The effect of these transactions on HEC s net worth position as a percentage of total assets is detailed in the following schedule:

Transcription

1 4 Old River Place Jackson, Mississippi (601) Telephone (601) Fax Management Discussion and Analysis Balance Sheet Analysis Hope Enterprise Corporation s (HEC s) total assets stood at $112.0 million at December 31, 2015, up almost $0.3 million from December 31, This minimal change in total assets belies significant changes in the underlying structure of the balance sheet during the year. We successfully retired ECD Plus, LLC, one of HEC s New Markets Tax Credit (NMTC) entities with total assets at wind down of approximately $7.7 million. Also, ECD Associates, LLC and ECD New Markets, LLC, our first NMTC entities, created to fund secondary capital transactions to Hope Credit Union, continued to receive repayments of that secondary capital and pay off NMTC related debt, and so continue to decline in size. During 2015, the total consolidated assets of ECD Associates, LLC fell by $5.2 million, reducing HEC s consolidated total assets by an equal amount. The effect of these transactions on HEC s net worth position as a percentage of total assets is detailed in the following schedule: Unrestricted 12.8% 12.1% Non-controlling interests 52.7% 61.8% Total unrestricted 65.4% 73.9% Temporarily restricted 8.8% 2.0% Permanently restricted 1.8% 1.6% Total net assets 76.0% 77.5% As detailed in the following schedule, the vast majority of HEC s assets are tied up in some form of loan, investment, or property that resulted from a loan: Loans receivable net of 63,809,168 72,136,028 allowance for loan losses Loan guarantees receivable 358,708 1,076,567 Investment in affiliated company 8,883,489 10,566,949 Investment in secondary capital of 12,725,000 12,827,500 HCU Foreclosed property 244,556 1,402,150 Total 86,020,921 98,009,194 Percent of total assets 77% 88% Notes payable increased from $24.5 million at December 31, 2014 to $27.0 million at December 31, 2015, an increase of $2.5 million. Creating opportunity where it is needed most. Arkansas Louisiana Mississippi Tennessee

2 Earnings Analysis Total revenue for 2015 was $20.8 million as compared to $15.9 million for 2015 and expenses were $12.6 million in 2015 as compared to $9.0 million for This represents an overall improvement of $1.3 million. The year ending December 31, 2015 was very good financially for HEC, as was the prior year. However, the financial performance should be placed in context. A huge driver for HEC s revenues in 2015 was the recognition of an $8 million grant from the U.S. Department of Education. The proceeds of this grant are restricted for use as a credit enhancement for loans to charter schools. Hence, even though this grant will have a major impact on HEC s lending for many years, its impact on 2015 operations was minimal. When this event is taken into account, HEC s 2015 performance was slightly negative, with a reduction in net asset of $275,000. This performance largely resulted from expense increases, with total expenses increasing by $3.6 million, from $9 million in 2014 to $12.6 million in In 2014 HEC provided no support to Hope Credit Union (HCU), compared to $615,000 in The provision for loan losses in 2015 was $2.3 million, compared to $271,000 in The large increase was related to a single loan, though still performing in 2015, was judged to be collateral dependent and so reserved against the value of the collateral. With regard to earned revenue, differences between 2015 and 2014 are summarized in the following schedule: Interest, dividends and related fees: Loans and other investments 1,996,780 5,924,985 Debt securities and cash equivalents 107,843 79,199 Gain (loss) on sale of assets 628, ,977 Contract services revenues 624, ,253 Total earned revenue 3,358,010 6,924,414 The reduction in interest, dividends and related fees from loans and other investments is almost solely attributable to a one-off transaction in The $807,000 gain on sale of assets in 2014 is almost exclusively related to the wind up of a NMTC related entity. Richard Campbell Chief Financial Officer William Bynum Chief Executive Officer

