1. Organization and Business Description

Hatteras Financial Corp. (the “Company”) was incorporated in Maryland on September 19, 2007. The Company invests in single-family residential mortgage assets, such as mortgage-backed securities (“MBS”), and other financial assets. To date, the Company has primarily invested in adjustable-rate (“ARMs”) and fixed rate MBS, issued or guaranteed by a U.S. Government agency, such as Ginnie Mae, or by a U.S. Government-sponsored entity, such as Fannie Mae and Freddie Mac (“agency securities”).

The Company is externally managed and advised by its manager, Atlantic Capital Advisors LLC (“ACA”).

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). As a result, the Company does not pay federal income taxes on taxable income distributed to shareholders if certain REIT qualification tests are met. It is the Company’s policy to distribute 100% of its taxable income, after application of available tax attributes, within the time limits prescribed by the Code, which may extend into the subsequent taxable year. However, the Company may conduct certain activities that cause it to earn income which will not be qualifying income for REIT purposes. The Company has designated certain of its subsidiaries as taxable REIT subsidiaries (“TRSs”) as defined in the Code to engage in such activities, and the Company may in the future form additional TRSs.

On August 31, 2015, the Company closed on its acquisition of Pingora Asset Management, LLC (“PAM”) and Pingora Loan Servicing, LLC (“PLS,” and together, “Pingora”), a specialized asset manager focused on investing in new-production performing mortgage servicing rights (“MSR”) and master-servicing residential mortgage loans sourced primarily from direct, ongoing relationships with loan originators. PAM is a registered investment advisor and PLS is an approved servicer with Fannie Mae, Freddie Mac and Ginnie Mae that is managed by PAM. The acquisition provides the Company with MSR portfolio management and master-servicing oversight capabilities to the Company, accelerating the Company’s entry into investing in MSR (see Note 6 for further discussion). In addition to being an income-producing investment, the Company expects that MSR will serve as a natural hedge against the impact of changes in interest rates on the fair value of the Company’s MBS portfolio. The Company acquired 100% of the voting interests of Pingora for cash consideration of approximately $23.5 million. In conjunction with the transaction, the Company also issued approximately $4.4 million of equity interests to Pingora management, a significant portion of which is subject to future vesting. The Company has accounted for the transaction as a business combination in accordance with ASC 805, Business Combinations. The acquisition did not have a material effect on the Company’s revenues, net income, total assets, financial condition or liquidity for the periods presented.

The opening balance sheet of Pingora as of the acquisition date consisted of the following assets and liabilities:

	Assets / (Liabilities)
Mortgage loans held for sale, at fair value	$	4,292
Cash and cash equivalents		1,937
Ascent software platform		2,000
Customer relationships intangible		16,000
Licenses		2,000
Goodwill		3,498
Warehouse lines of credit		(3,989	)
Deferred tax liabilities		(2,060	)
Other net liabilities		(215	)
	$	23,463

The acquisition is subject to certain post-closing adjustments and the Company’s allocation of the purchase price to the assets and liabilities acquired may be adjusted accordingly.