DEF 14A of Ellington Credit Co, Apr 6, 2023

DEF 14A of Ellington Credit Co

Filed Apr 6, 2023 · FY20220001560672-23-000030

Open on EDGAR

  1. Information Regarding the Nominees

    Information Regarding the Nominees To assist you in assessing our Board's nominees, we have set forth below biographical descriptions and certain other information with respect to each nominee for election as a trustee at the Annual Meeting, including the experience, qualifications, attributes or skills of each nominee that led us to conclude that such person should serve as a trustee. Our Board recommends a vote "FOR ALL" of the nominees listed below for election as trustees (Proposal 1 on the proxy card).

  2. Information Regarding the Nominees

    | Name and Position With Our Company | Age | Background Summary | | Robert B. Allardice, III Chairman of the Board | 76 | Mr. Allardice has served as a member of our Board since May 2013 and was appointed as Chairman of the Board in January 2021 and is Chairman of the Audit Committee. Mr. Allardice also served as a director, member of the audit committee, and chairman of the finance, investment and risk management committee of The Hartford Financial Services Group, Inc. (NYSE: HIG), from September 2008 through May 2022. Mr. Allardice served as a director of GasLog Partners LP (NYSE: GLOP) from October 2014 to January 2021. Mr. Allardice retired in 1999 from his position as regional chief executive officer of Deutsche Bank Americas Holding Corporation, North and South America, or "DBAHC." Prior to joining Deutsche Bank, Mr. Allardice was a consultant to Smith Barney. Prior to consulting to Smith Barney, Mr. Allardice spent nearly 20 years in positions of increasing responsibility at Morgan Stanley & Co., Inc. He founded the company's Merger Arbitrage Department and later became Chief Operating Officer of the Equity Department. Mr. Allardice has served as a board member of Bankers Trust Company, Carlyle Capital Corporation Ltd., DBAHC and Worldwide Excellerated Leasing Limited. Mr. Allardice earned a B.A., cum laude, from Yale University and an MBA from Harvard University, where he graduated as a George F. Baker Scholar. Our Board of Trustees believes that Mr. Allardice's more than 35 years of experience in the financial services industry, especially his experience as a senior executive officer engaged in strategic planning, risk management, talent development, financial management and financial reporting, and his service on the audit committee of an NYSE-listed company gives him the qualifications and skills to serve as a trustee of our Company. | | Michael W. Vranos Co-Chief Investment Officer & Trustee | 61 | Mr. Vranos has been our Co-Chief Investment Officer since October 2012 and a member of our Board of Trustees since our inception in 2012. Mr. Vranos is also the Chief Executive Officer and President of our Manager. Mr. Vranos also serves as Co-Chief Investment Officer of Ellington Financial Inc. (NYSE: EFC) ("EFC") and was a director of EFC from its inception in 2007 until August 2018. Mr. Vranos is also the founder and Chief Executive Officer of EMG, which he founded in December of 1994 to capitalize on distressed conditions in the mortgage-backed securities, or "MBS," derivatives market. Until December 1994, he was the Senior Managing Director of Kidder Peabody, in charge of residential mortgage-backed securities, or "RMBS," trading. Mr. Vranos graduated magna cum laude, Phi Beta Kappa with a B.A. in Mathematics from Harvard University. Our Board believes that Mr. Vranos' operational experience as Co-Chief Investment Officer of our Company, trading and market expertise and, in particular, his extensive experience in the mortgage securities business, give him the qualifications and skills to serve as a trustee of our Company. |

  3. Information Regarding the Nominees

    | Name and Position With Our Company | Age | Background Summary | | Laurence E. Penn Chief Executive Officer, President & Trustee | 61 | Mr. Penn has been our Chief Executive Officer and President since October 2012 and has served as a member of our Board since our inception in 2012. Mr. Penn is also a Vice Chairman of EMG, where he helps oversee many functions of the firm. Mr. Penn is also the Executive Vice President of our Manager and serves on EMG's Investment and Risk Management Committee. Mr. Penn also serves as Chief Executive Officer, President, and a member of the Board of Directors of EFC. Mr. Penn has also served as a Trustee of Ellington Income Opportunities Fund, a closed-end management investment company, since October 2018. In EMG's earlier years, Mr. Penn was the senior portfolio manager primarily responsible for investments in Agency RMBS. Prior to joining EMG in 1995 shortly after its inception, Mr. Penn was at Lehman Brothers, where he was a Managing Director and co-head of CMO origination and trading, and where he specialized in the trading of CMO derivatives. Prior to trading CMOs and CMO derivatives, Mr. Penn was in charge of Lehman Brothers' structured transaction modeling group from 1987 to 1990, where he was responsible for the structuring, modeling and computer system design for MBS and ABS, and where he was the co-creator (with Jonathan Amsterdam) of "BondTalk," the first high-level programming language specifically designed to model CMOs. Mr. Penn began his career at Lehman Brothers in 1984, after receiving a Master of Advanced Study in Mathematics from Cambridge University, where he studied as both a National Science Foundation Fellow and Winston Churchill Scholar. Mr. Penn graduated summa cum laude, Phi Beta Kappa with a B.A. in Mathematics from Harvard University. Mr. Penn was one of five winners nationwide in the 1980 Putnam collegiate mathematics problem-solving competition, and represented the United States in the 21st International Mathematics Olympiad held in London, England. Our Board believes that Mr. Penn's operational experience as President and Chief Executive Officer of our Company, risk management and trading expertise and, in particular, his extensive experience in the mortgage securities business, give him the qualifications and skills to serve as a trustee of our Company. | | Ronald I. Simon, Ph.D.Trustee | 84 | Dr. Simon is a private investor and financial consultant to businesses. Dr. Simon has served as a member of our Board since May 2013, and is Chairman of the Nominating and Corporate Governance Committee. Dr. Simon has also served as a member of the Board of Directors of EFC since 2007 and was appointed as Chairman of the Board of Directors and Chairman of the Audit Committee of EFC in January 2021. From March 2003 through February 2006, when it was acquired by Wachovia Corp., Dr. Simon was a director of WFS Financial, Inc., a publicly-traded financial services company specializing in automobile finance. From 1995 through 2002, Dr. Simon was a director of SoftNet Systems, Inc. ("SoftNet"), during 2001, he served as Acting Chairman, Chief Executive Officer, and Chief Financial Officer for SoftNet, Inc. From 2002 through August 2016 he was a director of its successor company, American Independence Corp. ("AIC"), a holding company engaged principally in the health insurance and reinsurance business. AIC was acquired by Independence Holdings Company ("IHC"), a holding company principally engaged in the disability, health insurance and pet insurance business, in August 2016, and he served as a director of IHC from August 2016 to February 2022, and as a member of the Audit Committee from November 2017 to February 2022. Dr. Simon earned a B.A. from Harvard University, an M.A. from Columbia University, and a Ph.D. from Columbia University Graduate School of Business. Our Board believes that Dr. Simon's expertise in finance and his extensive service in senior officer positions and directorships of public companies in a variety of industries give him the qualifications and skills to serve as a trustee of our Company. |

