,048,750
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The total change in unrealized appreciation (depreciation) included in the Statement of Operations attributable to Level 3
investments still held at July 31, 2021 is ($9,167).
The following is a summary of quantitative information about Level 3 Fair Value
Measurements:
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Fair Value as of
7/31/21
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Valuation
Techniques
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Unobservable Input
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Range/Weighted Average
Unobservable Input*
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Corporate Obligation
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$
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3,048,750
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Broker Quote
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Third Party
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$
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101.63
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*
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Input presents information for one security and reflects the value as of July 31, 2021.
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Federal Income Taxes: The Fund intends to elect and continue to qualify to be taxed as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended. If so qualified, the Fund generally will not be subject to federal income tax to the extent they distribute substantially all of their net investment income and capital gains to shareholders. The Fund
generally intends to operate in a manner such that they will not be liable for federal income or excise taxes.
The Fund has adopted financial reporting
rules regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense on the Statement of
Operations. During the period ended July 31, 2021, the Fund did not incur any interest or penalties. The Fund has reviewed all open tax years and major jurisdictions and concluded that no provision for income tax is required in the Funds
financial statements. The Funds Federal and state income and Federal excise tax returns for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of
revenue.
15
Angel Oak Dynamic Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2021 (Unaudited)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Security Transactions and Income Recognition: Investment security transactions are accounted for on trade
date. Gains and losses realized on sales of securities are determined on a specific identification basis. Interest income and expense is recorded on an accrual basis. Discounts and premiums on securities purchased are accreted or amortized using the
effective yield method, based on each securitys estimated life and recoverable principal and recorded in interest income on the Statement of Operations. Dividend income and corporate transactions, if any, are recorded on the ex-date. Paydown gains and losses on mortgage related and other asset-backed securities are recorded as components of interest income on the Statement of Operations. Payments received from certain investments held
by the Fund may be comprised of dividends, capital gains and return of capital. The Fund originally estimates the expected classification of such payments. The amounts may subsequently be reclassified upon receipt of the information from the issuer.
The actual character of distributions to the Funds shareholders will be reflected in the Form 1099 received by shareholders after the end of the calendar year.
Distributions to Shareholders: Distributions from the Funds net investment income are declared and paid monthly. The Fund intends to distribute their net realized long term capital gains and net
realized short term capital gains, if any, at least annually. Distributions to shareholders, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date. The treatment
for financial reporting purposes of distributions made to shareholders during the period from net investment income or net realized capital gains may differ from their ultimate treatment for federal income tax purposes. These differences are caused
primarily by differences in the timing of the recognition of certain components of income, expense or realized capital gain for federal income tax purposes. Where such differences are permanent in nature, they are reclassified in the components of
the net assets based on their ultimate characterization for federal income tax purposes. Any such reclassifications will have no effect on net assets, results of operations or net asset value per share of the Fund. For the period ended January 31,
2021, there were no reclassifications.
Share Valuation: The NAV per share of the Fund is calculated by dividing the sum of the value of the
securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by the total number of shares outstanding, rounded to the nearest cent. The Funds NAV will not be calculated on the days on
which the New York Stock Exchange is closed for trading.
Use of Estimates: The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues
and expenses during the period. Actual results could differ from those estimates.
Indemnifications: Under the Funds organizational
documents, the Fund will indemnify its officers and trustees for certain liabilities that may arise from performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety
of representatives and warranties which provide general indemnifications. The Funds maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred.
Cash and Cash Equivalents: Cash and cash equivalents are highly liquid assets including coin, currency and short-term investments that typically
mature in 30-90 days. Short-term investments can include U.S. government and government agency securities, investment grade money market instruments, investment grade fixed-income securities, repurchase
agreements, commercial paper and cash equivalents. Cash equivalents are extremely low risk assets that are liquid and easily converted into cash. These investments are only considered equivalents if they are readily available and are not restricted
by some agreement. When the Adviser believes market, economic or political conditions are unfavorable for investors, the Adviser may invest up to 100% of a Funds net assets in cash, cash equivalents or other short-term investments. Unfavorable
market or economic conditions may include excessive volatility or a prolonged general decline in the securities markets, or the U.S. economy. The Adviser also may invest in these types of securities or hold cash while looking for suitable investment
opportunities or to maintain liquidity.