3 CONSOLIDATED FINANCIAL STATEMENTS WITH SUPPLEMENTARY INFORMATION Years Ended December 31, 2015 and 2014

4 Table of Contents December 31, 2015 and 2014 REPORT Independent Auditors Report 1 FINANCIAL STATEMENTS Consolidated Statements of Financial Position 3 Consolidated Statements of Activities and Changes in Net Assets 4 Consolidated Statements of Cash Flows 6 7 SUPPLEMENTARY INFORMATION Schedule 1 Consolidating Statement of Financial Position 29 Schedule 2 Consolidating Statement of Activities and Changes in Net Assets 30 Schedule 3 Details of New Markets Tax Credit Companies Combining 31 Statement of Financial Position Schedule 4 Details of New Markets Tax Credit Companies Combining 33 Statement of Activities and Changes in Net Assets Schedule 5 ECD Investments, LLC Consolidating Balance Sheet 35 Schedule 6 ECD Investments, LLC Consolidating Statement of Operations 36

5 INDEPENDENT AUDITORS REPORT To the Board of Directors of Hope Enterprise Corporation Jackson, Mississippi We have audited the accompanying consolidated financial statements of Hope Enterprise Corporation and entities under its control, which comprise the consolidated statements of financial position as of December 31, 2015 and 2014, and the related consolidated statements of activities and changes in net assets and of cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

6 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hope Enterprise Corporation and entities under its control as of December 31, 2015 and 2014, and the changes in their consolidated net assets and their consolidated cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Report on Supplementary Information Our 2015 audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information included in Schedules 1 6 is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information is fairly stated in all material respects in relation to the 2015 consolidated financial statements as a whole. CARR, RIGGS & INGRAM, LLC Ridgeland, Mississippi March 31,

7 Consolidated Statements of Financial Position December 31, Assets Cash and cash equivalents $ 12,985,166 $ 9,828,090 Grants receivable 1,523, ,880 Contract revenue receivable 298, ,222 Receivable from Hope Federal Credit Union 2,410,597 Consumer mortgage loans held for sale 846,683 1,057,011 Loans receivable net of allowance for loan losses of approximately $4,418,000 (2015) and $2,171,000 (2014) 63,809,168 72,136,028 Loan guarantees receivable from Small Business Administration 358,708 1,076,567 Investment securities 5,803,936 Investment in affiliated company 8,883,489 10,566,949 Investment in secondary capital of Hope Federal Credit Union 12,725,000 12,827,500 Property and equipment, net 1,748,056 1,670,832 Foreclosed property 244,556 1,402,150 Other assets 322, ,862 Total assets $ 111,959,498 $ 111,631,091 Liabilities and net assets Liabilities: Accounts payable and accrued expenses $ 700,316 $ 538,689 Payable to Hope Federal Credit Union 42,187 Funds held in escrow 23,097 23,097 Notes payable 27,048,116 24,542,608 Total liabilities 27,771,529 25,146,581 Commitments and contingencies (Note 5, 12 and 13) Net assets: Unrestricted 14,310,827 13,502,753 Non controlling interests (Note 12) 58,947,574 68,969,205 Total unrestricted 73,258,401 82,471,958 Temporarily restricted 8,941,056 2,235,040 Permanently restricted 1,988,512 1,777,512 Total net assets 84,187,969 86,484,510 Total liabilities and net assets $ 111,959,498 $ 111,631,091 The accompanying notes are an integral part of these financial statements. 3