  4. Information Regarding the Nominees

    | Name and Position With Our Company | Age | Background Summary | | David J. Miller Trustee | 63 | Mr. Miller is currently a private investor and has served as a member of our Board since May 2013. He also serves on several private company boards, including StoneMor Inc. (where, from July 2019 to November 2022 when it was a public company, he served as the Chairman of the Compensation, Nominations & Governance Committee and as a member of the Audit Committee), Lombard International Assurance, J.G. Wentworth, and Prima Insurance. Mr. Miller also previously served as a member of the board of Figure Acquisition Corp., where he served as the Chair of the Audit Committee from February 2021 until December 2022. Mr. Miller previously served as the Chief Executive Officer of JGWPT Holdings, LLC, or its predecessor J.G. Wentworth, LLC from January 2009 until July 2014. Prior to joining J.G. Wentworth, LLC, in January 2009, Mr. Miller held various positions including: Executive Vice-President responsible for Ace Group's International Accident and Health Insurance Business, President and Chief Executive Officer of Kemper Auto and Home Insurance, and Chief Operating Officer of Providian Direct Insurance. Mr. Miller began his insurance career with Progressive Insurance where he held various positions over his seven-year career. Mr. Miller has a BSEE in electrical engineering from Duke University and an MBA in Finance from The Wharton School of the University of Pennsylvania. In November 2021 Mr. Miller was elected to serve a four-year term on the board of supervisors of Tredyffrin Township. He was previously a member of the New York Stock Exchange. Our Board of Trustees believes that Mr. Miller's financial and management expertise and his valuable experience gained from his tenure as an executive and as a director of other companies in the financial services industry gives him the qualifications and skills to serve as a trustee of our Company. | | Mary McBride Trustee | 67 | Ms. McBride has served as a member of our Board since March 2021. Ms. McBride was President of CoBank, ACB (“CoBank”), a cooperative bank and member of the Farm Credit System serving vital industries across rural America, from 2013 to 2016. Ms. McBride joined CoBank in 1993 and served as Vice President, Loan Policy & Syndications; Senior Vice President and Manager, Corporate Finance Division; Senior Vice President and Manager, Operations Division; Executive Vice President, Communications and Energy Banking Group; and Chief Operating Officer before being appointed Chief Banking Officer in 2010. Ms. McBride served as a Director of CatchMark Timber Trust, Inc., a real estate company that invests in timberlands, from February 2018 until September 2022, and has served as a Director of Intrepid Potash Inc., a diversified minerals company, since May 2020. Before joining CoBank, Ms. McBride was Senior Vice President and Manager, Commercial Lending at First Interstate Bank of Denver, N.A., and prior to that served as Assistant Vice President, Energy & Utilities at First National Bank of Boston. Ms. McBride served on the Biomass Technical Advisory and Research Committee of the U.S. Departments of Energy and Agriculture from 2006 to 2012. She also previously served as Chair of Mile High United Way. Ms. McBride received a Bachelor of Arts in Political Science from Wellesley College, a Master of Science in European Studies from the London School of Economics and a Master of Science in Applied Economics and International Management and Finance from the Sloan School of Management at the Massachusetts Institute of Technology. Our Board of Trustees believes that Ms. McBride's experience as president of CoBank, together with her experience serving as a board member for two other publicly traded companies, give her the qualifications and skills to serve as a trustee of our Company. |

  5. TO APPROVE EXECUTIVE COMPENSATION

    TO APPROVE EXECUTIVE COMPENSATION In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), Section 14A of the Securities Exchange Act of 1934, as amended, or the "Exchange Act," and as required by Rule 14a-21 promulgated thereunder, our Board of Trustees is providing our shareholders with the opportunity to cast a non-binding advisory "say on pay" vote on a resolution to approve the compensation we pay to our named executive officers. Because the "say on pay" vote is advisory and is not binding on our Board or our Compensation Committee, neither the Board nor the Compensation Committee will be required to take any action as a result of the outcome of the vote. However, the Board values shareholders' opinions and the Compensation Committee will take into consideration the outcome of the vote when making future executive compensation decisions. As described in the "Executive Compensation" section below, we are an externally managed company and all of our named executive officers for 2022 are employees of affiliates of our Manager or EMG and we have no employees. Because our management agreement provides that our Manager is responsible for managing our affairs, our named executive officers for fiscal year 2022 did not receive any cash compensation directly from us or any of our subsidiaries for serving as our executive officers and we do not have any agreements with any of our named executive officers with respect to their cash compensation and we do not intend to enter into any such agreement or pay any cash compensation directly to them. Notwithstanding the foregoing, we are required by our management agreement to reimburse our Manager or EMG for the allocable share of the salary and other compensation (including cash bonuses) paid by our Manager or EMG to certain of our executive officers who dedicate all or a portion of their time to us, based on the estimated percentage of each officer's time spent on our affairs, in each case with the amount of such compensation subject to the approval of our Compensation Committee. While all of our named executive officers devote some portion of their time to our affairs, for fiscal year 2022, we were only obligated to reimburse our Manager or EMG for compensation relating to Mr. Smernoff, our Chief Financial Officer, and Mr. Herlihy, our Chief Operating Officer. However, we have the discretion to pay annual cash bonuses and make incentive equity awards directly to our dedicated or partially dedicated executive officers, including our Chief Financial Officer and our Chief Operating Officer. The amount of compensation and incentive equity awards that we paid to our Chief Financial Officer and our Chief Operating Officer during 2022 and 2021, either directly or indirectly through reimbursements of our Manager or EMG, are described in the "Executive Compensation" section below. This advisory "say on pay" vote gives our shareholders the opportunity to express their views on the compensation we pay to our named executive officers, which at this time is solely limited to our Chief Financial Officer and our Chief Operating Officer, as disclosed in this Proxy Statement pursuant to Item 402 of Regulation S-K, which includes the compensation tables, the narrative discussion and any related material disclosed in this Proxy Statement. This vote is not intended to address any specific item of compensation, but rather the overall compensation we pay to our named executive officers and the policies and practices described in this Proxy Statement. The Board believes that the current compensation of our Chief Financial Officer and our Chief Operating Officer provides fair compensation designed to retain and motivate them and properly aligns their interests with those of our shareholders. For these reasons, the Board unanimously recommends that our shareholders vote in favor of the following resolution: "Resolved, that the Company's shareholders hereby approve, on a non-binding advisory basis, the compensation paid by the Company to its named executive officers, as disclosed in the Company's Proxy Statement for the 2023 Annual Meeting of Shareholders pursuant to Item 402 of Regulation S-K, including the compensation tables, the narrative discussion, and any related material disclosed in such Proxy Statement."