Reverse Repurchase Agreements: A reverse repurchase agreement is the sale by the Fund of a security to a
party for a specified price, with the simultaneous agreement by the Fund to repurchase that security from that party on a future date at a higher
16
Angel Oak Dynamic Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2021 (Unaudited)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
price. Securities sold under reverse repurchase agreements are reflected as a liability on the Statement of Assets and Liabilities. Interest payments made are recorded as a component of interest
expense on the Statement of Operations. Reverse repurchase agreements involve the risk that the counterparty will become subject to bankruptcy or other insolvency proceedings or fail to return a security to the Fund. In such situations, the Fund may
incur losses as a result of a possible decline in the value of the underlying security during the period while the Fund seeks to enforce their rights, a possible lack of access to income on the underlying security during this period, or expenses of
enforcing its rights. The Fund will segregate assets determined to be liquid by the Adviser or otherwise cover its obligations under reverse repurchase agreements.
The gross obligations for secured borrowing by the type of collateral pledged and remaining time to maturity on reverse repurchase contracts is as follows:
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Reverse Repurchase Agreements
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Overnight and Continuous
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Up to 30 Days
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30-90 Days
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Greater than 90
Days
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Total
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Corporate Obligations
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$
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$
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11,091,000
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$
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23,087,000
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$
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$
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34,178,000
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Total
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$
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$
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11,091,000
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$
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23,087,000
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$
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$
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34,178,000
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Gross amount of reverse repurchase
agreements in Balance Sheet Offsetting Information Table
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$
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34,178,000
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Amounts related to agreements not
included in offsetting disclosure in Balance Sheet Offsetting Information Table
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$
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Subordinated Debt of Banks and Diversified Financial Companies: The Fund may invest in subordinated debt securities,
sometimes also called junior debt, which are debt securities for which the issuers obligations to make principal and interest payment are secondary to the issuers payment obligations to more senior debt securities. Such
investments will consist primarily of debt issued by community banks or savings intuitions (or their holding companies), which are subordinated to senior debt issued by the banks and deposits held by the bank, but are senior to trust preferred
obligations, preferred stock and common stock issued by the bank.
High Yield Securities: The Fund may invest in below investment grade
securities, including certain securities issued by U.S. community banks and other financial institutions. These high-yield securities, also known as junk bonds, will generally be rated BB or lower by S&P or will be
of equivalent quality rating from another Nationally Recognized Statistical Ratings Organization, or if unrated, considered by the Adviser to be of comparable quality.
Structured Products: The Fund may invest in certain structured products, including community bank debt securitizations. Normally, structured products are privately offered and sold (that is, they are not
registered under the securities laws); however, an active dealer market may exist for structured products that qualify for Rule 144A transactions. The risks of an investment in a structured product depend largely on the type of the collateral
securities and the class of the structured product in which the Fund invest. In addition to the normal interest rate, default and other risks of fixed income securities, structured products carry additional risks, including the possibility that
distributions from collateral securities will not be adequate to make interest or other payments, the quality of the collateral may decline in value or default, the Fund may invest in Structured Products that are subordinate to other classes, values
may be volatile and disputes with the issuer may produce unexpected investment results.
Common and Preferred Stocks: The Fund may invest in
common and preferred stock. Common stock represents an equity (ownership) interest in a company, and usually possesses voting rights and earns dividends. Dividends on common stock are not fixed but are declared at the discretion of the issuer.
Common stock generally represents the riskiest investment in a company. In addition, common stock generally has the greatest appreciation and depreciation potential because increases and decreases in earnings are usually reflected in a
companys stock price. The Fund may also invest in preferred stock. Preferred stock is a class of stock having a preference over common stock as to the payment of dividends and the recovery of investment should a company be liquidated, although
preferred stock is usually junior to the debt securities of the issuer. Preferred stock typically does not possess voting rights and its market value may change based on changes in interest rates.
