SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Check the appropriate box:
Arlington Asset Investment Corp.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check all box that apply):
ARLINGTON ASSET INVESTMENT CORP.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD
ON June 16, 2022
To the Shareholders of Arlington Asset Investment Corp.:
The 2022 annual meeting of shareholders (the “Annual Meeting”) of Arlington Asset Investment Corp. (NYSE: AAIC) (“we,” “us,” “our,” “AAIC,” or the “Company”)
will be held on June 16, 2022, at 9:00 a.m. (Eastern Time) at the offices of Hunton Andrews Kurth LLP, 2200 Pennsylvania Avenue NW, 9
Floor, Washington, DC 20037
for the following purposes:
Only holders of the Company’s common stock outstanding at the close of business on the record date, April 18, 2022, are entitled to vote at the Annual Meeting. A list of shareholders entitled to vote at the Annual Meeting will be available for ten days prior to the Annual Meeting at the Company’s principal executive office, which is located at 6862 Elm Street, Suite 320, McLean, Virginia 22101.
Whether or not you plan to attend the Annual Meeting, it is important that your shares are represented and voted. Pursuant to rules adopted by the Securities and Exchange Commission (the “SEC”), we have provided access to our proxy materials over the Internet. Accordingly, we are sending the Notice of Internet Availability of Proxy Materials (the “Notice”) on or about May 2, 2022 to our shareholders of record as of April 18, 2022. The Notice contains instructions for your use of this process, including how to access our proxy statement and annual report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”) over the Internet, how to authorize your proxy to vote via the internet, telephone or mail, and how to request a paper copy of the proxy statement and Annual Report if you so desire. If you hold your shares in “street name” (i.e., through a broker, bank or other nominee), you will receive instructions from your nominee that you must follow in order to provide voting instructions to your nominee, or you may contact your nominee directly to request these instructions.
By Order of the Board of Directors,
D. Scott Parish
Senior Vice President, Chief Administrative Officer and Corporate Secretary
May 2, 2022
Important Notice Regarding the Availability of Proxy Materials for the 2022 Annual Meeting of Shareholders to be held on June 16, 2022. The proxy statement for the 2022 Annual Meeting of Shareholders and the Company’s 2021 Annual Report to Shareholders are available electronically at
as well as on our website at
TABLE OF CONTENTS
ARLINGTON ASSET INVESTMENT CORP.
2022 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD June 16, 2022
We are not aware of any other matters to be presented at the Annual Meeting.
Who can vote at the Annual Meeting?
If you hold these shares of record, the Notice is being sent directly to you by the Company. As a shareholder of record, you have the right to grant your voting proxy directly to the Company or to vote your shares at the Annual Meeting. You may also submit voting instructions prior to the meeting as described below under “How can I vote my shares prior to the Annual Meeting?”
If you hold these shares beneficially in “street name”, the Notice is being forwarded to you by your broker, bank, trustee or other nominee, which is considered the shareholder of record with respect to those shares. As a beneficial owner, you have the right to direct your broker, bank, trustee or other nominee on how to vote the shares in your account. As a beneficial owner, you are also invited to attend the Annual Meeting. However, beneficial owners generally cannot vote their shares directly because they are not the shareholder of record; instead, beneficial owners must instruct the broker, bank, trustee or other nominee how to vote their shares using the method described below under “How can I vote my shares prior to the Annual Meeting?”
: You may authorize your proxy online via the Internet by accessing the website
and following the instructions provided on the Notice or proxy card. Internet voting facilities will be available 24 hours a day and will close at 11:59 p.m. (Eastern Time) the day before the date of the Annual Meeting. To vote by Internet, you will need to use the 16-digit control number listed on the Notice or proxy card. Have your proxy card in hand when you access the web site and follow the additional steps when prompted.
: You may authorize your proxy by touch-tone telephone by calling 1-800-690-6903. Telephone voting facilities will be available 24 hours a day and will close at 11:59 p.m. (Eastern Time) the day before the date of the Annual Meeting. To vote by telephone, you will need to use the 16-digit control number listed on the Notice or proxy card. Have your proxy card in hand when you call and follow the additional steps when prompted.
: If you requested paper copies of the proxy materials to be sent to you by mail, you may authorize your proxy by completing, signing and dating your proxy card and returning it in the postage-paid reply envelope provided to you with the paper proxy materials.
The impact of broker non-votes, if any, on the outcome of the matters to be voted on at the Annual Meeting are described below under “How are votes counted?”
If your shares are held in a brokerage account by a broker, bank or other nominee, you should follow the instructions provided by your broker, bank or other nominee.
If you are a shareholder of record as of the record date, you will need to bring valid photo identification.
If you hold your shares in street name, you will need to bring valid photo identification and an account statement, a copy of your voting instruction form or other evidence acceptable to us of ownership of your shares as of the close of business on the record date. If you hold your shares in street name and wish to vote in person at the Annual Meeting, you also will need to contact your nominee and obtain a “legal proxy” from your nominee and bring it to the Annual Meeting. Even if you plan to attend the Annual Meeting, we encourage you to vote your shares before the meeting.
In the election of the six director nominees, you may vote “FOR,” “AGAINST” or “ABSTAIN” with respect to each of the director nominees. If a quorum is present at the Annual Meeting, in an uncontested director election, directors will be elected by receiving the affirmative vote of a majority of
the total votes cast for and against the election of such nominee. Abstentions and broker non-votes, if any, are not treated as votes cast and thus will have no effect on the outcome of the vote on the election of directors, although they will be considered present for the purpose of determining the presence of a quorum. Under our Bylaws, cumulative voting is not permitted.
Under the terms of our Corporate Governance Guidelines, if a nominee for director receives a greater number of votes “against” than votes “for” his or her election, the director is required to promptly tender to the Board his or her offer to resign from the Board. Upon recommendation of the Nominating and Governance Committee, the Board, excluding such individual, will decide whether or not to accept such offer to resign within 90 days following the shareholder vote, and thereafter, it will promptly and publicly disclose its decision. If the Board determines not to accept the director’s offer to resign, the director will continue to serve on the Board until the next annual meeting of shareholders and until the director’s successor is duly elected and qualified or until the director’s earlier resignation or removal. The Board may consider any factors it deems relevant in deciding whether to accept a director’s resignation.
Ratification of Appointment of PwC
You may vote “FOR,” “AGAINST” or “ABSTAIN” with respect to the proposal to ratify the appointment of PwC as our independent registered public accounting firm for 2022.
If a quorum is present, the proposal to ratify the appointment of PwC as our independent registered public accounting firm for 2022 will be approved if the votes cast in favor of the proposal exceed the votes cast opposing the proposal. Abstentions and broker non-votes, if any, are not treated as votes cast and thus will have no effect on the outcome of the vote on this proposal, although they will be considered present for the purpose of determining the presence of a quorum.
Advisory Vote on Executive Compensation
You may vote “FOR,” “AGAINST” or “ABSTAIN” with respect to advisory vote on the compensation of the Company’s executive officers.
If a quorum is present, the advisory vote on executive compensation will be approved if the votes cast in favor of the proposal exceed the number of votes cast against the proposal. Voting for this proposal is being conducted on an advisory basis and, therefore, the voting results will not be binding on the Company, the Board or the Compensation Committee. Abstentions and broker non-votes, if any, are not treated as votes cast and thus will have no effect on this proposal, although they will be considered present for the purpose of determining the presence of a quorum.
Ratification of the Second Amendment of the Company’s Shareholder Rights Agreement
You may vote “FOR,” “AGAINST” or “ABSTAIN” with respect to the proposal to ratify the Second Amendment to the Company’s Shareholder Rights Agreement.
If a quorum is present, the proposal to ratify the Second Amendment to the Company’s Shareholder Rights Agreement will be approved if the votes cast in favor of the proposal exceed the votes cast opposing the proposal. Abstentions and broker non-votes, if any, are not treated as votes cast and thus will have no effect on the outcome of the vote on this proposal, although they will be considered present for the purpose of determining the presence of a quorum.
Shareholder’s Liquidation Proposal
You may vote “FOR,” “AGAINST” or “ABSTAIN” with respect to the Liquidation Proposal.
If a quorum is present, the proposal to approve the Liquidation Proposal will be approved if the votes cast in favor of the proposal exceed the votes cast opposing the proposal. Abstentions and broker non-votes, if any, are not treated as votes cast and thus will have no effect on the outcome of the vote on this proposal, although they will be considered present for the purpose of determining the presence of a quorum.
We will provide copies of these proxy materials to banks, brokerage houses, fiduciaries and custodians holding in their names shares of our common stock beneficially owned by others in “street name” so that they may forward these proxy materials to the beneficial owners. The Company will, on request, reimburse brokers, banks and other nominees for their reasonable expenses in sending our proxy materials and voting instruction forms to “street name” beneficial owners to obtain their voting instructions.
In the event that the date of the 2023 annual meeting of shareholders is more than 30 days before or more than 60 days after the first anniversary date of this year’s annual meeting, our Bylaws provide that in order for a shareholder nomination for director or proposal to be presented at our 2023 annual meeting of shareholders, other than a shareholder proposal included in our proxy statement pursuant to Rule 14a-8, it must be delivered to the Corporate Secretary at our principal executive offices not earlier than the close of business on the 120
day prior to the date of such annual meeting and not later than the close of business on the later of the 90
day prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than 100 days prior to the date of such annual meeting, the 10
day following the day on which public announcement of the date of such annual meeting is first made by the Company.
Any shareholder nomination for director or proposal should be mailed to: Arlington Asset Investment Corp., 6862 Elm Street, Suite 320, McLean, VA 22101, Attention: Corporate Secretary.
Copies of our Bylaws are available on our website at
under “Governance,” or may be obtained from the Corporate Secretary at the address shown above.
ELECTION OF DIRECTORS
At the Annual Meeting, six directors are to be elected to serve until the 2023 annual meeting of shareholders and until their successors are duly elected and qualified or their earlier death, removal or resignation.
The Nominating and Governance Committee of the Board has unanimously recommended for nomination, and the Board has unanimously nominated and recommended for election, the six nominees listed below under “Nominees for Election as Directors.” All of the nominees are currently serving as members of our Board. Each nominee has agreed to be named in this proxy statement and to serve if elected. Unless otherwise directed, the persons named as proxies intend to vote “FOR” the election of each of the nominees.
Set forth below is biographical information as of April 11, 2022 for each of the Board’s nominees for election. Although we know of no reason why any of the nominees for director listed below would not be able to serve, if unforeseen circumstances (
death or disability) make it necessary for the Board to propose a substitute nominee for any of the nominees named below, the persons named as proxies will vote the proxies for the remaining nominees and substitute nominees chosen by the Board. If any substitute nominees are designated, we will file an amended proxy statement and proxy card that, as applicable, identifies the substitute nominees, discloses that such nominees have consented to being named in the revised proxy statement and to serve if elected, and includes biographical and other information about such nominees required by the rules of the SEC.
Nominees for Election as Directors
DANIEL E. BERCE,
age 68, is our Chairman of the Board and has served as a director of our Company since January 2011. Mr. Berce is Chief Executive Officer and President of General Motors Financial Company, Inc., a position he has held since General Motors Co. acquired AmeriCredit Corp. on October 1, 2010. Mr. Berce had been a director of AmeriCredit Corp. since 1990, and was Chief Executive Officer and President from 2005 through 2010, President from 2003 through 2005 and Chief Financial Officer from 1990 through 2003. Mr. Berce is also a director of FirstCash, Inc. (Nasdaq: FCFS), a publicly-traded consumer finance company, and AZZ, Inc. (NYSE: AZZ), a publicly-traded global provider of galvanizing services, welding services, specialty electrical equipment and highly engineered services.
Mr. Berce’s qualifications to serve as our Chairman and a director include his extensive leadership experience, specifically his experience as a chief executive officer and chief financial officer of a publicly-traded company. He also has over 30 years of experience in the consumer finance industry, experience in finance and accounting as well as experience as a director of multiple publicly-traded companies. Mr. Berce is also a licensed Certified Public Accountant and has served on our Audit Committee and the audit committees of other companies, all of which have designated him as an “audit committee financial expert.”