  6. PROPOSAL 4: APPROVAL OF THE ELLINGTON RESIDENTIAL MORTGAGE REIT 2023 EQUITY INCENTIVE PLAN

    PROPOSAL 4: APPROVAL OF THE ELLINGTON RESIDENTIAL MORTGAGE REIT 2023 EQUITY INCENTIVE PLAN At the Annual Meeting, shareholders will be asked to approve the Ellington Residential Mortgage REIT 2023 Equity Incentive Plan (the “2023 Plan”). The Board approved the 2023 Plan on March 21, 2023, or the "Effective Date," subject to the approval of our shareholders. As of March 22, 2023, an aggregate of only 250,191 Common Shares remained available for issuance under the Ellington Residential Mortgage REIT 2013 Equity Incentive Plan (the “Prior Plan”). The Board believes that the Prior Plan assisted in our recruitment and retention and helped align the interests of service providers with the interests of our shareholders. The Board believes that the 2023 Plan will also promote these interests. We believe that approval of the 2023 Plan will give us the flexibility to make share-based awards and other awards permitted under the 2023 Plan in amounts determined appropriate by the Committee (as defined below). These circumstances include but are not limited to the future price of our Common Shares, award levels and amounts provided by our competitors, and our hiring activity over the next few years. The closing market price of our Common Shares on March 22, 2023 was $6.99 per share, as reported on the New York Stock Exchange. As of March 22, 2023, the total number of outstanding Common Shares was 13,789,792. Our current potential dilution (which is the number of Common Shares available for grant under the Prior Plan, divided by the total number of Common Shares outstanding as of March 22, 2023) is approximately 1.8%. If the 2023 Plan is approved by shareholders, the potential dilution (which is the maximum number of Common Shares under the 2023 Plan, divided by the total number of Common Shares outstanding as of March 22, 2023) from issuances authorized under the 2023 Plan will increase to approximately 20%. While we are aware of the potential dilutive effect of compensatory equity awards, we also recognize the significant motivational and performance benefits that may be achieved from making such awards. The 2023 Plan is intended to replace the Prior Plan. Upon shareholder approval of the 2023 Plan, the Prior Plan will terminate, and no further grants will be made under the Prior Plan. However, any outstanding awards under the Prior Plan will continue in accordance with the terms of the Prior Plan, as applicable, and any award agreement executed in connection with such outstanding awards.

  7. Number of Shares; Award Limitations

    Number of Shares; Award Limitations The total number of Common Shares are authorized to be issued under the 2023 Plan, which number also represents the maximum aggregate number of Common Shares that may be issued under the 2023 Plan through incentive stock options, is equal to (i) 2,500,000 Common Shares; provided that, at any given time, the actual number of Common Shares that may be delivered with respect to awards pursuant to this clause (i) shall not exceed five percent (5.0%) of the total number of Common Shares outstanding at such time (up to a maximum of 2,500,000 Common Shares that may be delivered), plus (ii) the number of Common Shares remaining available for issuance under the Prior Plan as of the date of the Annual Meeting (which, as of March 22, 2023, is 250,191 Common Shares), plus (iii) the number of Common Shares subject to awards granted under the 2013 Equity Incentive Plan that are outstanding on the date of the Annual Meeting and that subsequently are forfeited, expire, or lapse unexercised or unsettled and the number of Common Shares issued pursuant to awards granted under the Prior Plan that are outstanding on the date of the Annual Meeting and that are subsequently forfeited to or reacquired by the Company, which as of March 22, 2023, is 44,804 Common Shares; this number represents approximately 0.3% of our outstanding Common Shares on a fully diluted basis. Long-term incentive plan units, or "LTIP Units," issued pursuant to awards under the shall reduce the maximum aggregate number of Common Shares that may be issued under the 2023 Plan on a one-for-one basis (i.e., each LTIP Unit shall be treated as an award of a Common Share).