The fundamental risk of investing in preferred stock is the risk that the value of the stock might decrease. Stock values fluctuate in response to the activities
an individual company or in response to general market and/or economic conditions. Historically, common stocks have provided greater long-term returns and have entailed greater short-term risks than preferred stocks, fixed income, and money market
investments. The market values of all securities, including common and preferred stocks, is based
17
Angel Oak Dynamic Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2021 (Unaudited)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued)
upon the markets perception of value and not necessarily the book value of an issuer or other objective measures of a companys worth. If you invest in the Fund, you should be willing
to accept the risks of the stock market (to the extent that a Fund invests in common stock) and should consider an investment in the Fund only as a part of your overall investment portfolio.
Trust Preferred Securities: The Fund may invest in trust preferred securities, or TruPS, which are securities that are typically issued by banks and other financial institutions that combine the
features of corporate debt securities and preferred securities as well as certain features of equity securities. TruPS are typically issued in the form of interest-bearing notes with preferred securities characteristics, or by an affiliated business
trust, generally in the form of beneficial interests in subordinated debentures or similarly structured securities. Many TruPS are issued by trusts or other special purpose entities established by banks and other financial institutions and are not a
direct obligation of those banks and other financial institutions. The TruPS market consists of both fixed and adjustable coupon rate securities that are either perpetual in nature or have stated maturity dates. TruPS are typically issued with a
final maturity date, although some (usually those of foreign issuers) are perpetual in nature. TruPS are typically junior and fully subordinated liabilities of an issuer and benefit from a guarantee that is junior and fully subordinated to the other
liabilities of the guarantor. In addition, TruPS typically permit an issuer to defer the payment of income for five years or more without triggering an event of default. Because of their subordinated position in the capital structure of an issuer
the ability to defer payments for extended periods of time without default consequences to the issuer, and certain other features (such as restrictions on common dividend payments by the issuer or ultimate guarantor when full cumulative payments on
the TruPS have not been made), TruPS are often deemed to be a close substitute for traditional preferred securities. TruPS also possess many of the typical characteristics of equity securities due to their subordinated position in an issuers
capital structure and because their quality and value are heavily dependent on the issuers profitability as opposed to any legal claims to specific assets or cash flows.
NOTE 3. DERIVATIVE TRANSACTIONS
Balance Sheet Offsetting Information
During the ordinary course of business, the Fund may enter into transactions subject to enforceable netting agreements or other similar arrangements (netting
agreements). Generally, the right to offset in netting agreements allows the Fund to offset any exposure to a specific counterparty with any collateral received or delivered to that counterparty based on the terms of the agreement. Generally,
the Fund manages its cash collateral and securities collateral on a counterparty basis. As of July 31, 2021, the Fund was not subject to any netting agreements.
The following table provides a summary of offsetting financial liabilities and derivatives and the effect of derivative instruments on the Statement of Assets and Liabilities as of July 31, 2021.
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Gross Amounts Not Offset
in
Statement of Assets and Liabilities
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Gross
Amounts of
Recognized
Liabilities
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Gross Amounts Offset in
Statement of Assets
and
Liabilities
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Net Amounts of
Liabilities Presented in
Statement of
Assets and Liabilities
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|
Financial
Instruments
|
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Cash
Collateral
Pledged
|
|
Net
Amount
|
Reverse Repurchase Agreements
|
|
$34,178,000
|
|
$
|
|
$34,178,000
|
|
$34,178,000
|
|
$
|
|
$
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In some instances, the collateral amounts disclosed in the tables were adjusted due to the requirement to limit the collateral
amounts to avoid the effect of overcollateralization. Actual collateral received/pledged may be more than the amounts disclosed herein.
NOTE 4. FEES
AND OTHER RELATED PARTY TRANSACTIONS
Under the terms of the investment advisory agreement, on behalf of the Fund (the Agreement), the
Adviser manages the Funds investments subject to oversight of the Trustees. As compensation for its management services, the Fund is obligated to pay the Adviser a fee computed and accrued daily and paid monthly at an annual rate of 1.35% of
the average daily Managed Assets (as
18
Angel Oak Dynamic Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2021 (Unaudited)
NOTE 4. FEES AND OTHER RELATED PARTY TRANSACTIONS (continued)
defined below) of the Fund. Managed Assets includes total assets (including any assets attributable to borrowing for investment purposes) minus the sum of the Funds accrued liabilities
(other than liabilities representing borrowings for investment purposes) (Managed Assets).