DAVID W. FAEDER,
age 65, has served as a director of our Company since June 2013. Mr. Faeder is a Managing Partner of Fountain Square Properties, a diversified real estate company, a position he has held since 2003. He served as the Vice Chairman from 2000 to 2003, President from 1997 to 2000 and Executive Vice President and Chief Financial Officer from 1993 to 1997 of Sunrise Senior Living, Inc., a provider of senior living services in the United States, United Kingdom and Canada. From 1991 to 1993 he served as Vice President of Credit Suisse First Boston (formerly First Boston Corporation), directing the real estate advisory business for the Resolution Trust Company in the Washington, DC area. From 1984 to 1991 he served as Vice President of Morgan Stanley and Company, Inc., a brokerage firm, specializing in real estate transactions and financings. Mr. Faeder is currently a director and chairman of the board of Federal Realty Investment Trust (NYSE: FRT), a publicly-traded real estate investment trust (“REIT”).
Mr. Faeder’s qualifications to serve as a director include his public company and accounting experience, his real estate investment experience from his time as a private real estate investor, and his past and present service on multiple public and private company boards, including his service on other companies’ audit committees as well as his past service on our Audit Committee, all of which had designated him as an “audit committee financial expert.”
MELINDA H. MCCLURE,
age 54, has served as a director of our Company since January 2019. Ms. McClure was the Chairman and Chief Executive Officer of VisionBank (in Organization), which was formed to become a Virginia-chartered commercial bank and served as Executive Vice President and Chief Strategy Officer and director of Old Dominion Bank following the two companies’ strategic combination. She served from 2006 to 2018 as the principal shareholder of Democracy Funding LLC, a registered broker-dealer. She held several positions at FBR & Co. (“FBR”), an investment bank, from 1991 to 2006, including senior managing director of investment banking focusing on middle market financial services and real estate companies. Ms. McClure is the lead independent director on the board of Independence Realty Trust, Inc. (NYSE: IRT), a publicly traded REIT that owns and manages multi-family communities. She served on the board of directors of the Bank of Georgetown, a privately held community bank headquartered in Washington, D.C., from its inception in 2005 to its sale to United Bank in 2016.
Ms. McClure’s qualifications to serve as a director include her 30 years of experience in the financial services, real
and capital markets sectors, including particular expertise in mortgage and property REITs, asset managers, specialty lenders and regulated financial institutions. She has
experience as a director of a
REIT where she serves as the lead independent director and s
he has significant corporate finance experience having managed over $15 billion in capital markets and advisory assignments.
The Board has designated Ms. McClure as an “audit committee financial expert.”
RALPH S. MICHAEL, III,
age 67, has served as a director of our Company since June 2006. He currently serves as Executive Vice President and Chairman of Fifth Third Bank, Greater Cincinnati, having served as Executive Vice President and Group Regional President of Fifth Third Bank from July 2015 until March 2018. Prior to that he served as Chief Executive Officer of Fifth Third Bank, Greater Cincinnati since December 2010. He served as President and Chief Operating Officer of The Ohio Casualty Insurance Company from 2005 to November 2007 and served as a director from 2002 to 2005. From 2003 to 2005 he was Executive Vice President and Manager of Private Asset Management and held other positions with U.S. Bank. From 1979 to 2002 he held various executive and management positions with PNC Financial Services Group. From 2003 to 2016, Mr. Michael served as a director of Key Energy Services, Inc. (NYSE: KEG), a publicly-traded company. Mr. Michael is currently a director Cleveland-Cliffs Inc. (NYSE: CLF), a publicly-traded company. He is also a director of Cincinnati Bengals, Inc., AAA Club Alliance and CSAA Insurance Exchange. Mr. Michael also serves as the Chairman of the Board of TriHealth, Inc., a nonprofit hospital group, and as a trustee of Xavier University (Ohio).
Mr. Michael’s qualifications to serve as a director include the broad business, banking and finance background obtained through his 40 years of experience working in financial services, much of which has been in executive
management positions which enable him to provide valuable insights on oversight matters, including banking, hedging and financial issues. Mr. Michael’s qualifications also including his service on our and other companies’ audit committee. The Board has designated Mr. Michael
as an “audit committee financial expert.”
ANTHONY P. NADER, III,
age 58, has served as a director of our Company since March 2015. Mr. Nader is a Managing Director of SWaN & Legend Venture Partners, a principal investment firm that Mr. Nader co-founded in 2006. Mr. Nader also serves as Vice Chairman of Asurion, a privately held company that provides technology protection. In 2008, Mr. Nader successfully merged his prior company, National Electronics Warranty (“NEW”) with Asurion. Mr. Nader joined NEW in 1990 as Chief Operating Officer, was named President in 1999 and Chief Executive Officer in 2006, a position he held until 2013. Mr. Nader is currently a
director of Federal Realty Investment Trust (NYSE: FRT), a publicly-traded REIT. He is also
the Chairman of the Inova Health System Board of Trustees. He also serves as a director of Optoro, Inc., BigTeams, DuraStat and MusiCapital LLC.
Mr. Nader’s qualifications to serve as a director include his 30 years of business and leadership experience as a senior executive with NEW which, under his leadership, grew to be the largest global provider of extended service plans for the consumer electronics and appliance industry. Mr. Nader also has a substantial and diversified investment background as a founder of SWaN & Legend Venture Partners that has investments in growth-oriented companies as well as domestic and international real estate holdings. In addition, Mr. Nader has extensive experience as a corporate board member, including his service on our and other companies’ audit committees. The Board has designated Mr. Nader as an “audit committee financial expert.”
J. ROCK TONKEL, JR.,
age 59, is our President and Chief Executive Officer, a position he has held since June 2014. He also has served as a director of the Company since March 2007. From February 2007 until June 2014, he served as our Chief Operating Officer. From April 2004 to February 2007, Mr. Tonkel served as President and Head of Investment Banking at FBR. Prior to this service, Mr. Tonkel served as FBR’s Executive Vice President and Head of Investment Banking, a position he assumed in February 2002. Mr. Tonkel joined FBR in 1994 as a Managing Director and Head of Investment Banking’s financial institutions group. Prior to joining FBR, Mr. Tonkel served as Special Assistant to the Director of the Office of Thrift Supervision, the regulatory agency for the savings and loan industry under the U.S. Department of Treasury.
Mr. Tonkel’s qualifications to serve as a director include his 35 years of experience in financial services companies, the mortgage industry, the investment banking industry, his experience in capital markets, as well as his expertise in public and private company finance. Further, his service as the Company’s Chief Executive Officer for the past seven years as well as his past position as President and Head of Investment Banking at FBR provide him with business and leadership experience in key areas of the investment and asset management industry.
THE BOARD UNANIMOUSLY RECOMMENDS
A VOTE “FOR” THE ELECTION OF EACH
OF THE NOMINEES LISTED ABOVE.
The Audit Committee has appointed PwC as our independent registered public accounting firm to audit our financial statements for the fiscal year ending December 31, 2022. A resolution will be presented at the Annual Meeting to ratify the appointment of PwC by the Audit Committee. If our shareholders do not ratify the appointment of PwC at the Annual Meeting, the Audit Committee will consider that fact in its review and future selection of our independent registered public accounting firm. Representatives of PwC will be present at the Annual Meeting and will have the opportunity to make statements if they desire to do so. Representatives of PwC are expected to be available to respond to appropriate questions.
If a quorum is present at the Annual Meeting, the ratification of the appointment of PwC as our independent registered public accounting firm for 2022 will be approved if the votes cast in favor of the ratification exceed the votes cast opposing the ratification.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RATIFICATION OF
THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP
AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2022.
Aggregate fees for professional services rendered for us and our subsidiaries by PwC for the years ended December 31, 2021 and 2020 were (dollars in thousands):
Audit Committee Pre-Approval Policies and Procedures
It is the Audit Committee’s policy to review and, if appropriate, pre-approve all audit and non-audit services provided by the independent registered public accounting firm to us and our subsidiaries. In accordance with this policy, the Audit Committee has granted authority to the Audit Committee Chairman, Mr. Michael, to approve non-audit services in an amount up to $50,000 on behalf of the Audit Committee. Any such approval will be communicated to the Audit Committee at the next scheduled meeting. The Audit Committee pre-approved 100% of the services provided by PwC to our Company and its subsidiaries during the fiscal year ended December 31, 2021.
ADVISORY VOTE ON EXECUTIVE COMPENSATION
Section 14A of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), added by the Dodd-Frank Wall Street Reform and Consumer Protection Act, provides our shareholders with an advisory vote to approve our executive compensation. In view of the most recent voting results where our shareholders voted, on an advisory basis, to hold an advisory vote on executive compensation annually, our Board has determined that advisory votes on executive compensation will be submitted to our shareholders every year until the next required advisory vote on the frequency of shareholder votes on executive compensation. This advisory vote gives our shareholders the opportunity to express their views on the compensation of our executive officers. Although this vote is advisory and is not binding, the Board and the Compensation Committee plan to take into consideration the outcome of the vote when making future executive compensation decisions.
As described in detail under “Compensation Discussion and Analysis” and “Executive Compensation Tables,” our compensation program is designed to align the interests of management with those of our shareholders, apply a pay-for-performance philosophy and attract and retain top management talent. On an ongoing basis, our Board and Compensation Committee analyze our compensation program and believe that our current executive compensation program directly links executive compensation to our performance and properly aligns the interests of our executive officers with those of our shareholders. For example:
See the information set forth under “Compensation Discussion and Analysis” and “Executive Compensation Tables” for more information on these elements of our executive compensation program.
For these reasons, the Board strongly endorses the Company’s executive compensation program and recommends that shareholders vote in favor of the following resolution:
“RESOLVED, that the Company’s shareholders approve, on an advisory basis, the compensation of the Company’s executive officers, as disclosed under the compensation disclosure rules of the SEC, including the “Compensation Discussion and Analysis,” compensation tables and narrative discussion contained in the proxy statement for the 2022 annual meeting of shareholders.”
THE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
“FOR” THE APPROVAL OF OUR EXECUTIVE COMPENSATION.
RATIFICATION OF THE SECOND AMENDMENT TO OUR SHAREHOLDER RIGHTS AGREEMENT TO EXTEND THE TERM FOR THREE ADDITIONAL YEARS
Our shareholders are being asked to ratify the Second Amendment to the Company’s previously shareholder approved Shareholder Rights Agreement (as amended by the First Amendment on April 13, 2018, the “Rights Agreement”) to extend the term of the Rights Agreement for an additional three years beyond its 2022 expiration date. The Rights Agreement was originally approved by our shareholders in 2009 and is intended and designed to protect the Company’s ability to use various tax benefits for the benefit of the Company and shareholders by reducing the likelihood of an “ownership change” occurring that would jeopardize the full utilization of such tax attributes. On June 1, 2009, our Board of Directors approved, and on June 5, 2009, the Company adopted the Rights Agreement in an effort to protect against a possible limitation on the Company’s ability to use its net operating loss carryforwards (“NOLs”), net capital loss carryforwards (“NCLs”) and built-in losses under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). Our shareholders originally approved the Rights Agreement at our 2010 annual meeting of shareholders held on June 2, 2010. As of December 31, 2021, our estimated NOLs and NCLs were approximately $165.0 million and $127.1 million, respectively. The Rights Agreement is intended to reduce the risk of a substantial loss of potential tax benefits arising from our NOLs, NCLs and certain other tax attributes. Our Board has determined that our NOLs and NCLs continue to be of fundamental importance to the Company’s business (including in the event that the Company decides to invest in other asset classes or pursue other business activities that may limit our ability to maintain our qualification as a REIT) and the continuation of the Rights Agreement to diminish the likelihood of an “ownership change” occurring under the Internal Revenue Code is in the best interests of the Company. There is no guarantee that the Rights Agreement will prevent the Company from experiencing an ownership change or otherwise experiencing a reduction in our ability to utilize these tax attributes. Our Board has unanimously recommended and declared advisable that our shareholders approve the Second Amendment.