  8. Options

    Options The 2023 Plan permits the grant of options to purchase Common Shares intended to qualify as incentive stock options under the Internal Revenue Code of 1986, as amended, or the "Code," and options that do not qualify as incentive stock options, referred to as nonqualified stock options. The exercise price of each option may not be less than 100% of the fair market value of a Common Share on the date of grant (110% in the case of incentive stock options granted to a participant holding 10% or more of the Company's Common Shares). The Committee may, in its sole discretion and without the consent of the participant, grant options in substitution for options held by employees of companies that we may acquire. In this case, the exercise price would be adjusted to preserve the acquisition date intrinsic value of the employee's option from his or her former employer. The term of each option will be fixed by the Committee but may not exceed 10 years from the date of grant (five years in the case of incentive stock options granted to a participant holding 10% or more of our Common Shares). The Committee will determine at what time or times each option may be exercised and the period of time, if any, after termination of employment during which options may be exercised. Except in the case of certain substitutions or certain changes in our capitalization, such as a share dividend, share split, extraordinary cash dividend, subdivision, or consolidations of shares that affect the number of Common Shares or the fair market value of our Common Shares, the exercise price of an option may not be reduced after its grant without the approval of our shareholders. In addition, no payment may be made in cancellation of an option whose exercise price exceeds fair market value without the approval of our shareholders. In general, an optionee may pay the exercise price of an option by cash, certified check, by tendering Common Shares, by attestation of ownership of Common Shares, by means of a broker-assisted cashless exercise, or in any other form or manner acceptable to the Committee. Any rights or restrictions with respect to the ability to transfer an option shall be set forth in the applicable award agreement, except that any option may be transferred by will or by the laws of descent and distribution. Incentive stock options granted under the 2023 Plan are nontransferable other than by will or laws of descent and distribution.

  9. Share Appreciation Rights

    Share Appreciation Rights Share appreciation rights, or "SARs," may be awarded under the 2023 Plan. Share appreciation rights entitle the participant to receive a number of Common Shares, cash, or a combination of Common Shares and cash, based on the increase in the fair market value of the shares from their grant date fair market value. The term of any SAR will be determined by the Committee, but in no event will an SAR have a term of more than 10 years from the date of grant (five years in the case of an SAR that is related to an incentive stock option granted to a participant holding 10% or more of our Common Shares). Any rights or restrictions with respect to the ability to transfer an SAR shall be set forth in the applicable award agreement, except that any SAR may be transferred by will or by the laws of descent and distribution. An SAR that relates to an incentive stock option is nontransferable other than by will or laws of descent and distribution.

  10. Restricted Share Units

    Restricted Share Units The 2023 Plan also allows the grant of restricted share units, or RSUs, meaning the right to receive Common Shares, cash, or a combination of Common Shares and cash in the future. At the time the RSU is granted, the Committee will specify the terms and conditions which govern the RSU, and will specify whether dividend equivalent rights are granted in connection with the RSUs. A participant's rights in the RSU may be nontransferable or forfeitable or both for a period of time or subject to the attainment of certain goals tied to performance criteria (or a combination of the two). These performance goals may include, for example, a requirement that we or any of our affiliates or the participant achieve objectives based on any of the performance criteria listed below.

  11. Incentive Awards

    Incentive Awards Incentive awards entitle the participant to receive a single lump sum payment which may be in cash, Common Shares, or a combination of cash and Common Shares, in the discretion of the Committee. At the time an incentive award is granted, the Committee will specify the terms and conditions which govern the award.

  12. Change in Control

    Change in Control The 2023 Plan provides that the Committee is authorized to take certain actions if there is a change in control of our Company. The Committee may prescribe that (i) outstanding awards that are options or SARs will become vested or exercisable immediately prior to the change in control or, for all other awards, will become earned and non-forfeitable in their entirety upon such change in control, (ii) outstanding awards will be replaced with substitute awards issued by the surviving company in the change in control, or (iii) outstanding awards will be canceled in exchange for a payment equal to the amount received by our shareholders in the transaction or, in the case of options and share appreciation rights, the amount by which that value exceeds the option exercise price or initial value of the share appreciation right. Under the 2023 Plan, a change in control is generally defined to include (i) the acquisition by any person of the direct or indirect beneficial ownership of at least 50% of our outstanding voting securities; (ii) the members of the Board at the beginning of any two-year period ceased to constitute a majority of the Board at the end of such two-year period (iii) a merger, consolidation or statutory share exchange where our shareholders hold less than 50% of the voting power of the surviving or resulting entity; or (iv) the approval of a plan of complete liquidation of the Company or the direct or indirect sale of substantially all of our assets.