The Adviser has also contractually agreed to
waive its fees and/or reimburse certain expenses (exclusive of any management fees, taxes, interest on borrowings, dividends on securities sold short, brokerage commissions, acquired fund fees and expenses, expenses incurred in connection with any
merger or reorganization and extraordinary expenses) to limit the Funds Total Annual Fund Operating Expenses to 0.25% (the Expense Limit) of the Funds Managed Assets through at least June 30, 2022 (the Limitation
Period). The Expense Limit may be eliminated at any time by the Board, on behalf of the Funds, upon 60 days written notice to the Adviser. Prior to the end of the Limitation Period, the Expense Limit may not be terminated by the Adviser
without the consent of the Board of Trustees. The Expense Limit is subject to repayment by the Fund within 36 months following the month in which that particular waiver and/or reimbursement occurred, provided that the Fund is able to make the
repayment without exceeding the expense limitations described above or the expense limitation in effect at the time of the reimbursement (whichever is lower). During the period ended July 31, 2021, the Fund waived $93,183 of expenses. The
amounts subject to repayment by the Fund, pursuant to the aforementioned conditions at July 31, 2021 are included in the table below.
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Recoverable through
January 31, 2024
|
|
|
Recoverable through
January 31, 2025
|
|
$
|
168,194
|
|
|
$
|
93,183
|
|
Destra Capital Investments LLC (Destra) provides investor support services in connection with the ongoing operation of
the Fund. Such services include providing ongoing contact with respect to the Fund and its performance with financial advisors that are representatives of financial intermediaries, and communicating with the NYSE specialist for the Shares, and with
the closed-end fund analyst community regarding the Fund on a regular basis. The Fund paid Destra a service fee in an annual amount equal to 0.12% of the average aggregate daily value of the Funds
Managed Assets during the Funds first year of operations. The Fund paid Destra 0.10% of the average daily value of the Funds Managed Assets from the end of the Funds first year of operations through the applicable termination date.
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services (Fund Services), an indirect wholly-owned subsidiary of
U.S. Bancorp, serves as the Funds Administrator (Administrator) and, in that capacity, performs various administrative and accounting services for the Fund. Fund Services also serves as the Funds fund accountant and transfer
agent. The Administrator prepares various federal and state regulatory filings, reports and returns for the Fund; prepares reports and materials to be supplied to the Trustees; monitors the activities of the Funds custodian; coordinates the
preparation and payment of the Funds expenses and reviews the Funds expense accruals. As compensation for its services, the Administrator is entitled to a monthly fee at an annual rate based upon the average daily net assets of the Fund.
U.S. Bank, N.A. (the Custodian) serves as custodian to the Fund.
Certain officers, Trustees and shareholders of the Fund are also owners or
employees of the Adviser.
NOTE 5. ORGANIZATIONAL AND OFFERING COSTS
Organization costs consist of costs incurred to establish the Fund and enable them to legally do business. Offering costs include state registration fees and legal fees regarding the preparation of the initial
registration statement. These organization and offering expenses were paid by the Adviser and are not be subject to reimbursement by the Fund.
NOTE
6. INVESTMENT TRANSACTIONS
For the period ended July 31, 2021, purchases and sales of investment securities, other than short-term investments
and short-term U.S. Government securities, were as follows:
|
|
|
Purchases
|
|
Sales
|
$13,164,341
|
|
$15,149,175
|
19
Angel Oak Dynamic Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2021 (Unaudited)
NOTE 6. INVESTMENT TRANSACTIONS (continued)
For the period ended July 31, 2021, there were no long-term purchases or long-term sales of U.S. Government
securities for the Fund.
During the period ended July 31, 2021, the Fund sold securities to an affiliated fund sponsored by the Adviser, in
accordance with the Rule 17a-7 procedures adopted by the Trust at a value of $6,638,358. The Fund experienced a gain of $400,391 on the sale of these securities.