Background and Purpose of the Rights Agreement
On June 1, 2009, our Board of Directors approved the Rights Agreement and declared a dividend of one purchase right to purchase shares of our Class A Junior Preferred Stock (“Right”) for each outstanding share of the Company’s Class A common stock and Class B common stock, payable to shareholders of record as of the close of business on June 5, 2009. The Board adopted the Rights Agreement in an effort to protect against a possible limitation on the Company’s ability to use its NOLs, NCLs and built-in losses under Sections 382 and 383 of the Internal Revenue Code, which may be used to reduce potential future federal income tax obligations. The Company’s ability to use its NOLs, NCLs and built-in losses would be limited if there were an “ownership change” under Section 382 of the Internal Revenue Code. This would occur if shareholders owning (or deemed under Section 382 to own) 5% or more of the Company’s stock were to increase their collective ownership of the aggregate amount of outstanding shares of the Company by more than 50 percentage points over a defined period of time. The Rights Agreement was adopted to reduce the likelihood of an “ownership change” occurring as defined by Section 382.
Following the Board’s adoption of the First Amendment, the Rights and the Rights Agreement were scheduled to expire on the earliest of (i) June 4, 2022, (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement, (iii) the time at which the Rights are exchanged pursuant to the Rights Agreement, (iv) the repeal of Sections 382 and 383 of the Internal Revenue Code or any successor statute if the Board determines that the Rights Agreement is no longer necessary for the preservation of the applicable tax benefits, or (v) the beginning of a taxable year of the Company to which the Board determines that no applicable tax benefits may be carried forward.
On April 11, 2022 the Board approved and on April 11, 2022, the Company adopted the Second Amendment to the Rights Agreement to extend the expiration date of the Rights Agreement to the earliest of (i) June 4, 2025 (i.e., the date that is three years after the expiration date of the existing Rights Agreement), (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement, (iii) the time at which the Rights are exchanged pursuant to the Rights Agreement, (iv) the repeal of Sections 382 and 383 of the Internal Revenue Code or any successor statute if the Board determines that the Rights Agreement
is no longer necessary for the preservation of the applicable tax benefits, (v) the beginning of a taxable year of the Company to which the Board determines that no applicable tax benefits may be carried forward or (vi) the close of business on the final date of the Company’s 2022 annual meeting of shareholders if approval of the Second Amendment by the Company’s shareholders has not been obtained.
Shareholder approval of the Second Amendment is required by the final date of the Company’s 2022 annual meeting of shareholders or the Rights Agreement will automatically expire on that date. The proposal with respect to the Second Amendment will be approved if the votes cast in favor of the proposal exceed the votes cast opposing the proposal.
The following description of the
is qualified in its entirety by reference to the text of the Second Amendment, which is attached to this proxy statement as Annex A. You are urged to carefully read the Second Amendment in its entirety as the description below is only a summary.
Description of Rights Agreement, as amended by the Second Amendment
The Rights Agreement is intended to act as a deterrent to any person or group acquiring 4.9% or more of the Company’s outstanding Class A common stock (an “Acquiring Person”) without the approval of the Board. Any Right held by an Acquiring Person are void and may not be exercised. No Person shall be an Acquiring Person unless the Board shall have affirmatively determined, in its sole and absolute discretion, within ten (10) business days (or such later time as the Board may determine) after such person has otherwise met the requirements of becoming an Acquiring Person, that such person shall be an Acquiring Person.
The Board authorized the issuance of one Right per each outstanding share of the Company’s Class A common stock and Class B common stock payable to shareholders of record as of the close of business on June 5, 2009. As of February 2017, all issued shares of Class B common stock have been converted into Class A common stock and as a result there are no shares of Class B common stock issued and outstanding. Subject to the terms, provisions and conditions of the Rights Agreement, if the Rights become exercisable, each Right would initially represent the right to purchase from the Company one ten-thousandth of a share of Series A Junior Preferred Stock for a purchase price of $21.30, subject to adjustment in accordance with the terms of the Rights Agreement (the “Purchase Price”). If issued, each fractional share of preferred stock would give the shareholder approximately the same dividend, voting and liquidation rights as does one share of the Company’s Class A common stock. However, prior to exercise, a Right does not give its holder any rights as a shareholder of the Company, including without limitation any dividend, voting or liquidation rights.
The Rights are generally not exercisable until the earlier of (i) 10 business days after a public announcement by the Company that a person or group has become an Acquiring Person and (ii) 10 business days after the commencement of a tender or exchange offer by a person or group for 4.9% or more of the Class A common stock. The date that the Rights may first become exercisable is referred to as the “Distribution Date.” Any transfer of shares of Class A common stock prior to the Distribution Date will constitute a transfer of the associated Rights. After the Distribution Date, the Rights may be transferred other than in connection with the transfer of the underlying shares of Class A common stock.
After the Distribution Date and following a determination by the Board that a person is an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter have the right to receive upon exercise of a Right and payment of the Purchase Price, that number of shares of Class A common stock having a market value of two times the Purchase Price.
After the Distribution Date and following a determination by the Board that a person is an Acquiring Person, the Board may exchange the Rights (other than Rights owned by such person or group which will have become void), in whole or in part, at an exchange ratio of one share of Class A common stock or a fractional share of Series A Preferred Stock (or of a share of a similar class or series of the Company’s preferred stock having similar Rights, preferences and privileges) of equivalent value, per Right (subject to adjustment).
The Rights and the Rights Agreement will expire on the earliest of (i) June 4, 2025, (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement, (iii) the time at which the Rights are exchanged pursuant to the Rights Agreement, (iv) the repeal of Sections 382 and 383 of the Internal Revenue Code or any successor statute if the Board determines that the Rights Agreement is no longer necessary for the preservation of the applicable tax benefits, (v) the beginning of a taxable year of the Company to which the Board determines that no applicable tax benefits may be carried forward and (vi) the close of business on the final date of the Company’s 2022 annual meeting of shareholders if approval of the Rights Agreement by the Company’s shareholders has not been obtained.
At any time prior to the time an Acquiring Person becomes such, the Board may redeem the Rights in whole, but not in part, at a price of $0.01 per Right (the “Redemption Price”). The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.
The Board may adjust the Purchase Price of the preferred shares, the number of preferred shares issuable and the number of outstanding Rights to prevent dilution that may occur as a result of certain events, including among others, a stock dividend, a forward or reverse stock split or a reclassification of the Class A Junior Preferred Stock or Class A common stock. No adjustments to the Purchase Price of less than 1% will be made.
Before the Distribution Date, the Board may amend or supplement the Rights Agreement without the consent of the holders of the Rights. Notwithstanding the foregoing, we are seeking shareholder ratification of the Second Amendment at the annual meeting. After the Distribution Date, the Board may amend or supplement the Rights Agreement
only to cure an ambiguity, to alter time period provisions, to correct inconsistent provisions, or to make any additional changes to the
, but only to the extent that those changes do not impair or adversely affect, in any material respect, any Rights holder and do not result in the Rights again becoming redeemable, and no such amendment may cause the Rights again to become redeemable or cause this
again to become amendable other than in accordance with the applicable timing of the
Possible Anti-Takeover Effects
Our Board unanimously recommends that the Second Amendment be approved for the reasons set forth in this proxy statement. You should be aware, however, that the Rights Agreement may have anti-takeover effects in that, subject to the limitations set forth above, it restricts the ability of a person or entity or group to accumulate our common stock such that they become an owner of 4.9% or more of the Company’s outstanding Class A common stock. Although the Rights Agreement is designed as a protective measure to preserve and protect our NOLs, NCLs and certain other tax attributes, the Rights Agreement may have the effect of impeding or discouraging an acquisition of common stock tender offer or other transaction if our Board does not grant an exemption. In addition, the Rights Agreement may impede the assumption of control by a holder of a large block of common stock in excess of the 4.9% threshold if an exemption is not granted.
The Rights Agreement should not interfere with any merger, acquisition or other business combination approved by the Board since the Board may exempt such merger, acquisition or business combination from the Rights Agreement. In addition, the Rights may be redeemed by the Company at any time as described above.
Neither the Rights Agreement nor the Second Amendment was adopted in response to any effort that we are aware of to accumulate our common stock or to obtain control of our Company. Our Board considers the Rights Agreement to be appropriate, reasonable and in the best interests of our Company and our shareholders because the Rights Agreement reduces the risk that we will be unable to utilize our available NOLs, NCLs and certain other tax attributes. In the opinion of our Board, the fundamental importance to us and our shareholders of maintaining the availability of the NOLs, NCLs and certain other tax attributes makes approval of the Rights Agreement an important value creation and value protection measure deserving of shareholder support.
THE BOARD UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS VOTE “FOR” THE APPROVAL
OF THE SECOND AMENDMENT TO THE COMPANY’S RIGHTS AGREEMENT.
TO CONSIDER A SHAREHOLDER PROPOSAL FOR THE BOARD TO EFFECTUATE THE LIQUIDATION OF THE COMPANY
The following shareholder proposal will be voted on at the Annual Meeting only if properly presented by or on behalf of the shareholder proponent. The shareholder proponent, VA Property 1 LLC, 240 W. Main Street, Suite 100, Charlottesville, VA 22902, a beneficial owner of 1,350,000 shares of the Company’s common stock, submitted the Liquidation Proposal.
The Board recommends a vote
the Liquidation Proposal and asks shareholders to read through the Company’s response which follows the Liquidation Proposal below.
RESOLVED – Shareholders recommend that the Board of Directors (the “Board”) of Arlington Asset Investment Corp. (“Arlington Asset” or the “Company”) take all lawful, extraordinary actions necessary to effectuate the liquidation of the Company.
Shareholder Supporting Statement
After many years of underperformance, we believe Arlington Asset should be liquidated for the benefit of its shareholders.
In the five years preceding this writing (dated December 1st, 2021), the Company’s book value has declined by over 50%, while the common stock has fallen even more precipitously.
Despite these abysmal results, management has nonetheless been richly compensated at the expense of shareholders. Since January of 2020, CEO Rock Tonkel has “earned” over $3.5 million in personal compensation. This is an impressive figure by virtually any measure, but particularly compared to the $0.00 in common dividends that the Board has declared over the same period.
Fundamentally, we believe that management has proven incapable in its stewardship of the investment portfolio, and that the Board has failed to take the extraordinary actions warranted by the Company’s chronic underperformance. To these ends, we believe that shareholders would be best served by an orderly liquidation of the Company.
As of December 1st, 2021, Arlington Asset’s most recently reported book value per share exceeded its YTD average share price by over 50%, and its current share price by over 60%. Stated simply, the Company would appear to offer far more value through a liquidation than it has generated as a going concern.
In our view, the time has come for the Board to fulfill its fiduciary duty to shareholders, and to end Arlington Asset’s persistent underperformance. In the interest of reclaiming the fair value of the Company’s assets, we would urge our fellow shareholders to vote in favor of this proposal.
BOARD OF DIRECTORS
STATEMENT IN OPPOSITION TO THE
The Board unanimously recommends a vote
the Liquidation Proposal.
For the reasons set forth below, the Board believes that the approval of the Liquidation Proposal
be in the best interests of the Company and its shareholders.
The Board, which is comprised of a group of persons with a diverse balance of knowledge, experience, background and capability who are acutely familiar with the Company's business, industry, risks and opportunities, believes that it is well-positioned to oversee our strategy, portfolio and value creation initiatives as well as decisions about fundamental business matters affecting the Company and our shareholders such as a liquidation. As in the past, the Board – and management team – will continue to consider investor input and act in a manner that it considers to be in the best interests of our shareholders. Along these lines:
The Board believes that our investment strategy, regularly reviewed and optimized as appropriate, advances the best interests of shareholders, evidenced by the transitions we have implemented to our portfolio and corporate strategies that have delivered a strong total return on capital in recent quarters.