8 Consolidated Statements of Activities and Changes in Net Assets Year ended December 31, 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues and gains Grants and contributions $ 5,679,136 $ 10,517,369 $ 400,000 $ 16,596,505 In kind contributions 828, ,024 Interest, dividends and related fees: Loans and other investments 1,996,780 1,996,780 Investment securities and cash equivalents 107, ,843 Net realized and unrealized losses on investment securities (19,344) (19,344) Gain on sale of assets 628, ,920 Contract services revenue 624, ,467 9,845,826 10,517, ,000 20,763,195 Net assets released from restrictions: Expiration of time restrictions 93,010 (93,010) Satisfaction of program restrictions 3,718,343 (3,718,343) Transfers from changes in program restrictions 189,000 (189,000) Total revenues and gains 13,846,179 6,706, ,000 20,763,195 Expenses Program expenses: Development finance 6,889,955 6,889,955 Housing initiative 797, ,895 Policy and advocacy 707, ,145 Other programs 1,830,553 1,830,553 10,225,548 10,225,548 General administration: General and administration expense 2,045,652 2,045,652 Fund raising and communication 283, ,514 Total expenses 12,554,714 12,554,714 Equity in loss of affiliated company (1,257,460) (1,257,460) Change in net assets before non controlling interest 34,005 6,706, ,000 6,951,021 Non controlling interests in subsidiaries' net loss 774, ,097 Change in net assets attributable to controlling interest 808,102 6,706, ,000 7,725,118 Net assets attributable to controlling interests: At beginning of year 13,502,753 2,235,040 1,777,512 17,515,305 Dividends paid to controlling interests (28) (28) At end of year 14,310,827 8,941,056 1,988,512 25,240,395 Net assets of non controlling interests (Note 12) 58,947,574 58,947,574 Total net assets at end of year $ 73,258,401 $ 8,941,056 $ 1,988,512 $ 84,187,969 The accompanying notes are an integral part of these financial statements. 4

9 Consolidated Statements of Activities and Changes in Net Assets Year ended December 31, 2014 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues and gains Grants and contributions $ 1,993,581 $ 5,944,530 $ 360,000 $ 8,298,111 In kind contributions 629, ,955 Interest, dividends and related fees: Loans and other investments 5,924,985 5,924,985 Debt securities and cash equivalents 79,199 79,199 Net realized and unrealized losses on debt securities held as investments (937) (937) Gain on sale of assets 806, ,977 Contract services revenue 113, ,253 9,547,013 5,944, ,000 15,851,543 Net assets released from restrictions: Expiration of time restrictions 200,000 (200,000) Satisfaction of program restrictions 5,594,301 (5,594,301) Total revenues and gains 15,341, , ,000 15,851,543 Expenses Program expenses: Development finance 4,530,210 4,530,210 Housing initiative 791, ,804 Policy and advocacy 652, ,927 Other programs 1,003,225 1,003,225 6,978,166 6,978,166 General administration: General and administration expense 1,757,737 1,757,737 Fund raising and communication 253, ,631 Total expenses 8,989,534 8,989,534 Equity in earnings of affiliated company 380, ,561 Change in net assets before non controlling interest 6,732, , ,000 7,242,570 Non controlling interests in subsidiaries' income (1,485,893) (1,485,893) Change in net assets attributable to controlling interest 5,246, , ,000 5,756,677 Net assets attributable to controlling interests: At beginning of year 8,256,736 2,084,811 1,417,512 11,759,059 Dividends paid to controlling interests (431) (431) At end of year 13,502,753 2,235,040 1,777,512 17,515,305 Net assets of non controlling interests (Note 12) 68,969,205 68,969,205 Total net assets at end of year $ 82,471,958 $ 2,235,040 $ 1,777,512 $ 86,484,510 The accompanying notes are an integral part of these financial statements. 5