NOTE 7. FEDERAL TAX INFORMATION
The tax characterization
of distributions paid for the period ended January 31, 2021 were as follows:
|
|
|
|
|
|
|
2021 (a)
|
|
Distributions paid from:
|
|
|
|
|
Ordinary Income
|
|
$
|
1,886,827
|
|
Net Long-Term Capital Gain
|
|
|
33,390
|
|
Return of Capital
|
|
|
910,173
|
|
Total
|
|
$
|
2,830,390
|
|
(a)
|
Fund commenced operations on June 30, 2020.
|
At January 31, 2021, the components of distributable earnings (accumulated deficit) on a tax basis were as follows:
|
|
|
|
|
|
|
|
|
Tax Cost of Investments
|
|
$
|
113,891,608
|
|
Unrealized Appreciation*
|
|
|
3,240,487
|
|
Unrealized Depreciation*
|
|
|
(248,381
|
)
|
Net Unrealized Appreciation
(Depreciation)*
|
|
$
|
2,992,106
|
|
Undistributed Ordinary Income
|
|
|
|
|
Undistributed Long-Term Gain
(Loss)
|
|
|
|
|
Accumulated Gain (Loss)
|
|
$
|
|
|
Other Accumulated Gain (Loss)
|
|
|
(13
|
)
|
Distributable Earnings (Accumulated
Deficit)
|
|
$
|
2,992,093
|
|
*
|
Represents aggregated amounts of investments and reverse repurchase agreements in the Fund.
|
The temporary differences between book basis and tax basis in the Fund are primarily attributable to amortization of callable bonds.
As of January 31, 2021, the Fund did not have any capital loss carryforwards.
Certain capital losses incurred after October 31 and within the current taxable year, are deemed to arise on the first business day of the Funds following taxable year. For the tax period ended January
31, 2021, the Fund did not defer any post-October losses.
NOTE 8. CREDIT AGREEMENTS
On October 8, 2020, the Fund entered into a $20 million line of credit agreement (the Facility) with Cadence Bank N.A., which matures October 8, 2023. Under the Facility, interest is charged on a
floating rate based on one-month LIBOR plus 2.40% and is payable on the last day of the interest period, which was 2.49% as of July 31, 2021. For the period ended July 31, 2021, the average principal balance and interest rate was $1,160,221 and
2.52%. During the reporting period the Fund was required to pay Cadence Bank N.A. a commitment fee of 0.50% and 0.25% on the unused portion of the Facility if the Fund did not achieve a 50% and 75% utilization rate in each year, respectively. For
the period ended July 31, 2021, these expense and commitment fees, amounted to $38,739 and are included in the Interest and Commissions expense line item that is reflected in the Statement of Operations. The Fund paid an origination fee of $100,000
per the agreement with Cadence Bank on October 8, 2020, and
20
Angel Oak Dynamic Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2021 (Unaudited)
NOTE 8. CREDIT AGREEMENTS (continued)
$27,500 of other expenses, which were paid upfront and are being accrued for daily over the life of the loan. The maximum loan outstanding during the year was $20,000,000 from February 1, 2021,
through February 10, 2021. As of July 31, 2021, the outstanding principal balance under the Facility was $0.
NOTE 9. ACCOUNTING PRONOUNCEMENTS
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference
Rate Reform on Financial Reporting. The main objective of the new guidance is to provide relief to companies that will be impacted by the expected change in benchmark interest rates at the end of 2021, when participating banks will no longer be
required to submit London Interbank Offered Rate (LIBOR) quotes by the UK Financial Conduct Authority. The new guidance allows companies to, provided the only change to existing contracts are a change to an approved benchmark interest
rate, account for modifications as a continuance of the existing contract without additional analysis. In addition, derivative contracts that qualified for hedge accounting prior to modification, will be allowed to continue to receive such
treatment, even if critical terms change due to a change in the benchmark interest rate. For new and existing contracts, the Fund may elect to apply the amendments as of March 12, 2020 through December 31, 2022. The Adviser is currently
assessing the impact of the ASUs adoption to the Funds financial statements and various filings.
In October 2020, the SEC adopted new
regulations governing the use of derivatives by registered investment companies (Rule 18f-4). Rule 18f-4 will impose limits on the amount of
derivatives a Fund can enter into, eliminate the asset segregation framework currently used by funds to comply with Section 18 of the 1940 Act, and require funds whose use of derivatives is greater than a limited specified amount to establish
and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager. Funds will be required to comply with Rule 18f-4 by August 19, 2022. It is not currently
clear what impact, if any, Rule 18f-4 will have on the availability, liquidity or performance of derivatives. Management is currently evaluating the potential impact of Rule
18f-4 on the Fund. When fully implemented, Rule 18f-4 may require changes in how a Fund uses derivatives, adversely affect the Funds performance and increase
costs related to the Funds use of derivatives.