The Board regularly reviews
our business strategy with our management team with a goal of
optimizing opportunities for enhancing overall shareholder value.
In 2020, our Board and management team conducted a comprehensive review of potential new investment strategies that could generate attractive risk adjusted returns for our shareholders while complementing our historical focus of investing in levered agency mortgage-backed securities (“MBS”). Upon completing its review, our Board concluded that we should seek to reduce our risk by both lowering leverage and increasing liquidity while working towards building out a unique investment platform that would enable us to construct a portfolio of differentiated high return assets with compelling growth opportunities in large scale markets. During 2020, we started to execute this strategic action plan to transition our business into new investment classes in mortgage servicing right (“MSRs”) related assets, single-family residential (“SFR”) rental properties and opportunistic credit assets that complement our historical levered agency MBS investment strategy. The successful build out of these new investment silos began to produce strong returns in the latter half of 2021, as recently demonstrated by the Company producing the second largest economic return, measured as the change in book value per share plus dividends (“Economic Return”), for the fourth quarter of 2021 out of the 24 companies included in the FTSE Nareit Mortgage Home Financing Index. We believe the successful execution of our carefully designed strategic plan has laid the foundation for the Company to produce strong shareholder returns over time, and the Board strongly believes that it is in the best interests of shareholders for the Company to continue with its current business plan. In further support of our view that there is substantial intrinsic value in the Company, we continue to make accretive repurchases of shares of our common stock, totaling approximately 21% of the shares outstanding since the commencement of the repurchase program in 2020.
Conversely, the Board believes that the Liquidation Proposal is not in the best interests of shareholders, including because the Board believes that a liquidation of our assets would (i) deprive shareholders of potential upside from our value creation initiatives, (ii) not assure that shareholders would receive fair value for their shares of common stock and (iii) permanently surrender the substantial value of our tax benefits.
The Board strongly believes that a liquidation of our assets is not a prudent or value-maximizing strategy for the Company. We do not believe a liquidation would result in proceeds that reflect the full value of our assets in light of the prospects we see for our business, as evidenced by our performance in recent quarters. Thus, as discussed in greater detail below, the Board does not believe that a liquidation of our assets would result in shareholders receiving fair value for their shares of common stock, and that implementing the proposed liquidation is not in the best interests of our shareholders.
Highlights of the Successful Transition of Our Investment Portfolio
We transitioned our investment strategy over the last two years to focus primarily on the following priorities:
Our Board believes that the priorities listed above have served, and continue to serve, the best interests of our shareholders. Overall, the Board is very encouraged by the progress we have made in transitioning our investment portfolio and is optimistic about our prospects going forward. Specifically, we have taken positive steps towards our objective of complementing our core agency MBS portfolio with investment channels in MSR related assets, SFR rental properties and opportunistic credit investments, while operating with balance sheet flexibility through relative low leverage and strong liquidity. Below are highlights of the successful transition of our investment portfolio:
Other Concerning Issues with the Liquidation Proposal
The Liquidation Proposal mandates a complete liquidation of the Company and that the Board take all legal action to pursue and implement such liquidation. As discussed below, the Board believes there are a variety of additional serious issues in pursuing this alternative:
The Board is optimistic that our management team will continue to successfully execute on our new investment strategy and build on our recent successes. The Board and management team will continue to regularly review the strategy and value creation opportunities and pursue risk oversight measures. We have taken great effort to transition the Company into a differentiated investment firm dedicated to developing high return programmatic investment channels. As we continue to fully scale our MSR and SFR portfolios, we expect to demonstrate additional earnings power and value creation going forward. We believe that our current diversified investment strategy can deliver attractive long-term returns to shareholders over time while we continue to maintain the financial flexibility to return capital to shareholders through accretive stock repurchases at today’s current stock prices or through dividends to shareholders if the discount of our stock price to our book value per share meaningfully narrows.
Conversely, liquidating the Company would force shareholders to surrender their current investment in exchange for a one-time, cash pay-out in an unplanned taxable event at an uncertain future date that our Board believes will net shareholders far less than the value of the assets currently working for them. The Board believes that the continuation of the Company’s investment strategies, regularly reviewed and adjusted as circumstances warrant, will deliver substantial more value to shareholders over time.
For numerous reasons, including those noted herein, the Board believes that the implications arising from embracing a proposal of complete liquidation would have a severe detrimental impact to our shareholders. The Board should also retain its full discretion to determine the future course of the Company for the benefit of shareholders and our stakeholders. The Board recommends that you vote
the Liquidation Proposal.
THE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
“AGAINST” THE APPROVAL OF THE SHAREHOLDER PROPOSAL TO LIQUIDATE THE COMPANY.
The Board believes that its current composition and leadership structure offers the right balance of experience, qualifications and diversity of perspectives to provide expert and independent oversight of the Company’s business, strategy and management. The Board’s governance and leadership highlights include the following:
Board Skills, Qualifications and Experience
Our Board members have significant ownership in the Company and they offer the right balance of skills, qualifications, experience, leadership and diversity of perspectives to provide expert and independent oversight over our business and strategy as demonstrated in the chart below:
Board Leadership Structure
Our Board currently separates the roles of Chairman and Chief Executive Officer, with the Chairmanship being held by Mr. Berce, an independent director. Mr. Tonkel serves as our Chief Executive Officer, a position held since June 2014.
We recognize that strong independent leadership within our Board is important and believe that having an independent Chairman (or in the absence of an independent Chairman, the addition of a Lead Independent Director) is currently the best corporate governance structure for our Company. In accordance with our Corporate Governance Guidelines, if our Chairman is not an independent director, the independent directors shall elect a Lead Independent Director who is elected annually to act in a lead capacity to coordinate the actions of the other independent directors, as described below. Our current Chairman, Mr. Berce, is an independent director who coordinates and moderates executive sessions of the Board’s independent directors and acts as principal liaison between the independent directors and the Chief Executive Officer on (i) topics or issues as requested by the independent directors, any committee of the Board or the full Board or (ii) any topic selected by the Chairman. In addition to the duties of all Board members, the Chairman is responsible for exercising oversight of the Board and to ensure that the following functions are addressed as needed or as appropriate, as determined in the good faith and discretion of the Chairman:
Independence of our Board
The listing standards of the New York Stock Exchange (the “NYSE”) and our Corporate Governance Guidelines require that a majority of our directors must be independent directors. Our Corporate Governance Guidelines specify that an “independent” director is a director who meets the independence requirements of the NYSE, as then in effect, and of such additional guidelines as our Board may adopt. These categorical standards provide a baseline for determining the independence of members of the Board. The independence standards used by our Board are attached to our Corporate Governance Guidelines, which are available on our website at
In making affirmative independence determinations, the Board broadly considers all relevant facts and circumstances, including, among other factors, any commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships to which a director is party. Using these criteria, the Board has affirmatively determined that the following directors have no material relationship with our Company and are independent under the listing standards of the NYSE and our Corporate Governance Guidelines: Daniel E. Berce, David W. Faeder, Melinda H. McClure, Ralph S. Michael, III and Anthony P. Nader, III.
Chief Executive Officer Succession Policy
In order to minimize the potential disruption to our Company upon the resignation, termination, death, disability or other form of absence of our Chief Executive Officer, our Board adopted a Chief Executive Officer Succession Plan Policy (the “CEO Succession Policy”). The CEO Succession Policy is general in nature and intended to provide the Board and Nominating and Governance Committee with contingency procedures upon such a succession of the Chief Executive Officer.
Board refreshment is important to our Company. The Nominating and Governance Committee of the Board rigorously evaluates all current directors and director candidates in accordance with the director qualifications described in our Corporate Governance Guidelines. Consideration of diversity is one of many attributes relevant to any nomination to the Board and is implemented through our Nominating and Governance Committee’s evaluation process. Director candidates
are nominated based on a consideration of
business experience and skills, independence, diversity, judgment, integrity, and the ability to commit sufficient time and attention to the activities of the Board. Further, the Nominating and Governance Committee annually assesses the composition and needs of the Board as a whole, including with respect to diversity, and such matters are also the subject of full Board discussions.
We believe that diversity is a valuable component of an effective and dynamic board, and we will continue to make diversity an integral part of our Board evaluation and nomination process. As we think about the development of our Board and succession planning over the coming years, we plan to continue to improve upon the diversity of our Board members while maintaining a balance of knowledge, experience and capability on our Board, as exhibited by our most recent appointment of Ms. McClure.
We feel that the aforementioned Board characteristics are in the best interest of our Company and shareholders.
Board Meetings and Executive Sessions of our Non-Management Directors
The Board held a total of seven meetings during 2021. Each of the incumbent directors attended at least 75% of the aggregate total number of meetings of the Board and the Board committees on which they served in 2021. In accordance with our Corporate Governance Guidelines, our non-management directors are required to meet quarterly without the presence of our management directors.
Board Committees for 2021
The Board currently has three standing committees: the Audit Committee, the Compensation Committee and the Nominating and Governance Committee. From time to time the Board may establish other standing or special committees to discharge specific duties delegated to such committees by the Board. The committee membership for 2021 and the number of meetings of each committee during 2021 are described below. Mr. Tonkel does not serve on any of the Board’s standing committees.
The current members of the Audit Committee are Mr. Michael, who serves as Chairman, and Mr. Berce, Ms. McClure and Mr. Nader. Among other responsibilities, the Audit Committee assists the Board in monitoring our financial reporting process and is solely responsible for hiring and monitoring the independence and performance of our independent auditors. The Board has determined that each member of the Audit Committee is independent according to the independence standards set forth in the NYSE listing standards and our Corporate Governance Guidelines. In addition, each member of the Audit Committee meets the heightened independence requirements for audit committees specified by Rule 10A-3 under the Exchange Act. The Board has determined that each member of the Audit Committee is financially literate under the standards established by the NYSE. The Board has also determined that each of Messrs. Michael, Berce, Nader and Ms. McClure are qualified as an “audit committee financial expert” within the meaning of applicable SEC rules and possess related financial management expertise within the meaning of the listing standards of the NYSE. The Board has adopted a written charter for the Audit Committee, a current copy of which is available to shareholders on our website at
For additional information on our Audit Committee’s oversight of our financial reporting process, please refer to “Audit Committee Report” in this proxy statement. For additional information on the Audit Committee’s role in risk management see “Risk Oversight” below.
The current members of the Compensation Committee are Mr. Faeder, who serves as Chairman, and Messrs. Berce and Michael. The Board has determined that each member of the Compensation Committee is independent according to the independence standards set forth in the NYSE listing standards and our Corporate Governance Guidelines. The Compensation Committee reviews our compensation plans and makes recommendations concerning those plans and concerning executive officer compensation. The Board has adopted a written charter for the Compensation Committee, a current copy of which is available to shareholders on our website at
. For additional information on the Compensation Committee’s processes and procedures for the consideration and determination of executive and director compensation, please refer to “Compensation Discussion and Analysis” and “Compensation Committee Report” in this proxy statement.
Nominating and Governance Committee
The current members of the Nominating and Governance Committee are Mr. Nader, who serves as Chairman, and Mr. Faeder and Ms. McClure. The Board has determined that each member of the Nominating and Governance Committee is independent according to the independence standards set forth in the NYSE listing standards and our Corporate Governance Guidelines. The Nominating and Governance Committee assists the Board in identifying qualified and diverse individuals to become Board members, plays a leadership role in shaping the governance of our Company, engages in management succession planning and development, and oversees the evaluation of the Board. The Board recently enhanced its oversight regarding environmental, social and governance (“ESG”) matters by charging the Nominating and Governance Committee with monitoring and overseeing the Company’s initiatives regarding ESG matters. The Board has adopted a written charter for the Nominating and Governance Committee, a current copy of which is available to shareholders on our website at
Code of Ethics
We have not adopted a code of ethics that applies only to our principal executive officer, principal financial officer and principal accounting officer because the Board has adopted a Statement of Business Principles that is broadly written and covers these officers and their activities as well as all officers, directors and employees of the Company. Our Statement of Business Principles is available on our website at
Availability of Corporate Governance Materials
Shareholders may view our corporate governance materials, including our Bylaws, Corporate Governance Guidelines, Statement of Business Principles and the charters of each of the committees of our Board, on our website at
. Our corporate governance materials may be obtained free of charge by submitting a written request to the Corporate Secretary c/o Arlington Asset Investment Corp., 6862 Elm Street, Suite 320, McLean, Virginia 22101.