10 Consolidated Statements of Cash Flows Years ended December 31, Operating activities Change in net assets attributable to controlling interests $ 7,725,118 $ 5,756,677 Adjustments to reconcile change in net assets to net cash provided by operating activities: Non controlling interests in subsidiaries' income (loss) (774,097) 1,485,893 Depreciation and amortization 265, ,503 Uncollectible loan guarantees receivables 520,843 Provision for loan losses 2,255, ,977 Forgiveness of mortgage loan debt 846, ,242 Gain on sale of assets (628,920) (806,977) Equity in (gain) loss in excess of cash distribution from affiliate 1,683,460 (61,061) Impairment losses on foreclosed property 34,134 Realized and unrealized loss on investments 19, Proceeds from sales of mortgage loans held for sale 210,328 30,593 Changes in operating assets and liabilities: Contract revenue receivable (91,944) 397,933 Grants receivable (1,156,856) 672,408 Other receivables and prepaid expenses (2,042,956) (3,300,986) Accounts payable and other liabilities 119,440 (680,626) Net cash provided by operating activities 8,951,443 4,598,647 Investing activities Net decrease in loans held for investment 5,155, ,079 Purchase of investments (5,873,977) Proceeds from maturities and sales of investments 50,000 12,094 Decrease in restricted cash held in escrow 2,744,452 Proceeds from repayment of secondary capital loans 102,500 2,378,500 Proceeds from sales of foreclosed property 1,855, ,629 Purchase of property and equipment (341,630) (209,610) Net cash provided by investing activities 947,687 5,676,144 Financing activities Cash dividends paid to controlling interests (28) (431) Cash dividends paid to non controlling interests (9,247,534) (4,062,469) Long term borrowings 6,920,641 2,511,000 Payments on long term borrowings (4,415,133) (10,022,541) Net cash used in financing activities (6,742,054) (11,574,441) Net increase (decrease) in cash and cash equivalents 3,157,076 (1,299,650) Cash and cash equivalents, beginning of year 9,828,090 11,127,740 Cash and cash equivalents, end of year $ 12,985,166 $ 9,828,090 Supplemental disclosure of noncash investing and financing activities: Property received upon foreclosure on loans $ 68,657 $ 58,708 Transfers to loan guarantees receivable Loan receivable from affiliate exchanged for non controlling interest $ $ 315,744 $ $ 74,936 4,021,975 The accompanying notes are an integral part of these financial statements. 6

11 NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of the Company Hope Enterprise Corporation (the Company ) is a not for profit development financial corporation primarily serving Arkansas, Louisiana and Mississippi. The goal of the Company is to improve the regional economy through investment, jobs and growth. The services of the Company include financing, management assistance, financial counseling and market development and are designed to support business creation and expansion, homeownership and community development. Basis of Presentation The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of the Company and entities under its control which include, ECD Investments, LLC (ECDI), ECD Investments BIDCO, Inc. (BIDCO), Home Again, Inc. (Home Again), ECD Associates, LLC (ECDA), ECD New Markets, LLC (ECDNM), ECD Plus, LLC (ECD Plus), ECD Central City, LLC (ECD Central), ECD New Markets 3, LLC (ECDNM3) ECD New Markets 4, LLC (ECDNM4), ECD New Markets 5, LLC (ECDNM5), Hope New Markets 1, LLC (HNM1), Hope New Markets 2, LLC (HNM2), Hope New Markets 3, LLC (HNM3) and Hope New Markets 4, LLC (HNM4). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of such consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The allowance for loan losses and the valuation of foreclosed property and investments are determined utilizing material estimates that are particularly susceptible to change in the near term. ECDI is a limited liability company subsidiary of the Company and owns the corporate stock of BIDCO. The purpose of ECDI and BIDCO is the same as that of the Company. Home Again is a nonprofit organization in which the Company serves as the primary sponsor and also controls the Board of Directors. Home Again provides mortgage financing and recovery consultation services to eligible people in the coastal region of Mississippi in the aftermath of Hurricane Katrina. There are also 11 additional limited liability companies included in the consolidated financial statements of the Company which include ECDA, ECDNM, ECD Plus, ECD Central, ECDNM3, ECDNM4, ECDNM5, HNM1, HNM2, HNM3 and HNM4. The Company serves as the Managing Member of all 11 entities. Debt and equity funding into ECDA and ECDNM is used for secondary capital loans and contributions to Hope Federal Credit Union (HFCU). The remaining 9 limited liability companies are Community Development Entities (CDEs) created for investors to benefit from the New Markets Tax Credit program administered by the U.S. Department of the Treasury. Substantially all of the qualified equity investments must be in turn used to provide available investment capital to low income communities. The CDEs will dissolve after the loans provided by the CDEs mature, in accordance with the terms of the CDE operating agreements. 7