In October 2020, the SEC adopted new Rule 12d1-4 under the 1940 Act and other regulatory changes
which are expected to be effective on or about January 19, 2022. Those changes are intended to streamline and enhance the regulatory framework for investments by one fund into another fund or fund-of-funds arrangements. These regulatory
changes may limit the Funds ability to pursue its principal investment strategies by investing in other investment companies or pooled investment vehicles or to invest in those investment companies or pooled investment vehicles it believes are
most desirable. Management is currently assessing the potential impact of the new rule on the Funds financial statements.
In December 2020, the
SEC adopted a new rule providing a framework for fund valuation practices (Rule 2a-5). Rule 2a-5 establishes requirements for determining fair value in
good faith for purposes of the 1940 Act. Rule 2a-5 will permit fund boards to designate certain parties to perform fair value determinations, subject to board oversight and certain other conditions. Rule 2a-5 also defines when market quotations are readily available for purposes of the 1940 Act and the threshold for determining whether a fund must fair value a security. In connection with
Rule 2a-5, the SEC also adopted related recordkeeping requirements and is rescinding previously issued guidance, including with respect to the role of a board in determining fair value and the accounting and
auditing of fund investments. The Fund will be required to comply with the rules by September 8, 2022. Management is currently assessing the potential impact of the new rules on the Funds financial statements.
NOTE 10. COVID-19 RISK
The global outbreak of COVID-19 has disrupted economic markets and the prolonged economic impact is uncertain. The operational and financial performance of the issuers of
securities in which the Fund invests depends on future developments, including the duration and spread of the outbreak, and such uncertainty may in turn impact the value of the Funds investments.
NOTE 11. SUBSEQUENT EVENT
Management of the Fund has
evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date these financial statements were issued. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments.
21
Additional Information (Unaudited)
1. Shareholder Notification of Federal Tax Status
For the
taxable period ended January 31, 2021, certain dividends paid by the Fund may be subject to a maximum tax rate of 20% as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Fund intends to designate the maximum amount
allowable as taxed at a maximum rate of 20%.
For the taxable period ended January 31, 2021, the Fund paid qualified dividend income of 0.00%.
For the taxable period ended January 31, 2021, the percentage of ordinary income dividends paid by the Fund that qualifies for the dividends received
deduction available to corporations was 0.00%.
For the taxable period ended January 31, 2021, the percentage of ordinary income distributions paid
by the Fund that is designated as short-term capital gain distributions under Internal Revenue Section 871(k)2(c) was 8.49%.
For the taxable
period ended January 31, 2021, the percentage of taxable ordinary income distributions for the Fund that is designated as interest related dividends under Internal Revenue 871(k)1(c) was 84.42%.
2. Disclosure of Portfolio Holdings
The Fund will file a
complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Part F of Form N-PORT. The Funds Part F of
Form N-PORT is available on the SECs website at http://www.sec.gov and may be reviewed and copied at the SECs Public Reference Room in Washington, D.C. Information on the operation of the Public
Reference Room may be obtained by calling (800) SEC-0230.
3. Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio securities and information
regarding how the Fund voted those proxies during the most recent twelve month period ended June 30, is available without charge upon request by (1) calling the Funds at (855) 751-4324 and
(2) from Fund documents filed with the SEC on the SECs website at www.sec.gov.
4. Dividend Reinvestment Plan
Pursuant to the Funds Dividend Reinvestment Plan (the Plan), distributions of dividends and capital gains are automatically reinvested in Shares
of the Fund by Fund Services, as Plan Agent. Unless a Shareholder indicates another option on the account application or otherwise opts-out, Shareholders holding at least one full Share of the Fund will be
automatically enrolled in the Plan. Shareholders who do not participate in the Plan will receive all distributions in cash.