Our Nominating and Governance Committee’s responsibilities, as noted above and as described in its charter, include seeking, screening and recommending director candidates for nomination to serve on the Board on behalf of the Board. Our Corporate Governance Guidelines also contain information concerning the responsibilities of the Nominating and Governance Committee with respect to identifying and evaluating director candidates. The Nominating and Governance Committee may identify potential Board candidates from a variety of sources, including recommendations from our management and our shareholders.
Process for Identifying and Evaluating Director Candidates
The full Board reviews the composition of the Board on a regular basis in order to ensure that the Board is comprised of members that have the experience, qualifications and diversity of perspectives necessary to ensure expert and independent oversight of the Company’s strategy and management. The Board believes that the long-term interests of our shareholders are best served by a Board that strikes a balance between continuity of institutional knowledge and fresh, diverse perspectives. To that end, the Board’s most recent recruitment and selection process resulted in the successful appointment of Ms. McClure, which we believe added a Board member with a broad and diverse background that compliments the current strengths and experience of our other Board members.
The Nominating and Governance Committee thoroughly evaluates all director candidates in accordance with the director qualifications described in our Corporate Governance Guidelines, a copy of which is available on our website at
, to ensure a continued match of their skill sets against the needs of the Company. The Nominating and Governance Committee evaluates properly submitted shareholder nominations no differently than other nominations. In accordance with our Corporate Governance Guidelines, the Nominating and Governance Committee considers, among other things, business experience and skills, independence, diversity, judgment, integrity, the ability to commit sufficient time and attention to the activities of the Board, the absence of any potential conflicts with our interests, and such other factors as it deems appropriate given the current needs of the Board and our Company to maintain a balance of knowledge, experience and capability. The Nominating and Governance Committee recommends candidates based on its consideration of each individual’s specific skills and experience and its annual assessment of the composition and needs of the Board as a whole, including with respect to diversity. Consideration of diversity, as one of many attributes relevant to a nomination to the Board, is implemented through the Nominating and Governance Committee’s evaluation process. In particular, the Nominating and Governance Committee obtains and reviews questionnaires, interviews candidates as appropriate and engages in thorough discussions at committee meetings in an effort to identify the best candidates and to populate an effective Board. The effectiveness of the Board’s diverse mix of viewpoints, backgrounds, experience, expertise, skills and other demographics are considered as part of the Nominating and Governance Committee’s annual assessment.
Although we do not have a formal policy regarding diversity on our Board of Directors, as we continue to refresh our Board over time, the Board and Nominating and Governance Committee considers diversity of race, ethnicity, gender, age,
and background important factors in relation to its evaluation of director candidates and potential nominees.
Communications with the Board and Chairman of the Board
Shareholders and other persons wishing to communicate with the Board should send any communication in writing to our Corporate Secretary c/o Arlington Asset Investment Corp., 6862 Elm Street, Suite 320, McLean, Virginia 22101. Any such communication from shareholders must state the number of shares of common stock beneficially owned by the shareholder making the communication. The Corporate Secretary will forward such communication to the full Board, a committee of the Board, the Chairman or to any other individual director or directors, as appropriate. If a communication is unduly hostile, threatening, illegal or otherwise inappropriate, the Corporate Secretary is authorized by the Board to discard the communication or take appropriate legal action regarding the communication.
Environmental, Social and Governance Initiatives
We are committed to continuing to build healthy ESG principals into our corporate culture and are actively focused on the management and improvement of the Company’s efforts regarding ESG matters that are relevant to our business, shareholders and stakeholders. Our Nominating and Governance Committee has primary oversight over our efforts regarding ESG matters.
As we continue to seek alternative investment opportunities, the Company has been able to invest in various opportunities that are environmentally and socially responsible. Through our investments in the U.S. housing system, we have been able to support affordable housing in communities across the U.S. and have recently had the opportunity to invest in opportunities that support the renewable energy sector.
We are proud to help support home ownership in the U.S. through our investments in residential mortgages. As investors in residential MBS, we provide mortgage lenders with the capital needed to make additional mortgage loans, thereby allowing homeowners to obtain financing for the homes. In addition, investors in residential MBS increase the liquidity of the residential mortgage market that contributes to lowering the borrowing cost of residential mortgages thereby increasing the home ownership affordability for families in the U.S.
We recently launched a SFR rental property investment strategy to acquire, lease and operate SFR homes as rental properties. To execute our SFR investment strategy, we have partnered with a leading global asset manager that has nearly $140 billion of assets under management including approximately $1.5 billion in more than 4,400 SFR properties. This partnership enables us to leverage our partner’s scale, intellectual capital and access their long-standing best practices in ESG. Our partner is a signatory of the United Nations Principles for Responsible Investment, which aligns with our commitment to responsible investment practices. We seek to integrate important ESG factors into our SFR investment decision making and portfolio management in an attempt to deliver sustainable returns that align with the interests and values of our shareholders. We believe that a focus on certain ESG factors better positions our SFR portfolio to deliver long-term sustainable outcomes and, with the support of our partner, we will be able to better integrate responsible investment and ESG factors into our investment decision making process. We believe current trends support our SFR investment strategy with a rising housing demand fueled by strong population growth as well as a post-pandemic demand for single-family homes. In addition, declining housing affordability has increased the home rental demand. At the same time, there is a limited supply of new housing evidenced by the current growth in the U.S. population outpacing the number of annual housing starts. By offering quality homes in attractive neighborhoods, we believe we give families the opportunity to reside in a home located in a community that may not have otherwise been attainable. We consider our investments in SFR properties to fill an important need for a large portion of the U.S. population and complements our other investments that support home ownership in the U.S.
During 2021, we also invested in residential solar panel loans that are sustainable home improvement loans primarily used to finance the acquisition and installation of solar panels and related energy storage systems and equipment in residential homes. Solar panel loans further align our responsible investing practices while being able to support the environmental benefits of renewable energy.
We hope to continue to build upon our responsible investment practices to further improve our ESG goals.
We are committed to minimizing the overall environmental impact of our operations and strive to use our resources efficiently. Our corporate headquarters is located in an office space of less than 3,000 square feet. As an investment firm with a total of 9 employees and minimal office space, our business operations have a relatively modest environmental footprint. Additionally, our corporate headquarters are located in McLean, VA with access to public transportation and we allow all of our employees to participate in a hybrid work environment which allows them to periodically work remotely which further reduces our environmental footprint by generally lowering vehicle emissions. We are also committed to various “green” initiatives demonstrated by the following:
Also, in order to reduce the impact on the environment of our annual proxy solicitation, we have opted to make this proxy statement and our Annual Report available electronically via the Internet, as permitted by SEC rules, rather than in printed form. This “e-proxy” process limits the printing and mailing of this proxy statement which reduces the overall environmental impact as we are no longer printing and delivering high volumes of materials. We are continually committed to various environmental issues and are actively focused on the management of such issues.
Human Capital Management
We recognize that the success of our company is contingent on our employees and we strive to have highly engaged employees that are committed to each other and our shareholders. We first and foremost prioritize the health and safety of our employees. At the onset of the COVID-19 pandemic (“COVID-19”), we promptly and securely transitioned the Company’s employees to a fully virtual work environment. As circumstances continued to develop and change over the last year, we have been able to offer a hybrid work environment for all of our employees. We also provide our highly skilled employees an engaging, rewarding, supportive and inclusive environment to grow professionally and contribute to the growth and success of the Company. We are committed to providing the best possible climate for maximum development and goal achievement for all of our employees. Our practice is to treat each employee as an individual while developing a spirit of teamwork. In order to maintain an atmosphere where these goals can be accomplished, we provide a comfortable and progressive workplace. Most importantly, we have a workplace where communication is open and problems can be discussed and resolved in a mutually respectful atmosphere. We take into account individual circumstances and the individual employee. We firmly believe that with direct communication, we can continue to resolve any difficulties that may arise and develop a mutually beneficial relationship with our employees. We offer a market competitive compensation program designed to align the interest of our employees with those of our shareholders. In addition to a competitive compensation program, we offer a 401(k) match, employer-paid health contribution benefits and a flexible leave program to allow for a productive work-life balance. We believe our success in managing our team of employees is evident in the fact that our current employees have an average tenure of over 15 years.
We believe that regular, transparent communication with our shareholders is essential, and the input of our shareholders helps us better evaluate our business, corporate governance and executive compensation practices. Our executives regularly strive to engage with current shareholders, prospective shareholders and investment analysts at investor conferences and one-on-one meetings as well as our quarterly earnings conference calls. Through these engagements, we seek to ensure that our corporate governance practices accommodate the priorities of our shareholders. Through our outreach program, members of our executives seek to meet regularly with a significant number of our shareholders to discuss our investment portfolio strategy, financial and operating performance, capital allocation, corporate governance and executive compensation practices and to solicit feedback on these and a variety of other topics. In concert with these ongoing
communications, we regularly provide updates on our business strategy,
and other key developments through a wide range of media including our company website,
press releases, SEC filings
our Annual Report and Proxy Statement filings.
We also utilize our proxy season to further engage with our shareholders and have engaged a proxy solicitation and corporate advisory firm to help facilitate our outreach program to help successfully and efficiently cultivate the strongest possible relationship with our shareholders and to obtain feedback and address any questions regarding our investment strategy and executive compensation program. Further information regarding our shareholder engagement, specifically as it related to our 2021 “Say-on-Pay” vote, is discussed in greater detail under “Compensation Discussion and Analysis —Shareholder Outreach on our Advisory Vote on Executive Compensation”.
Our Audit Committee is primarily responsible for overseeing our risk management processes on behalf of the Board. The Audit Committee receives reports from management and its internal auditor, at least quarterly, regarding the Company’s performance, market conditions and assessments of risks that may impact the Company, as well as reports regarding the strategies used to hedge the exposure to market risk, including interest rate, prepayment, extension, spread, credit, liquidity and regulatory risk. The Audit Committee also receives and discusses regular and required communications from the Company’s independent registered public accounting firm regarding, among other things, the Company’s internal controls. In addition to discussion of these reports, the Audit Committee holds separate quarterly executive sessions with one or more of the chief financial officer, the chief accounting officer, the Company’s internal auditor, and representatives of the Company’s independent public accounting firm to discuss any matters that the Audit Committee or these persons believe should be discussed in the absence of other members of management. While the Board (through the Audit Committee) oversees our operational policies and risk management, our management team is responsible for the day-to-day risk management processes and provides periodic reviews to the Board. We believe this division of responsibilities is the most effective approach for addressing the risks facing our Company.
The Board also evaluates the threat of cybersecurity to the Company’s operations and information technology systems. In light of the increasing cyber threats to all companies, the Company regularly engages a third-party cybersecurity consultant to test and evaluate the security posture of the Company’s information technology and physical security systems. The Company conducts this analysis to provide the Board with a full review of potential threat detection and remediation recommendations to enhance the Company’s systems.
Director Attendance at the Annual Meeting
In accordance with our Corporate Governance Guidelines, directors are expected to attend our Annual Meeting of shareholders, unless excused by the Chairman (or in the absence of an independent Chairman, the Lead Independent Director) with good cause. All of our current directors attended the 2021 annual meeting of shareholders.