12 NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Although not included in the consolidated financial statements, the Company is also the primary sponsor of HFCU. Under the terms of its contractual arrangements, the Company has agreed to reimburse HFCU for certain operating expenses and losses incurred on loans considered to be higher risk than typically underwritten by regulated financial institutions such as HFCU. Such obligations are limited so as to not provide HFCU monthly net income of more than $20,000. HFCU and the Company share the same members of management and certain HFCU members are also borrowers from the Company and its affiliates. The net assets of the Company are reported as unrestricted, temporarily restricted or permanently restricted. Restricted net assets are created by donor imposed restrictions on their use. All other net assets are legally unrestricted and are therefore reported as unrestricted net assets. Temporarily restricted net assets are grants restricted to and intended for support of future operations and/or specific programs. Permanently restricted net assets are grants donated as permanent revolving loan funds. In connection with the preparation of the consolidated financial statements, management of the Company evaluated subsequent events through March 31, 2016, which was the date the consolidated financial statements were available to be issued. Fair Value Measurements Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company utilizes a fair value hierarchy for measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Three levels of inputs are used to measure fair value: Level 1 Level 2 Level 3 Valuations based on unadjusted quoted prices for identical assets in active markets accessible at the measurement date. Valuations derived for similar assets in active markets, or other inputs that are observable or can be corroborated by market data. Valuations derived from unobservable (supported by little or no market activity) inputs that reflect an entity's best estimate of what hypothetical market participants would use to determine a transaction price at the reporting date. When quoted market prices in active markets are unavailable, the Company determines fair values using various valuation techniques and models based on a range of observable market inputs including pricing models, quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, prepayment speeds, default rates and discounted cash flow. In most cases, these estimates are determined based on independent third party valuation information, and the amounts are disclosed in the Level 2 of the fair value hierarchy. If quoted market prices and 8

13 NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) independent third party valuation information are unavailable, the Company produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3. The Company generally obtains one quoted market price or dealer quote per instrument. When dealer quotations are used, the Company uses the mid mark as fair value. As part of the price verification process, valuations based on quotes are corroborated by comparison both to other quotes and to recent trading activity in the same or similar instruments. To the extent the Company determines a price or quote is inconsistent with actual trading activity observed in that investment or similar investments, or if the Company does not believe the quote is reflective of the market value for the investment, the Company would internally develop a fair value using this observable market information. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Grants Receivable Unconditional grants are recognized as revenue in the period the commitment is received. Unconditional grants to be received over a period of time in excess of one year are recorded at fair value at the date of the grant based upon the present value of payments to be received. Contract Services Revenue and Related Receivables Contract services revenue is recognized in the period services are rendered. For related receivables, no allowance for doubtful accounts has been deemed necessary. Management determines the allowance by reviewing all outstanding amounts on a monthly basis, identifying troubled accounts and using historical experience applied to an aging of accounts. Contract receivables are written off when deemed uncollectible. Recoveries of contract receivables previously written off are recorded when received. Consumer Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of aggregate cost or market value and are primarily fixed rate single family residential loans originated and held under contract to be sold in the secondary market to a permanent investor. Such loans are generally sold within 30 days and mortgage servicing rights are released at point of sale. Although investors have limited recourse to return a purchased loan, no such returns occurred in 2015 or All mortgage loans are collateralized by the related residence of the borrower. Net unrealized losses, if any, are recognized through a valuation allowance by a charge to expense. 9