  13. Tax Consequences to Participants

    Tax Consequences to Participants Options and SARs. Participants will not realize taxable income upon the grant of an option or a SAR. Upon the exercise of a nonqualified stock option or a SAR, a participant will recognize ordinary compensation income (subject to withholding if an employee) in an amount equal to the excess of (i) the amount of cash and the fair market value of the Common Shares received, over (ii) the exercise price of the award. A participant will generally have a tax basis in any Common Shares received pursuant to the exercise of a nonqualified stock option or SAR that equals the fair market value of such Common Shares on the date of exercise. Subject to the discussion under "—Tax Consequences to the Company" below, we will be entitled to a deduction for federal income tax purposes that corresponds as to timing and amount with the compensation income recognized by a participant under the foregoing rules. When a participant sells the Common Shares acquired as a result of the exercise of a nonqualified stock option or SAR, any appreciation (or depreciation) in the value of the Common Shares after the exercise date is treated as long- or short-term capital gain (or loss) for federal income tax purposes, depending on the holding period. The Common Shares must be held for more than 12 months to qualify for long-term capital gain treatment. Participants eligible to receive an option intended to qualify as an incentive option (i.e., under Section 422 of the Code) will not recognize taxable income on the grant of an incentive option. Upon the exercise of an incentive option, a participant will not recognize taxable income, although the excess of the fair market value of the Common Shares received upon exercise of the incentive option, or "ISO Shares," over the exercise price will increase the alternative minimum taxable income of the participant, which may cause such participant to incur alternative minimum tax. The payment of any alternative minimum tax attributable to the exercise of an incentive option would be allowed as a credit against the participant's regular tax liability in a later year to the extent the participant's regular tax liability is in excess of the alternative minimum tax for that year. Upon the disposition of ISO Shares that has been held for the required holding period (generally, at least two years from the date of grant and one year from the date of exercise of the incentive option), a participant will generally recognize capital gain (or loss) equal to the excess (or shortfall) of the amount received in the disposition over the exercise price paid by the participant for the ISO Shares. However, if a participant disposes of ISO Shares that have not been held for the requisite holding period, or a "Disqualifying Disposition," the participant will recognize ordinary compensation income in the year of the Disqualifying Disposition in an amount equal to the amount by which the fair market value of the ISO Shares at the time of exercise of the incentive option (or, if less, the amount realized in the case of an arm's length disposition to an unrelated party) exceeds the exercise price paid by the participant for such ISO Shares. A participant would also recognize capital gain to the extent the amount realized in the Disqualifying Disposition exceeds the fair market value of the ISO Shares on the exercise date. If the exercise price paid for the ISO Shares exceeds the amount realized (in the case of an arm's-length disposition to an unrelated party), such excess would ordinarily constitute a capital loss. The Company will generally not be entitled to any federal income tax deduction upon the grant or exercise of an incentive option, unless a participant makes a Disqualifying Disposition of the ISO Shares. If a participant makes a Disqualifying Disposition, the Company will then, subject to the discussion below under "—Tax Consequences to the Company," be entitled to a tax deduction that corresponds as to timing and amount with the compensation income recognized by a participant under the rules described in the preceding paragraph. Under current rulings, if a participant transfers previously held Common Shares (other than ISO Shares that has not been held for the requisite holding period) in satisfaction of part or all of the exercise price of an option, whether a nonqualified stock option or an incentive option, no additional gain will be recognized on the transfer of such previously held Common Shares in satisfaction of the nonqualified stock option or incentive option exercise price (although a participant would still recognize ordinary compensation income upon exercise of a nonqualified stock option in the manner described above). Moreover, that number of Common Shares received upon exercise, which equals the number of previously held Common Shares surrendered in satisfaction of the nonqualified stock option or incentive option exercise price, will have a tax basis that equals, and a capital gains holding period that includes, the tax basis and capital gains holding period of the previously held Common Shares surrendered in satisfaction of the nonqualified stock option or incentive option exercise price. Any additional Common Shares received upon exercise will have a tax basis that equals the amount of cash (if any) paid by the participant, plus the amount of compensation income recognized by the participant under the rules described above. The 2023 Plan generally prohibits the transfer of awards other than by will or according to the laws of descent and distribution or pursuant to a qualified domestic relations order, but the 2023 Plan allows the Committee to permit the transfer of awards (other than incentive options), in its discretion. For income and gift tax purposes, certain transfers of nonqualified stock options should generally be treated as completed gifts, subject to gift taxation. The Internal Revenue Service has not provided formal guidance on the income tax consequences of a transfer of nonqualified stock options (other than in the context of divorce) or SARs. However, the Internal Revenue Service has informally indicated that after a transfer of options (other than in the context of divorce pursuant to a domestic relations order), the transferor will recognize income, which will be subject to withholding, and FICA/FUTA taxes will be collectible at the time the transferee exercises the options. If a nonqualified stock option is transferred pursuant to a domestic relations order, the transferee will recognize ordinary income upon exercise by the transferee, which will be subject to withholding, and FICA/FUTA taxes (attributable to and reported with respect to the transferor) will be collectible from the transferee at such time. In addition, if a participant transfers a vested nonqualified stock option to another person and retains no interest in or power over it, the transfer is treated as a completed gift. The amount of the transferor's gift (or generation-skipping transfer, if the gift is to a grandchild or later generation) equals the value of the nonqualified stock option at the time of the gift. The value of the nonqualified stock option may be affected by several factors, including the difference between the exercise price and the fair market value of the Common Shares, the potential for future appreciation or depreciation of the Common Shares, the time period of the nonqualified stock option and the illiquidity of the nonqualified stock option. The transferor will be subject to a federal gift tax, which will be limited by (i) the annual exclusion of $17,000 per donee (for 2023, subject to adjustment in future years), (ii) the transferor's lifetime unified credit, or (iii) the marital or charitable deductions. The gifted nonqualified stock option will not be included in the participant's gross estate for purposes of the federal estate tax or the generation-skipping transfer tax.

  14. Tax Consequences to Participants

    This favorable tax treatment for vested nonqualified stock options has not been extended to unvested nonqualified stock options. Whether such consequences apply to unvested nonqualified stock options or to SARs is uncertain and the gift tax implications of such a transfer is a risk the transferor will bear upon such a disposition. Other Awards: Share Awards, Restricted Share Units, Other Equity-Based Awards, and Incentive Awards. A participant will recognize ordinary compensation income upon receipt of cash pursuant to an incentive award or, if earlier, at the time the cash is otherwise made available for the participant to draw upon. Individuals will not have taxable income at the time of grant of a restricted share unit award, but rather, will generally recognize ordinary compensation income at the time he or she receives cash or Common Shares in settlement of the restricted share unit award, as applicable, in an amount equal to the cash or the fair market value of the Common Shares received. A recipient of a share award or other equity-based award or the receipt of shares pursuant to an incentive award generally will be subject to tax at ordinary income tax rates on the fair market value of the Common Shares when received, reduced by any amount paid by the recipient; however, if the Common Shares are not transferable and are subject to a substantial risk of forfeiture when received, a participant will recognize ordinary compensation income in an amount equal to the fair market value of the Common Shares (i) when the Common Shares first become transferable and are no longer subject to a substantial risk of forfeiture, in cases where a participant does not make a valid election under Section 83(b) of the Code, or (ii) when the award is received, in cases where a participant makes a valid election under Section 83(b) of the Code. If a Section 83(b) election is made and the Common Shares are subsequently forfeited, the recipient will not be allowed to take a deduction for the value of the forfeited Common Shares. If a Section 83(b) election has not been made, any dividends received with respect to restricted Common Shares that are subject at that time to a risk of forfeiture or restrictions on transfer generally will be treated as compensation that is taxable as ordinary income to the recipient; otherwise the dividends will be treated as dividends. LTIP Units. LTIP Units received by a participant are intended to be treated as profits interests in a partnership for U.S. federal income tax purposes. The treatment of profits interests generally under the U.S. federal income tax rules are currently under review by the Internal Revenue Service, the Department of the Treasury, and Congress, and there can be no assurance that the LTIP Units will be treated as profits interests. Provided that the LTIP Units are respected as profits interests, a participant will not realize taxable income upon the issuance of an LTIP Unit or upon the vesting of an LTIP Unit, and neither the Company nor the Operating Partnership will be allowed a deduction upon issuance or vesting. Instead, the participant will be treated as a partner in the Operating Partnership from the date of grant of the LTIP Unit, and will consequently receive allocations of income, gain, loss, credit, and deduction from the Operating Partnership, along with distributions of cash. Such items generally have the same character (i.e., capital or ordinary) in the hands of the participant as the items had in the hands of the Operating Partnership. Additionally, if and when an LTIP Unit both vests and reaches capital account equivalency under the Operating Partnership Agreement, a participant will be eligible to convert that LTIP Unit into an Operating Partnership unit.