Contributions to Charitable Entities
During the past three fiscal years, we have not made any charitable contributions to any charitable organization for which any of our directors served as an executive officer.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of the following non-employee directors, all of whom are independent according to the standards set forth in the NYSE listing standards and our Corporate Governance Guidelines: Messrs. Faeder (Chairman), Berce and Michael. None of the current members of the Compensation Committee has ever served as an officer or employee of our Company or had any relationship with our Company requiring disclosure as a related party transaction under the applicable SEC rules. Further, during 2021, none of our executive officers serve as:
Director Stock Ownership Guidelines
Under our ownership guidelines, each member of the Board who is not also an executive officer is required to retain 100% of any equity awards made to such director from and after February 9, 2011 until the date on which the director is no longer a director of our Company.
Compensation for our non-employee directors is established by our Compensation Committee to provide an appropriate level of compensation relative to the work required for service on our Board, as well as to director compensation practices in the competitive market. Our Compensation Committee periodically, and at least annually, reviews non-employee director compensation to assure that individual cash components and equity awards are appropriately positioned. Below are certain highlights of the Company’s non-employee compensation program, which are consistent with recognized best practice:
Our non-employee director compensation for 2021 included:
We also reimburse our non-employee directors for their reasonable out-of-pocket expenses incurred in attending meetings of our Board and its committees and corporate events that directors may be asked to attend.
Director Compensation for 2021
The following table contains compensation information for each of our non-employee directors who served on the Board during the year ended December 31, 2021. Mr. Tonkel, Jr., our President and Chief Executive Officer, did not receive any compensation for his service as a member of the Board in 2021.
The following chart compares our director median pay compared to the director median pay of our Compensation Peer Group (as defined
below under “Compensation Peer Group Analysis”)
, the most recently available data for the Compensation Peer Group (Data Source: Third-party independent data provider that collects data directly from public company
Annual Grant of DSUs to Non-Employee Directors
On June 15, 2021, the date of our 2021 annual meeting of shareholders, each of our non-employee directors received an annual grant of 19,607 DSUs having an aggregate grant date fair value of $80,000, based on the closing sale price of our common stock on the NYSE on June 15, 2021. The DSUs were granted pursuant to the Company’s 2021 Long-Term Incentive Plan. Prior to the issuance of DSUs, our non-employee directors received annual grants of RSUs pursuant to the Company’s 2014 Long-Term Incentive Plan and the Prior Plans (as defined below). The award terms of the DSUs and RSUs issued to our non-employee directors (when referenced collectively below, “DSUs”) are materially the same.
A non-employee director’s interest in DSUs awarded pursuant to our 2021 Long-Term Incentive Plan vest immediately on the award grant date. These vested DSUs are converted into shares of our common stock on a one-for-one basis, with any fractional shares being settled in cash, upon the later of the date the director separates from our service or the first anniversary of the grant date (the “Settlement Date”). If a change in control occurs before the Settlement Date, the settlement will occur on the control change date.
Prior to the effectiveness of our 2021 Long-Term Incentive Plan and our 2014 Long-Term Incentive Plan, previously awarded RSUs to our non-employee directors were granted pursuant to the Company’s 2011 Long-Term Incentive Plan, the Company’s 2004 Long-Term Incentive Plan, the FBR Stock and Annual Incentive Plan or the Company’s Non-Employee Director Stock Compensation Plan (collectively, the “Past Plans”). A non-employee director’s interest in RSUs awarded pursuant to one of the Past Plans vested if he served on our Board from the date of grant until the first anniversary of the award. Vested RSUs awarded under the Past Plans ordinarily are converted to shares of common stock on a one-for-one basis, with any fractional share being settled in cash, one year after the participant ceases to be a member of our Board.
DSUs do not have any voting rights but are entitled to cash dividend equivalent payments.
The following table sets forth certain information regarding DSUs granted in 2021 to our non-employee directors as discussed above:
Our executive officers for the year ended December 31, 2021 were J. Rock Tonkel, Jr., President and Chief Executive Officer, and Richard E. Konzmann, Executive Vice President, Chief Financial Officer and Treasurer. Messrs. Tonkel and Konzmann have been appointed by our Board to serve as our executive officers for the fiscal year ending December 31, 2022.
J. ROCK TONKEL, JR.
, age 59, is our President and Chief Executive Officer, a position he has held since June 2014. He also has served as a director of the Company since March 2007. From February 2007 until June 2014, he served as our President and Chief Operating Officer. From April 2004 to February 2007, Mr. Tonkel served as President and Head of Investment Banking at FBR. Prior to this service, Mr. Tonkel served as Executive Vice President and Head of Investment Banking at FBR, a position he assumed in February 2002. Mr. Tonkel joined FBR in 1994 as a Managing Director and Head of Investment Banking’s financial institutions group. Prior to joining FBR, Mr. Tonkel served as Special Assistant to the Director of the Office of Thrift Supervision, the regulatory agency for the savings and loan industry under the U.S. Department of Treasury.
RICHARD E. KONZMANN
, age 53, is our Executive Vice President, Chief Financial Officer and Treasurer, a position he has held since March 2015. Prior to joining the Company, Mr. Konzmann was employed by American Capital, Ltd. (NASDAQ: ACAS), a publicly traded private equity firm and global asset manager of publicly traded mortgage real estate investment trusts, business development companies and private equity funds. While at American Capital, Ltd., Mr. Konzmann served as Senior Vice President, Accounting from 2006 to March 2015, Vice President, Accounting from 2003 to 2005 and Corporate Controller from 2002 to 2003. From 1993 to 2002, Mr. Konzmann served in various controllership, finance and asset management roles with Crestline Capital Corporation (NYSE: CLJ) and Host Marriott Corporation (NYSE: HMT). From 1990 to 1993, Mr. Konzmann was employed with the public accounting firm Deloitte and Touche LLP. Mr. Konzmann is a Certified Public Accountant.
Security Ownership of Management and Certain Beneficial Owners
The following table sets forth, as of the record date, April 18, 2022, certain information concerning the beneficial ownership of our common stock by (i) each of our directors and director nominees, (ii) each of our executive officers, (iii) all of our executive officers and directors as a group and (iv) each person known to us to be the owner of more than 5% of our common stock.
For purposes of the table below, beneficial ownership has been determined in accordance with Rule 13d-3 of the Exchange Act. Unless indicated otherwise in the footnotes to the table below, each individual has sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by such person. The address of each individual listed in the table is c/o Arlington Asset Investment Corp., 6862 Elm Street, Suite 320, McLean, Virginia 22101.
The following table sets forth, as of December 31, 2021, information with respect to compensation plans under which equity securities are authorized for issuance:
Review, Approval or Ratification of Transactions With Related Persons
Our policy and practice is not to enter into any related party transaction with any of our executive officers or directors (or transactions not in the ordinary course of business or not performed on standard market terms with shareholders known to beneficially own over 5% of a class of our voting securities or their related persons), unless the transaction is approved by a majority of our disinterested directors. Pursuant to its charter, the Audit Committee is responsible for reviewing and approving all transactions between our Company and any related person that are required to be disclosed pursuant to Item 404 of SEC Regulation S-K. In addition, pursuant to its charter, the Nominating and Governance Committee periodically reviews our conflicts of interest policies as set forth in our Statement of Business Principles concerning directors and executive officers, and reviews with management our procedures for implementing and monitoring compliance with such policies.
This Compensation Discussion and Analysis describes the key features of our compensation strategy, policies, programs and practices for our executive officers that served during the year ended December 31, 2021. Our executive officers for the year ended December 31, 2021 were J. Rock Tonkel, Jr., President and Chief Executive Officer, and Richard E. Konzmann, Executive Vice President, Chief Financial Officer and Treasurer.
The primary purpose of the Compensation Committee is to assist the Board in discharging its responsibilities relating to compensation of the Company’s directors and officers. In furtherance of this role, the Compensation Committee seeks to attract and retain high-quality leadership and ensure that the Company’s executive compensation strategy supports the Company’s objectives and shareholder interests. In this Compensation Discussion and Analysis, we sometimes refer to the Compensation Committee as the “Committee.”
We are an investment firm that focuses primarily on investing in mortgage related assets and residential real estate. Our investment capital is currently allocated between the following asset classes:
We manage our investment portfolio with the goal of obtaining a high risk-adjusted return on capital. We evaluate the rates of return that can be achieved in each asset class and for each individual investment within an asset class in which we invest. We then evaluate opportunities against the returns available in each of our investment alternatives and attempt to allocate our assets and capital with an emphasis toward what we believe to be the highest risk-adjusted return available. We expect this strategy will cause us to have different allocations of capital and leverage in different market environments. In addition, we also may pursue other business activities that would utilize our experience in analyzing investment opportunities and applying similar portfolio management skills.
We are a Virginia corporation that was incorporated on November 10, 1997. We are internally managed and do not have an external investment advisor.
of Our Investment Portfolio
The uncertainty and economic impact of COVID-19
continued throughout 2021, and during the last two years, the Company took strategic actions to reduce risk by lowering leverage and increasing our liquidity position as we continued to build a unique investment portfolio of differentiated high return asset classes with compelling growth opportunities in large scale markets.
During the transition of our investment strategy over the last two years, we focused primarily on the following priorities:
The Company has continued to make substantial progress towards our long-term goal of establishing multiple investment channels which complement our historical agency MBS portfolio and diversify risk while improving the Company’s level and reliability of returns over time. During 2021, we successfully launched our new strategy of acquiring, leasing and operating SFR properties. We acquired SFR properties that offer attractive current cash returns plus the opportunity to experience additional returns over time through potential home price appreciation. In addition, the Company continued to expand upon our strategic relationship for investing in MSR related assets. We believe these strategies offer compelling high-return growth opportunities that should result in the intrinsic value of the Company’s platform exceeding its book value over time. In support of this view, the Company continued to make accretive repurchases of shares of its common stock during 2021. As we continue to execute on our differentiated investment strategies, we expect higher returns from these investments to provide increased earnings power over time which can form the potential pathway for returning additional capital to shareholders.
Our Performance Highlights
The following are some key financial and operational highlights for the year ended December 31, 2021:
Summary of Total Direct Compensation Program Elements
In 2021, the Compensation Committee continued and improved upon its approach to executive compensation with the overarching goals of linking pay-for-performance, aligning the interests of management with those of shareholders and retaining top management talent. Our executive compensation program continued to include many performance-based features that provide incentives for our executive officers to achieve both short- and long-term business objectives and was designed to include three direct compensation components: base salary, annual cash incentive and long-term equity incentive compensation opportunities for each executive. In this regard, the following graphic illustrates the performance-based structure of the total target compensation for each of our executive officers in 2021:
Summarized below is a description of our three direct compensation components and their principal contribution to our compensation objectives, as well as the key highlights with respect to each component for 2021.
In furtherance to the highlighted items above, we believe our executive compensation programs and policies reflect a number of governance best practices, including the following:
At our 2021 annual meeting of shareholders, we asked our shareholders to vote, on an advisory basis, on the compensation of our executive officers as disclosed in our 2021 proxy statement, commonly referred to as a “Say-on-Pay” advisory vote. We received “For” votes in support of our “Say-on-Pay” proposal from 69.4% of the votes cast. This was lower than the
level of support in prior years. As mentioned above, w
that regular, transparent communication with our shareholders is essential, and the input of our shareholders helps us better evaluate our business, corporate
our executive compensation practices.
n 2021, we expanded the scope of our shareholder outreach program
, with the support of a
proxy solicitation and corporate advisory firm
to better understand why we received a lower “Say-on-Pay” vote and
to obtain feedback and address any questions regarding our executive compensation program.
Since our 2021 Annual Meeting, we reached out to our shareholders, focusing on our 25 largest shareholders, which represented approximately
93% of our total institutional shareholders
33% of our total outstanding common stock, as of December 31, 2021
. Some shareholders we contacted either did not respond or confirmed that a discussion was not needed at that time.