14 NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans Receivable Loans receivable are stated at the amount of unpaid principal less an allowance for loan losses and consist of commercial loans, consumer mortgage loans not held for sale and forgivable mortgage loans. The commercial loans are typically collateralized by property, equipment, inventories, and/or receivables with loan to value ratios from 50 percent to 100 percent and are generally guaranteed by the principals of the borrowing business entity. Interest income is computed on the loan balance outstanding and is accrued as earned. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. For all loans 90 days or more past due, the Company generally discontinues the accrual of interest and recognizes income only as received. A loan may also be placed in non accrual status when, in management s judgment, the collection of interest is doubtful. All interest accrued but not collected for loans that are placed in non accrual status or charged off is reversed through interest income unless management believes the accrued interest is recoverable through the liquidation of collateral. Interest received on non accrual loans is either applied against principal or reported as interest income, based on management s assessment regarding the recovery of principal. When material, the net amount of nonrefundable loan origination fees and direct costs associated with the lending process is deferred and accreted to interest income over the lives of the loans using a method that approximates the interest method. A loan is considered impaired when it is probable, based on current information and events, that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired commercial loans are measured by either the present value of expected future cash flows discounted at the loan s effective interest rate, the loan s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status. A loan is considered a troubled debt restructured loan based on individual facts and circumstances. The Company makes various types of concessions when structuring troubled debt restructurings (TDRs) including rate reductions, payment extensions, and forbearance. The Company classifies troubled debt restructured loans as impaired and evaluates the need for an allowance for loan losses on a loan by loan basis. An allowance for loan losses is based on either the present value of estimated future cash flows or the estimated fair value of the underlying collateral. Loans retain their interest accrual status at the time of modification. At December 31, 2015, the Company had 3 commercial real estate loan and 4 other business asset loans classified as TDRs which totaled approximately $5,207,000. At December 31, 2014, the Company had 2 commercial real estate loan and 3 other business asset loans classified as TDRs which totaled approximately $268,000. For these TDRs, the Company had a related loan loss allowance of approximately $2,843,000 and $33,000 at December 31, 2015 and 2014, 10

15 NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) respectively. These loans were modified by changing certain interest terms. As a result, there was approximately $50,000 of accrued interest which was forgiven in There were no specific charge offs of principal related to TDRs during 2015 or Collateral dependent loans that are TDRs are charged down to the most likely fair value estimate less a cost to sell estimate, which would approximate net realizable value. During 2015 and 2014, there were no TDRs that subsequently defaulted within twelve months of loan modification. Loans receivable also include forgivable mortgage loans that are made to accommodate the financial needs of qualifying customers. The terms of these loans differ significantly from traditional mortgage loans since they are forgivable over a stated period of time, typically from five to ten years, and become due only on the sale or transfer of the residence. No principal or interest payments are therefore received for loans made under the forgivable loan programs. Persons receiving loans under the programs must meet certain eligibility requirements and agree to occupy the residence for a stated period of time. The Company holds a secured interest in certain of the property funded until the occupancy period is met. At such time, the interest in the property is transferred to the borrower. No allowance for credit losses has been deemed necessary based on the forgivable nature of the loans and management s evaluation of the excess of the value of the collateral securing the loans over the unforgiven portion of the mortgage loans. The Company recorded approximately $847,000 and $411,000 in debt forgiveness during 2015 and 2014, respectively, related to these mortgage loans. As of December 31, 2015, the Company has a conditional promise to forgive the following amounts over the next five years: 2016 $ 971, , , , ,000 Allowance for Loan Losses The allowance for loan losses is determined based on various components for individually impaired loans and for homogeneous pools of loans. The allowance for loan losses is increased by a provision for loan losses, which is charged to expense and reduced by charge offs, net of recoveries by portfolio segment. The methodology for determining charge offs is consistently applied to each segment. The allowance for loan losses is maintained at a level that, in management s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, and changes in its risk profile, credit concentrations, historical trends and economic conditions. This evaluation also considers the balance of impaired loans. The Company evaluates the allowance for loan losses on an individual loan basis for impaired loans. All other loans are evaluated on a collective basis. Losses on individually identified impaired loans are measured based on the present value of expected future cash flows discounted at each loan s original effective 11