  15. Tax Consequences to the Company

    Tax Consequences to the Company Reasonable Compensation. In order for the amounts described above to be deductible by the Company (or a subsidiary), such amounts must constitute reasonable compensation for services rendered or to be rendered and must be ordinary and necessary business expenses. Golden Parachute Payments. The ability of the Company (or the ability of one of its subsidiaries) to obtain a deduction for future payments under the 2023 Plan could also be limited by the golden parachute rules of Section 280G of the Code, which prevent the deductibility of certain excess parachute payments made in connection with a change in control of an employer-corporation.

  16. Information Regarding Our Board and Its Committees

    Information Regarding Our Board and Its Committees Trustees are expected to attend all of our regular and special meetings of the Board and all meetings of the committees on which they serve. In 2022, there were seven meetings of the Board, and each of the current trustees attended at least 85% of the meetings of both the Board and committees on which he or she served. We have a policy that trustees attend our annual meetings of shareholders. Mr. Miller, Mr. Allardice, Dr. Simon, Mr. Vranos, Mr. Penn, and Ms. McBride attended the 2022 Annual Meeting of Shareholders. Our Board of Trustees has established three standing committees of the Board: Audit, Compensation, and Nominating and Corporate Governance. The charter for each committee, more fully describing the responsibilities of each committee, can be found on our website at www.earnreit.com under the "For Our Shareholders—Corporate Governance" section. Pursuant to their charters, each of these committees is comprised solely of independent trustees. The table below indicates our current committee membership and the number of times each committee met in 2022.

  17. Information Regarding Our Board and Its Committees

    | Trustee Name | Audit Committee | Compensation Committee | Nominating and Corporate Governance Committee | | Robert B. Allardice, III | Chair | Member | Member | | David J. Miller | Member | Chair | Member | | Mary McBride | Member | Member | Member | | Ronald I. Simon, Ph.D. | Member | Member | Chair | | Number of Meetings in 2022 | 6 | 6 | 5 |

  18. Information Regarding Our Board and Its Committees

    Our committees make recommendations to the Board as appropriate and regularly report on their activities to the entire Board. Audit Committee Pursuant to its charter, our Audit Committee assists the Board in overseeing (1) the integrity of our financial statements; (2) our compliance with legal and regulatory requirements; (3) the qualifications and independence of our independent auditors; and (4) the performance of our independent auditors and internal audit function. Each member of the Audit Committee meets the independence requirements of the NYSE and SEC rules and regulations, and each is financially literate. Our Board has determined that each of Mr. Allardice, the chairman of our Audit Committee, Ms. McBride, Mr. Miller and Dr. Simon is an "audit committee financial expert" as that term is defined by the SEC and that each satisfies the financial expertise requirements of the NYSE. Compensation Committee Pursuant to its charter, the Compensation Committee's principal functions are to assist the Board in discharging its responsibilities relating to (1) compensation of our trustees and officers; (2) review, approval, and administration of compensation plans and programs and other benefit plans for our trustees, officers, employees, and consultants and other third parties who perform services for us; and (3) compensation of our Manager. The Compensation Committee may form and delegate authority to subcommittees comprised entirely of independent trustees or its chair when appropriate. Our Board has determined that each member of the Compensation Committee meets the independence requirements of the NYSE that apply to compensation committee members. Nominating and Corporate Governance Committee Pursuant to its charter, the Nominating and Corporate Governance Committee is responsible for identifying, recruiting, considering and recommending to our Board qualified candidates for election as trustees and recommending a slate of nominees for election as trustees at our annual meetings of shareholders. It also reviews the background and qualifications of individuals being considered as trustee candidates pursuant to attributes and criteria established by the committee and the Board from time to time. It reviews and makes recommendations on matters involving general operation of our Board and our corporate governance, and annually recommends to our Board nominees for each committee of the Board. In addition, the committee annually facilitates the assessment of our Board's performance as a whole and of the individual trustees and reports thereon to the Board. The committee is responsible for reviewing and approving in advance any related party transactions, other than related party transactions which have been pre-approved pursuant to pre-approval guidelines to address specific categories of transactions, which the committee reviews, evaluates and updates, as appropriate, from time to time. In selecting candidates to recommend to our Board as trustee nominees, the Nominating and Corporate Governance Committee looks at a number of attributes and criteria, including experience, skills, expertise, diversity of experience, personal and professional integrity, character, business judgment, time availability in light of other commitments, dedication, conflicts of interest and such other relevant factors that the Nominating and Corporate Governance Committee considers appropriate in the context of the needs of the Board. The Nominating and Corporate Governance Committee views diversity as a positive factor in considering trustee candidates, but it does not have a formal policy about diversity of board members, and neither includes nor excludes any candidate from consideration solely based on the candidate’s diversity traits. In assessing the needs of the Board, the Nominating and Corporate Governance Committee and our Board review and consider from time to time the requisite skills and characteristics of individual trustees as well as the composition of the Board as a whole. After completing its evaluation of individual trustee nominees and our Board as a whole, our Board concluded that the six nominees for trustee named in this Proxy Statement collectively have the experience, qualifications, attributes and skills to effectively oversee the management of our Company, including a high degree of personal and professional integrity, an ability to exercise sound business judgment on a broad range of issues, sufficient experience and background to have an appreciation of the issues facing our Company, a willingness to devote the necessary time to Board duties, a commitment to representing the best interests of the Company and its shareholders and a dedication to enhancing shareholder value. The Nominating and Corporate Governance Committee will consider candidates recommended by shareholder for service on our Board and such proposed nominees will be considered and evaluated under the same criteria as described above. Any recommendation submitted to the Company should be in writing and should include any supporting material the shareholder considers appropriate in support of that recommendation, but must include all information relating to such proposed nominee that would be required to be disclosed in connection with the solicitation of proxies for the election of the proposed nominee as a trustee in an election contest (even if an election contest is not involved), or would otherwise be required in connection with such solicitation, in each case pursuant to Regulation 14A (or any successor provision), a written statement certifying, among other things, that the proposed nominee, will serve as a trustee if elected and must otherwise comply with the requirements under our bylaws for shareholders to propose nominees. Shareholders wishing to propose a candidate for consideration may do so by submitting the above information addressed to Attention: Secretary, Ellington Residential Mortgage REIT, 53 Forest Avenue, Old Greenwich, Connecticut 06870. All recommendations for trustee nominations received by the Secretary that satisfy our bylaws requirements relating to such trustee nominations will be presented to the Nominating and Corporate Governance Committee for its consideration. Shareholders also must satisfy the notification, timeliness, consent, and information requirements set forth in our bylaws. For more information regarding these timing requirements, see "General Information—Shareholder Proposals."