Below is additional information on our “Say-on-Pay” outreach:
We Reached Out To Our Top Institutional Shareholders
Consideration of Shareholder Advisory Vote on the Frequency of Future Advisory Votes on Executive Compensation
At our 2017 annual meeting of shareholders, we asked our shareholders to vote, on an advisory basis, on the frequency of future advisory votes on executive compensation commonly referred to as a “say-when-on-pay” advisory vote. Our shareholders overwhelmingly approved holding an advisory vote on executive compensation annually, with approximately 89% of the votes cast voting in favor an annual advisory vote on executive compensation. The Board took into consideration the results of the say-when-on-pay advisory vote and determined that advisory votes on executive compensation will be submitted to shareholders every year until the next required advisory vote on the frequency of shareholder votes on executive compensation. However, through our ongoing engagement with shareholders, the Board will continue to consider any shareholder concerns and feedback in the future.
Compensation Philosophy and Objectives
Our overall compensation program seeks to align executive compensation with the achievement of the Company’s business, strategic, operational, governance and risk management objectives and with individual performance towards these objectives. It also seeks to enable the Company to attract, retain and reward executive officers and other key employees who contribute to our success and to incentivize them to enhance long-term shareholder value. In reviewing the
components of compensation for each executive officer, the Compensation Committee considers pay-for-performance on both an annual and long-term basis. To implement this philosophy, the total compensation program is designed to be
competitive with the programs of other companies with which the Company competes for executives and provide incentives to our executive officers to act in the best interest of our Company. Consideration is given to each executive’s overall responsibilities, professional qualifications, length of service, business experience, historical job performance and competitive employment opportunities.
Our compensation program for the executive officers for 2021 was designed to meet the following objectives:
Compensation Committee Responsibilities and Authority
Our Compensation Committee reviews our executive compensation and makes recommendations to our Board with respect to our compensation structures and policies. Generally, the Compensation Committee is responsible for reviewing existing compensation and benefit policies, including reviewing and approving incentive programs and equity-based compensation plans. Specifically, with regard to its discretionary power to determine short- and long-term incentive awards, the Compensation Committee has the duty to evaluate the performance of our executive officers, as well as to review and approve corporate goals and objectives relevant to the compensation of our Chief Executive Officer and, in consultation with our Chief Executive Officer, our other executive officers.
The Compensation Committee has engaged Semler Brossy as its independent compensation consultant to provide advice and assistance regarding the Company’s executive compensation programs, including the structuring of our 2021 compensation program. One or more representatives from Semler Brossy meet, from time to time, with the Compensation Committee with respect to various matters, including: (i) a benchmarking review of peer company executive compensation; (ii) the awards of annual incentive compensation; (iii) evaluating the various elements and structure of our overall compensation program in light of current executive compensation practices for companies in our industry; (iv) assisting in the development of an appropriate peer group for compensation related items; and (v) other matters determined by the Compensation Committee. The Compensation Committee considered advice and recommendations received from Semler Brossy regarding executive compensation matters. Semler Brossy reported directly to the Compensation Committee, worked with management only under the direction of the Compensation Committee, and did not provide any other advice or consulting services to the Company. The Compensation Committee assessed the independence factors in accordance with applicable SEC rules and NYSE Listing Standards and other facts and circumstances and concluded that Semler Brossy’s work for the Compensation Committee did not raise any conflicts of interest.
Developing recommendations for our Board regarding our compensation programs and the specific elements and levels of compensation for our executive officers is central to the role of the Compensation Committee. The Committee does not have a specific allocation goal between cash and equity-based compensation or between short- and long-term incentive compensation. Instead, the Compensation Committee relies upon its collective business judgment as applied to the
challenges confronting the Company, together with regular compensation peer group analyses, evaluations of internal equity considerations and the recommendations of management. The Committee also considers advice and data from independent consultants, including Semler
, and information provided by our employees. The Compensation
Committee additionally utilizes subjective information when considering the compensation to be paid or awarded to each of our executive officers, including the executive’s overall responsibilities, professional qualifications, length of service, experience, historical job performance
competitive employment opportunities
, and the Company’s overall business strategy
We believe the variety of inputs considered by the Compensation Committee provides a basis for the Compensation Committee to make informed decisions on the design of our executive compensation program and the elements and amounts of compensation paid or awarded to our executive officers.
Compensation Peer Group Analysis
In structuring the 2021 executive compensation program, the Compensation Committee worked with members of the Company’s management, with the support of Semler Brossy, in considering the compensation practices of certain companies the Compensation Committee deemed to be the Company’s peer group solely for purposes of comparing executive compensation programs (the “Compensation Peer Group”). From a stock price performance perspective, the Company is compared generally to publicly-traded REITs and specialty finance companies that also invest primarily in residential mortgage assets. However, a significant number of these companies are externally managed and therefore do not disclose sufficient information to be included in the Compensation Peer Group for comparing executive compensation programs. The Compensation Committee reviews the possible composition of our Compensation Peer Group, including the size of the Compensation Peer Group and the rationale for including certain companies, each of which have similarity to us based on one or more factors, such as business focus, size and/or geography. Because of the limited compensation information available for publicly-traded internally managed REITs, the Compensation Committee developed a Compensation Peer Group that extends beyond publicly-traded REITs and includes both publicly-traded internally managed REITs and specialty finance companies that invest in either residential mortgage assets or other similar financial products and are competitors for executive talent. The Compensation Peer Group was used to help with the structuring and analysis of our 2021 compensation program and consisted of the following companies: Arbor Realty Trust, Inc., Capital Southwest Corporation, Chimera Investment Corporation, Dynex Capital, Inc., Hannon Armstrong Sustainable Infrastructure Capital, Inc., Hercules Capital, Inc., iStar Inc., Ladder Capital Corp., Main Street Capital Corporation, MFA Financial, Inc., New York Mortgage Trust, Inc., and Redwood Trust, Inc.
The following chart compares our Chief Executive Officer’s total pay for 2020, the most recently available data for the Compensation Peer Group, at various percentiles for the chief executive officers of the companies included in our Compensation Peer Group and the Russell 3000. Total pay is calculated as the total compensation amount reported by each company in their executive compensation tables included in their individual proxy statements. (Data Source: Third-party independent data provider that collects data directly from public company SEC filings):
Role of Executive Officers in Determining Executive Compensation for Executive Officers
The recommendations of our executive officers also play a role in the compensation decision making process. They provide the Compensation Committee with certain compensation related data, assess certain achievements and performances, and assist the Compensation Committee with their evaluation of individual performance as well as recommend direct report base salary and short- and long-term incentive awards. The Compensation Committee has the discretion to accept, reject or modify these recommendations.
Elements of Executive Compensation
Our 2021 executive compensation program was designed to consist of the following direct compensation elements, each of which are described in more detail below:
Base salary provides our executives with a minimum amount of cash compensation that is not variable or “at-risk.” The Compensation Committee seeks to pay our executive officers a competitive base salary in recognition of their job responsibilities for a publicly held company and generally review base salaries for our executives on an annual basis considering several factors, including competitive factors within our industry, past contributions and individual performance. As discussed above, in setting base salaries, the Compensation Committee is mindful of the total compensation paid to each individual and the overall goal of keeping the amount of cash compensation that is provided in the form of base salary substantially lower than the amount of cash and equity incentive opportunity that is available, assuming that performance targets are met or exceeded. The Compensation Committee also considers compensation provided to the executive officers in past years, including any recent adjustments to their respective base salaries. The base salaries for Messrs. Tonkel and Konzmann were unchanged in 2021 as compared to 2020, and Mr. Tonkel has not received an increase in base salary since becoming Chief Executive Officer in 2014 and Mr. Konzmann has not received an increase in base salary since 2016.
The table below presents the base salary for each executive officer for 2021, 2020 and 2019:
Annual Performance-Based Cash Bonus Opportunities
The annual performance-based cash bonus for our executive officers are administered under our 2021 Long-Term Incentive Plan. As described above, 50% of the annual performance-based cash bonus is determined by the achievement of a quantitative corporate performance criteria based on Total Return. Total Return is defined as the total realized and unrealized income of the weighted average capital in all MSR related assets, SFR residential properties, credit investments and a targeted amount of capital allocated to levered agency MBS as well as the accretion or dilution from stock repurchases or issuances. Invested capital excludes capital temporarily invested in agency MBS during the Company’s transition to new investment asset classes.
The Compensation Committee selected Total Return because it directly ties to the success of our executives’ ability to effectively implement and execute the Company’s new investment strategy. As mentioned above, during the last two years, the Company took strategic actions to reduce risk by lowering leverage and increasing our liquidity position as we continued to build a unique investment portfolio of differentiated high return asset classes with compelling growth opportunities in large scale markets. The Company made substantial progress towards our long-term goal of establishing multiple investment channels which complement our historical agency MBS portfolio and diversify risk while improving the Company’s level and reliability of returns over time. The success of this transition is reflected in the Total Return for 2021 which was 13.46%. The Total Return measurement goals were established by the Committee at the beginning of 2021 and the Total Return measurement directly ties each executive’s compensation to the performance of the Company’s ability to execute on our differentiated investment strategies that we expect to create higher returns and provide increased earnings power over time which can form the potential pathway for returning additional capital to shareholders. The following table summarizes the Total Return performance goals and corresponding payouts as a percentage of base salary for Messrs. Tonkel and Konzmann, with linear interpolation for achievement between the performance levels:
After the Compensation Committee examined our performance under the Total Return measurement goals (weighted 50%) they examined each executive’s individual performance on a subjective basis (weighted 50%) to determine the actual bonus payments to our executive officers. The Compensation Committee retains full negative discretion to reduce (but not increase) the annual performance-based cash bonus otherwise earned by achieving the Total Return goals.
As described above, 50% of the annual performance-based cash bonus was based on the Compensation Committee’s subjective assessment and evaluation of each executive’s performance based upon a set of predetermined qualitative measurement criteria that concentrated on the overall management and operation of the Company, taking into account the executive’s contribution to the protection of the Company, its employees and stakeholders, while continuing to focus on long-term shareholder value. The specific predetermined measurement criteria that the Compensation Committee considered are set forth below:
The Compensation Committee conducted a thorough review of each executive’s performance related to the specific predetermined qualitative measurement criteria as well as the overall performance of the Company for 2021. In particular, the Compensation Committee noted:
The Committee determined that, based on its subjective assessment and evaluation of the achievement of the predetermined measurement criteria, including a review of a self-assessment provided by the Company’s executives, Messrs. Tonkel and Konzmann merited payout of the qualitative portion of the annual bonus due to the accomplishment of the predetermined measurement criteria (in particular, the key accomplishments discussed above under “Annual Performance-Based Cash Bonus Opportunities”). However, considering the market conditions during 2021 and the Company’s common stock price trading at a significant discount to its book value during the year, the Compensation Committee, with the support of the executives, exercised its negative discretion and determined to reduce the payout of the qualitative portion of the annual performance-based cash bonus for each executive. The Committee determined, with the support of Mr. Tonkel, to not pay Mr. Tonkel any payout under the qualitative portion of his annual performance-based cash bonus and reduced Mr. Konzmann’s payout under the qualitative portion of his annual performance-based cash bonus by 70% of that total target bonus amount.