If the Fund declares a
dividend or distribution payable either in cash or in Shares of the Fund and the market price of Shares on the payment date for the distribution or dividend equals or exceeds the Funds NAV per Share, the Fund will issue Shares to participants
at a value equal to the higher of NAV or 95% of the market price. The number of additional Shares to be credited to each participants account will be determined by dividing the dollar amount of the distribution or dividend by the higher of NAV
or 95% of the market price. If the market price is lower than NAV, or if dividends or distributions are payable only in cash, then participants will receive Shares purchased by the Plan Agent on participants behalf on the NYSE or otherwise on
the open market. If the market price exceeds NAV before the Plan Agent has completed its purchases, the average per Share purchase price may exceed NAV, resulting in fewer Shares being acquired than if the Fund had issued new Shares.
There are no brokerage charges with respect to Shares issued directly by the Fund. However, whenever Shares are purchased or sold on the NYSE or otherwise on the
open market, each participant will pay a pro rata portion of brokerage trading fees. Currently, dividend reinvestment plan participants that direct the sale of Shares through the Plan Agent are subject to a $25.00 fee plus a sales commission of
$4.95.
The reinvestment of dividends and net capital gains distributions does not relieve participants of any income tax that may be payable on such
dividends or distributions.
22
Purchases of additional Shares of the Fund will be made on the open market. There is no transaction fee, and each
participant will pay a pro rata share of brokerage commissions incurred in connection with purchases made on the open market. Shareholders can also sell Fund Shares held in the Plan account at any time by contacting the Plan Agent by telephone or in
writing. The Plan Agent will mail a check to you (less applicable brokerage trading fees) on the settlement date, which is three business days after your Shares have been sold. If you choose to sell your Shares through your broker, you will need to
request that the Plan Agent electronically transfer your Shares to your broker through the Direct Registration System.
Shareholders participating in
the Plan may withdraw from the Plan at any time by contacting the Plan Agent by telephone or in writing. Such termination will be effective immediately if the notice is received by the Plan Agent prior to any dividend or distribution record date;
otherwise, such termination will be effective on the first trading day after the payment date for such dividend or distribution, with respect to any subsequent dividend or distribution. If you withdraw, your Shares will be credited to your account;
or, if you wish, the Plan Agent will sell your full and fractional Shares and send you the proceeds, less a fee currently set at $25.00 and less a sales commission currently set at $4.95. If a Shareholder does not maintain at least one whole Share
in the Plan account, the Plan Agent may terminate such Shareholders participation in the Plan after written notice. Upon termination, Shareholders will be sent a check for the cash value of any fractional Share in the Plan account, less any
applicable broker commissions and taxes. Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund and the Plan Agent reserve the right to amend or terminate the Plan. Participants generally will receive written notice
at least 60 days before the effective date of any amendment. In the case of termination, participants will receive written notice at least 60 days before the record date for the payment of any dividend or distribution by the Funds.
All correspondence or additional information about the Plan should be directed to Fund Services in writing at 615 East Michigan Street, Milwaukee,
Wisconsin 53202.
5. Compensation of Trustees
Each Trustee who is not an interested person (i.e., an Independent Trustee) of the Fund Complex (which includes affiliated registrants not
discussed in this report) receives an annual retainer of $58,000 (pro-rated for any periods less than one year), paid quarterly as well as $12,000 for attending each regularly scheduled meeting in person in
connection with his or her service on the Board of the Fund Complex. In addition, each Committee Chairman receives additional annual compensation of $12,000 (pro-rated for any periods less than one year).
Independent Trustees are permitted for reimbursement of out-of-pocket expenses incurred in connection with attendance at meetings. The Funds Statement of
Additional Information includes additional information about the Trustees and is available upon request by calling toll free (855) 751-4324.
6. Trustees and Officers
The business of the Fund is managed under the direction of the Board. The Board
formulates the general policies of the Fund and meets periodically to review the Funds performance, monitor investment activities and practices, and discuss other matters affecting the Fund. The Trustees are fiduciaries for the Funds
shareholders and are governed by the laws of the State of Delaware in this regard. The names and addresses of the Trustees and officers of the Trusts are listed below along with a description of their principal occupations over at least the last
five years. The address of each Trustee and Officer of the Trusts is c/o Angel Oak Capital Advisors, LLC, 3344 Peachtree Road NE, Suite 1725, Atlanta, GA 30326. The Funds Statement of Additional Information includes additional information
about the Trustees and is available upon request by calling toll free (855) 751-4324.
23