  19. Compensation of Our Trustees in 2022

    | Name | Fees Earned or Paid in Cash | Restricted Common Share Awards (1) | All Other Compensation(2) | Total Compensation | | Robert B. Allardice, III | $105,000 | $53,006 | $5,070 | $163,076 | | David J. Miller | 72,500 | 53,006 | 5,070 | 130,576 | | Ronald I. Simon, Ph.D. | 72,500 | 53,006 | 5,070 | 130,576 | | Mary McBride | 65,000 | 53,006 | 5,070 | 123,076 | | Laurence E. Penn | — | — | — | — | | Michael W. Vranos | — | — | — | — |

  20. EXECUTIVE COMPENSATION

    EXECUTIVE COMPENSATION We are currently considered a “smaller reporting company” for purposes of the SEC’s executive compensation disclosure rules. In accordance with such rules, we are required to provide a Summary Compensation Table and an Outstanding Equity Awards at Fiscal Year End Table, as well as limited narrative disclosures. Further, our reporting obligations extend only to the individuals serving as our Chief Executive Officer, and our two other most highly compensated executive officers. The following individuals were our named executive officers (“NEOs”) for the year ended December 31, 2022: •Laurence E. Penn, our Chief Executive Officer and President; •Christopher Smernoff, our Chief Financial Officer; and •JR Herlihy, our Chief Operating Officer. As an externally managed company, none of our executive officers are employees of the Company. In fact, we do not have any employees, and we are managed by our Manager, pursuant to our management agreement. Our executive officers are employed by affiliates of our Manager or EMG, and our Manager makes them available to us pursuant to our management agreement. Except as set forth below, because our management agreement provides that our Manager is responsible for managing our affairs, our executive officers do not receive cash compensation from us for serving as our executive officers, and we do not pay or provide benefits, nor do we reimburse the cost of any compensation or benefits paid by our Manager, EMG or their affiliates, to our executive officers. We do not currently have any agreements with any of our executive officers regarding their cash compensation and we do not intend to enter into any such agreement or pay any cash compensation directly to them. Additionally, our management agreement does not require that our executive officers devote a specific percentage of their time to our business. Notwithstanding the foregoing, we are required by our management agreement to reimburse our Manager for the costs of the wages (including bonuses), salaries, and benefits incurred by our Manager or EMG with respect to our Chief Financial Officer and our Chief Operating Officer (together, the "Compensated NEOs"), in each case, based on the estimated percentage of their time spent on our affairs and subject to the approval of the amount of such reimbursement by our Compensation Committee. In addition, we have the discretion to pay annual cash bonuses directly to our NEOs and make incentive equity awards to our NEOs in amounts that are subject to approval by our Compensation Committee. All of our NEOs, including our Chief Financial Officer and our Chief Operating Officer, are partially dedicated, which means they spend a portion of their time on the affairs of the Company and a portion of their time dedicated to the affairs of our Manager or EMG.

  21. Summary Compensation Table

    Summary Compensation Table The following table sets forth the compensation paid to the Compensated NEOs for services they rendered to us during the fiscal years presented. NEOs who did not receive any compensation for their services rendered to us in the fiscal years presented have been omitted from the table.

  22. Summary Compensation Table

    | Name and Principal Position | Year | Salary(1) | Bonus(2) | Stock Awards(3) | All Other Compensation(4) | Total | | Christopher Smernoff Chief Financial Officer | 2022 | $45,833 | $42,429 | $28,601 | $5,352 | $122,215 | | | 2021 | 47,708 | 37,594 | 36,839 | 6,051 | 128,192 | | JR Herlihy Chief Operating Officer | 2022 | 49,271 | 64,350 | 58,235 | 11,344 | 183,200 | | | 2021 | 49,500 | 58,500 | 81,010 | 11,050 | 200,060 |

  23. Summary Compensation Table

    (1)Reflects the portion of the executive officer's base salary that we were required to reimburse to the Manager. (2)Reflects the portion of the executive officer's bonus that was earned in 2022 and for which we were required to reimburse to the Manager. Approximately 17% of Mr. Smernoff's and approximately 28% of Mr. Herlihy's 2022 cash bonus ($7,150 for Mr. Smernoff and $22,575 for Mr. Herlihy) will not be earned until December 31, 2023 and, in accordance with SEC rules, has not been included in this table. (3)Represents the aggregate grant date fair value awards granted on December 15, 2022, under our 2013 Equity Incentive Plan to Mr. Smernoff and Mr. Herlihy of 3,989 and 8,122 restricted Common Shares, respectively. The aggregate grant date fair value was calculated in accordance with FASB ASC Topic 718, disregarding any potential forfeitures. See “Note 2— Summary of Significant Accounting Policies” to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, for additional information regarding the assumptions underlying such calculation. These awards will vest in substantially equal installments on each of December 15, 2023 and December 15, 2024, subject to Mr. Smernoff’s and Mr. Herlihy’s continuous employment through such date. (4)Amounts in this column represent dividends cash amounts paid to the executive officers in respect of their unvested restricted Common Share awards in each respective year.

  24. Outstanding Equity Awards at Fiscal Year End

    Outstanding Equity Awards at Fiscal Year End The following table lists the restricted Common Shares awarded to our NEOs that were unvested and outstanding as of December 31, 2022.