Based on the Compensation Committee’s assessment of the items above and the Total Return for 2021 of 13.46%, annual performance-based cash bonuses were awarded to Messrs. Tonkel and Konzmann for performance in 2021 of $800,000 and $517,500, respectively, as illustrated in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
Long-Term Performance-Based Equity Incentive Awards
The long-term performance-based equity incentive component of our total compensation program is designed to further align the long-term interests of our executive officers with those of our shareholders, reward long-term shareholder value creation, serve as a retention tool, provide the appropriate balance with the short-term annual bonus program and help ensure management focuses on the long-term impact of short-term decisions. In 2021, the Compensation Committee increased the portion of long-term incentive awards that have a three-year performance measurement period to 75% of the total grant value versus only 60% in 2020. The remaining 25% of the total grant value is time-based, which will increase or decrease in value depending on our common stock price performance and has a substantial three-year cliff vesting period. The long-term equity incentives awarded to our executives in 2021 consisted of grants the following types of long-term equity incentive awards:
The chart below illustrates the performance and vesting periods for our long-term performance-based equity incentive awards that were granted to the executives in 2021:
The performance-based RSUs and past Performance Stock Units (“PSUs”) (collectively, “Performance-based Stock Awards”) granted to executive officers of the Company are convertible into shares of the Company’s common stock following the applicable performance periods to the extent they are earned. The PSUs previously granted to executive officers consisted of three types of awards (i) PSUs that are eligible to vest based on the Company’s compound annualized growth in the Company’s book value per share (i.e., book value change with such adjustments as determined and approved by the Compensation Committee plus dividends on a reinvested basis) over a three-year performance period (“Book Value PSUs”), (ii) PSUs that are eligible to vest based on the Company’s compound annualized total shareholder return, which includes share price changes plus dividends on a compound, reinvested basis, over a three-year performance period as measured relative to a competitive peer group, consisting of companies listed in the FTSE NAREIT Mortgage Home Financing Index (“Relative TSR PSUs”), and (iii) PSUs that are eligible to vest on the third anniversary of the grant date based on a return on equity performance metric (“ROE PSUs”) over a one-year performance period. The vesting of Performance-based Stock Awards are subject to both continued employment under the terms of the award agreement and the achievement of the Company performance goals established by the Compensation Committee.
On June 15, 2021, the Compensation Committee awarded a target number of long-term equity incentive awards that consisted of
and time-based RSAs
with an aggregate grant date fair value equal to 100% of each executive’s base salary. Absolute TSR RSUs represented 50% of the total award grant date fair value, Relative TSR RSUs represented 25% of the total award grant date fair value, and time-based RSAs represented 25% of the total award grant date fair value.
For the Absolute TSR RSUs and Relative TSR RSUs granted in 2021, the Compensation Committee established a three-year performance period. The actual number of shares of common stock that will be issued to each executive at the end of the applicable performance period will vary between 0% and 250% of the target number of the Absolute TSR RSUs and Relative TSR RSUs granted, depending on performance results. If the minimum threshold level of performance goals is not achieved, no awards are earned. To the extent the performance results are between the minimum threshold level and maximum level of the performance goals, between 50% to 250% of the target number of Absolute TSR RSUs and Relative TSR RSUs granted will be earned. If TSR during the measurement period is negative, the percentage of the Relative TSR RSUs earned are capped at a maximum of 100% of target. Upon settlement, vested Absolute TSR RSUs and Relative TSR RSUs are converted into shares of the Company’s common stock on a one-for-one basis.
The performance goals applicable to Performance-based Stock Awards are determined each year by the Compensation Committee and based on, among other things, the Compensation Committee’s review of various historical and expected future performance metrics of the Company and other companies in the same industry, current and expected future market conditions, as well as advice and data from independent consultants. The performance goals and payout schedule applicable to the Absolute TSR RSUs and Relative TSR RSUs granted in 2021 are set forth below:
Performance-based Stock Awards do not have any voting rights. No dividends are paid on outstanding Performance-based Stock Awards during the applicable performance period. Instead, dividend equivalents are accrued on outstanding Performance-based Stock Awards during the applicable performance period, deemed invested in shares of the Company’s common stock and are paid out in shares of common stock at the end of the performance period to the extent that the underlying Performance-based Stock Awards are earned and vest. Performance-based Stock Awards that are earned following the performance period are converted into shares of the Company’s common stock on a one-for-one basis. These earned Performance-based Stock Awards and dividend equivalents are settled in whole shares of common stock with a cash payment in lieu of any fractional share.
Time-based RSAs have the same voting rights as the Company’s common stock. Dividends declared and paid by the Company on its common stock will be paid in cash on the shares of RSAs, but any such dividend payments will be treated as compensation reportable on the executive’s Form W-2. Vested RSAs are settled in whole shares of the Company’s common stock with a cash payment in lieu of any fractional share.
The threshold, target and maximum share awards for the Performance-based Stock Awards and the number of shares for the Time-Based RSAs granted to the Company’s executive officers on June 15, 2021 are as follows:
The right to receive shares of common stock upon the vesting of Performance-based Stock Awards at the end of the performance period is subject to both continued employment and the achievement of the Company performance goals established by the Compensation Committee. The employment requirement, but not the performance requirement, is waived in the event the awardee dies, becomes disabled or retires; provided, however, that if the awardee dies, becomes disabled or retires before the first anniversary of the grant date, the number of Performance-based Stock Awards that are earned under the performance targets are pro-rated based on the number of days the awardee worked during the year. If an awardee is terminated without “cause,” the Compensation Committee, in the exercise of its discretion, determines whether any of the Performance-based Stock Awards have been earned, provided that the Compensation Committee may not approve a payout that exceeds the number of Performance-based Stock Awards earned under the performance targets. In the event of a change in control, the number of Performance-based Stock Awards granted in 2021 that are outstanding and unearned at the time of the change in control shall become exercisable, vest or become free of restrictions, etc. as if the performance goals or objectives are achieved to the maximum extent. Except as described above, or as the Compensation Committee at any time may otherwise determine, an awardee will forfeit the right to any Performance-based Stock Awards or restricted stock if he or she terminates employment before the vesting date.
Long-Term Performance-Based Equity Incentive: Successfully Aligning Compensation with Historical Performance
Our executive compensation program includes performance-based features to align the interests of our executive officers with those of our shareholders and to provide incentives for our executive officers to achieve both short-term and long-term business objectives, including through short-term annual cash incentives and long-term equity incentives. The Company’s current and past long-term equity incentive plans have been designed to align the incentives of our executive officers with the performance of the Company’s total book value return, total stock return and return on equity.
Historically, our executive officers’ actual long-term equity performance-based compensation earned over the relevant completed performance periods have been substantially lower than the target long-term equity performance compensation as reflected in the Summary Compensation Tables disclosed in our annual proxies as a result of the Company’s actual book value and stock price performance compared to the rigorous target performance measurements established by the Compensation Committee. The Company is required to disclose the target long-term equity performance compensation as of the grant date in its Summary Compensation Tables. Consistent with our pay-for-performance philosophy, a significant portion of our executive officers’ 2021, 2020 and 2019 realized compensation consisted of variable performance-based annual and long-term incentive compensation. As an illustration of our commitment to pay for performance, the table below shows our executive officers’ total compensation as reported in the “Summary Compensation Table for 2021”, compared to the substantially lower total amount of compensation actually realized by our executive officers for each such year. The table below supplements, but does not replace, the “Summary Compensation Table for 2021” on page 51:
The historical results of the Company’s long-term equity incentive compensation programs have demonstrated their overarching rigorous performance nature that works to align the interests of the Company’s management with that of its shareholders over the long-term. Performance-based Stock Awards that are earned or vested are dependent on the achievement of the various rigorous performance measures. This is displayed in the following graphic that compares the executive officer’s total maximum Performance-based Stock Award opportunity potential to the actual value that has been realized or expected to be earned for the Performance-based Stock Awards granted from 2015 through 2020:
Realized Value of Past Executive Performance-based Stock Award Grants
The Board has adopted stock ownership guidelines for our executive officers that were designed to require the executive officers to maintain ownership of a minimum number of shares of the Company’s common stock. Under the ownership guidelines, each executive officer is required to retain one-half of all shares distributed from the Company and one-half of all shares realized upon the exercise of stock options or vesting of stock awards, not including any shares sold or tendered by the executive officer to pay taxes and associated costs due as a result of such distribution, exercise or vesting, until the earlier of (i) the date on which the executive officer is no longer an executive officer of the Company or (ii) the executive
officer’s achievement of the following ownership levels of the Company’s stock determined in accordance with the guidelines:
As of April 18, 2022, the executive officers beneficially owned 3.3% of our outstanding common stock in aggregate. Mr. Tonkel is among the largest shareholders of our Company and has personally been a consistent buyer of the Company’s stock. Since January 1, 2020, as previously announced publicly, Mr. Tonkel has purchased 215,000 shares of the Company’s common stock (120,000 shares during 2020; 55,000 shares during 2021; and 40,000 shares during 2022) in the open market for an aggregate purchase value of approximately $667,000, based on the weighted average share price at the time of purchase. Mr. Konzmann also purchased 40,000 shares of the Company’s common stock in the open market during that time for an aggregate purchase value of approximately $104,000, based on the weighted average share price at the time of purchase. The Committee believes that the current equity holdings of the executive officers closely align their interests with those of our shareholders.
The Board has adopted a compensation “clawback” policy for the recovery of compensation from our executive officers under certain circumstances. Pursuant to the clawback policy, we have the right to recover any cash bonus awarded to an executive officer (i) in the event of an accounting restatement due to material noncompliance by the Company with the financial reporting requirements of the federal securities laws with respect to financial statements filed by the Company within twelve months after the date of such award and (ii) where such noncompliance was the result of intentional misconduct by that executive officer. Under the policy, the executive officer must reimburse us for the difference between the amount of the original bonus received by that executive officer and the amount of the bonus such officer would have received had the bonus amount been calculated based on the restated financial statements.
Perquisites and Other Personal Benefits
Given the focus on cash and equity-based compensation in our industry as well as following executive compensation “best practices,” we do not believe that it is necessary to provide perquisites and other personal benefits as part of the total compensation of our executive officers. We do not provide tax “gross up” payments or other tax reimbursement payments to our executive officers.
Our executive officers are eligible to participate in our group health insurance, life insurance benefit, 401(k) match and other programs on the same terms as our other employees.
We do not provide defined benefit plans, nonqualified deferred compensation plans or other retirement benefits to our executive officers, other than a tax-qualified defined contribution savings plan available to all of our employees pursuant to Section 401(k) of the Internal Revenue Code.
Section 162(m) of the Internal Revenue Code generally provides that a public company may not deduct compensation in excess of $1 million paid in any taxable year to any executive officer who is named in the Summary Compensation Table (who are referred to as “covered employees” in Section 162(m)). The Committee considers the Section 162(m) deduction limit when it assesses the Company’s executive compensation practices. However, in order to maintain flexibility in compensating the Company’s executive officers in a manner designed to promote our Company’s goals, including retention and providing incentives to the executive officers, the Committee has not adopted a policy that all compensation must be deductible and may authorize payments to executives that may not be fully deductible if the Committee believes that the payments are in the Company’s interests. Furthermore, as a REIT, we are generally not subject to federal and state corporate income tax and therefore tax deductions are less valuable to us than to many other corporations. Thus, current compensation awarded in excess of $1 million to our executive officers generally will not be deductible.
The Committee regularly monitors the risks and rewards associated with our compensation programs. The Committee also establishes our compensation programs with the intent to align our interests with shareholders and to help prevent unnecessary or excessive risk taking. We believe that our compensation policies and practices are well balanced and designed to avoid creating compensation incentives that encourage unnecessary or excessive risks that could potentially have a material adverse effect on our Company. The Compensation Discussion and Analysis section above describes our general compensation policies, practices, and philosophies that are applicable for our executive officers. We use variable compensation for all of our executive officers, with a focus on performance. We provide a balance between short- and long-term, cash and equity incentive compensation to ensure management focuses on the long-term impact of short-term decisions and that management’s interests are aligned with those of our shareholders. As an additional safeguard against unnecessary or excessive risk taking, even if pre-established performance metrics are satisfied, the Compensation Committee retains the right to reduce overall and individual awards. The Compensation Committee continually assesses our executive compensation programs and has implemented additional policies and practices that we believe have further mitigated compensation driven risk. Some of these policies and practices include limits on executive bonuses, the adoption of a clawback
policy and the adoption of executive officer stock ownership guidelines, as previously described in more detail in this proxy statement.
Reconciliation of Non-GAAP Measures
In addition to the financial results reported in accordance with generally accepted accounting principles applied in the United States (“GAAP”), the Company reported non-GAAP core operating income measures. Further information on the Company’s non-GAAP measures can be found in the Company’s Annual Report. The following table presents our computation of non-GAAP core operating income for the year ended December 31, 2021 (amounts in thousands, except per share amounts):