  25. Outstanding Equity Awards at Fiscal Year End

    | | Stock Awards | | | Name | Number of Common Shares That Have Not Vested | Market Value of Common Shares That Have Not Vested (1) | | Christopher Smernoff(2) | 5,755 | $39,479 | | JR Herlihy(3) | 12,005 | 82,354 |

  26. Outstanding Equity Awards at Fiscal Year End

    (1)Value is determined by multiplying the number of unvested restricted Common Shares by $6.86, the closing price for our Common Shares on the NYSE on December 30, 2022, the last trading day of the year. (2)The restricted Common Shares are subject to forfeiture prior to December 15, 2023 in the case of 1,995 Common Shares, December 16, 2023 in the case of 1,766 Common Shares, and December 15, 2024 in the case of 1,994 Common Shares. (3)The restricted Common Shares are subject to forfeiture prior to December 15, 2023 in the case of 4,061 Common Shares, December 16, 2023 in the case of 3,883 Common Shares, and December 15, 2024 in the case of 4,061 Common Shares.

  27. Potential Payments Upon Termination or Change in Control

    Potential Payments Upon Termination or Change in Control Since our NEOs are employees of EMG, we generally do not have any obligation to make any payments to any of our NEOs upon a termination of employment or upon a change in control. Our Compensated NEOs are subject to standard employment contracts for the benefit of EMG. If a Compensated NEO were terminated other than for cause or voluntary resignation, the deferred portion of such executive officer's 2022 cash bonus and any outstanding unvested restricted Common Shares held by such executive officer would continue to vest under the terms of their employment contract. In addition, upon a change in control, the restricted Common Shares would immediately vest under the terms of their Common Share award agreements.

  28. Pay Versus Performance Table

    Pay Versus Performance Table As required by Item 402(v) of Regulation S-K, we are providing the following information regarding the relationship between executive compensation and the Company’s financial performance for each of 2021 and 2022. The table below summarizes the (i) compensation values reported in the Summary Compensation Table for our principal executive officer (“PEO”) and average for our other non-PEO NEOs as compared to the “Compensation Actually Paid,” calculated pursuant to the applicable rules and (ii) Company’s financial performance for the years ended December 31, 2022 and 2021.

  29. Pay Versus Performance Table

    | Year | Summary Compensation Table Total for PEO(1) | Compensation Actually Paid to PEO(1)(2) | Average Summary Compensation Table Total for Non-PEO NEOs(1) | Average Compensation Actually Paid to Non-PEO NEOs(1)(2) | Total Shareholder Return(3) | Net Income (Loss)(4) | | | | | | | | (In thousands) | | 2022 | — | — | $152,708 | $123,890 | $66.05 | $(30,198) | | 2021 | — | — | 164,126 | 146,756 | 88.06 | (6,309) |

  30. Pay Versus Performance Table

    (1)For each of the years included above, the PEO was Laurence E. Penn and the non-PEO NEOs were JR Herlihy and Christopher Smernoff. As reflected in the Summary Compensation Table and noted elsewhere in this proxy statement, because our management agreement provides that our Manager is responsible for managing our affairs, our NEOs do not receive any cash compensation from us or any of our subsidiaries for serving as our executive officers. However, we are required by our management agreement to reimburse our Manager or EMG for the allocable share of the salary and other compensation paid by our Manager or EMG to certain of our executive officers who dedicated all or a portion of such officer’s time to us, based on the estimated percentage of such officer's time spent on our affairs. For the years presented above, Mr. Smernoff, our Chief Financial Officer, and Mr. Herlihy, our Chief Operating Officer, were the only NEOs for which we paid or reimbursed any portion of the compensation paid by our Manager. (2)For details regarding how the amounts in this column are calculated, refer to the “Adjustments to Summary Compensation Tables to Determine Compensation Actually Paid" table immediately below. (3)Total Shareholder Return assumes $100 invested at December 31, 2020 in common stock of the Company and the reinvestment of dividends. (4)Reflects the Company's net income (loss) prepared in accordance with GAAP for each of the years shown. Compensation Actually Paid represents totals from the Summary Compensation Table above, adjusted for certain items as detailed in the following table for the years ended December 31, 2021 and 2022:

  31. Pay Versus Performance Table

    | Adjustments to Summary Compensation Tables to Determine Compensation Actually Paid | 2021 | 2022 | | Average for Non-PEO NEOs Summary Compensation Table—Total | $164,126 | $152,708 | | Deduction of Average Amounts Reported under the "Stock Awards" column in the Summary Compensation Table | (58,924) | (43,418) | | Add (Subtract): | | | | Average of the year-end fair value of any equity awards granted in the covered fiscal year that are outstanding and unvested as of the end of the covered fiscal year | 58,698 | 41,541 | | Average amount of change as of the end of the covered fiscal year (from the end of the prior fiscal year) in fair value of any awards granted in prior years that are outstanding and unvested as of the end of the covered fiscal year | (5,899) | (9,970) | | For awards granted in prior years that vest in the covered fiscal year, the amount equal to the average change as of the vesting date (from the end of the prior fiscal year) in fair value | (11,245) | (16,971) | | Total Equity Award Related Adjustments | (17,370) | (28,818) | | Average Compensation Actually Paid—Total | $146,756 | $123,890 |

  32. Pay Versus Performance Table

    The following graph illustrates the relationship between average Compensation Actually Paid to our non-PEO NEOs and the Company's cumulative total return on our common shares, assuming a $100 investment on December 31, 2020 and the reinvestment of dividends for each year presented below. We did not include a graph illustrating the relationship between average Compensation Actually Paid to our PEO and the Company's cumulative total return on our common shares because, as discussed elsewhere in this proxy statement, we do not compensate our PEO. The following graph illustrates the relationship between average Compensation Actually Paid to our non-PEO NEOs and the Company's net income (loss) for each year presented below. We did not include a graph illustrating the relationship between average Compensation Actually Paid to our PEO and the Company's net income (loss) because, as discussed elsewhere in this proxy statement, we do not compensate our PEO. Please see "Executive Compensation—Narrative Disclosure to Summary Compensation Table" above for more information on how the Compensation Actually Paid to our Compensated NEOs is determined.