16 NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) market interest rate. As a practical expedient, impairment may be measured based on the loan s observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through the provision added to the allowance for loan losses. Though management believes the allowance for loan losses to be adequate, ultimate losses may vary from their estimates. However, estimates are reviewed periodically, and, as adjustments become necessary, they are reported in the change in net assets during periods in which they become known. Investment Securities Investment securities are carried at fair value based on quoted market prices. Unrealized gains and losses are included in the change in net assets. The primary components that determine a security s fair value are its coupon rate, maturity and credit characteristics. The Company holds these securities as part of its asset/liability strategy and they may be sold as a result of changes in interest rate risk, prepayment risk or other similar economic factors. Premiums and discounts on investment securities are recognized as adjustments to interest income by the interest method over the period to maturity and adjusted for prepayments as applicable. The specific identification method is used to compute the realized gains or losses on the sale of these assets. Security purchases and sales are accounted for on the trade date. Investment in Affiliated Company The Company has a 98.91% non controlling equity interest in Hickory Holdings, LLC (Hickory). The investment in affiliated company is accounted for using the equity method of accounting. Hickory is not consolidated since the Company has a preferred unit interest, does not control the operations of Hickory, and does not control the election or termination of Hickory s managing members or it management. The principal business activity of Hickory is the acquisition, ownership, financing and holding of lease equipment and other personal property. Property and Equipment Property and equipment are stated at cost, if purchased, and estimated fair value at the date received, if donated to the Company. Depreciation on property and equipment is calculated principally by the straight line method over the estimated useful lives of the assets which generally range from three to 39 years. The carrying value of long lived assets is reviewed if facts and circumstances indicate a potential impairment of carrying value may have occurred utilizing relevant cash flow and profitability information. Impairment losses are recorded when the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. 12

17 NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Foreclosed Property Property acquired through, or in lieu of, loan foreclosure is held for sale and is initially recorded at the fair value of the property acquired at the date of foreclosure net of estimated selling costs, establishing a new cost basis. Loan balances in excess of the fair value of the property acquired at the date of foreclosure are charged to the allowance for loan losses. A valuation allowance and a corresponding charge to operations is established to reflect declines in value subsequent to acquisition, if any, below the new basis. Required developmental costs associated with foreclosed property under construction are capitalized and considered in determining the fair value of the property. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in program expenses. Income Taxes The Company and Home Again have received rulings from the Internal Revenue Service for exemption from income taxes as public charities under Internal Revenue Code Sections 501(c)(3) and 509 (a)(2). Since ECDI, ECDA, ECDNM, ECD Plus, ECD Central, ECDNM3, ECDNM4, ECDNM5, HNM1, HNM2, HNM3 and HNM4 are limited liability companies, no income taxes are provided. The results of operations are reportable by the LLC members on their individual income tax returns. BIDCO is subject to income taxes at the corporate level. As such, deferred income taxes relate to temporary differences between assets and liabilities of BIDCO that are recognized differently for financial reporting purposes and income tax purposes. Deferred tax assets and liabilities pertain to net operating loss carryforwards and the allowance for loan losses. A valuation allowance of approximately $2,439,000 and $2,107,000, respectively, was recorded at December 31, 2015 and 2014, to offset the net deferred tax assets of BIDCO. The valuation allowance is established to provide for amounts that management considers may not be realized as a result of income limitations. At December 31, 2015, BIDCO had net operating loss carryforwards of approximately $6,506,000 that will begin to expire in Potential exposures involving tax positions taken that may be challenged by taxing authorities contain assumptions based upon past experiences and judgments about potential actions by taxing jurisdictions. Management does not believe that the ultimate settlement of these items will result in a material amount. With minimum exceptions, the Company is no longer subject to income tax examinations prior to Effects of Recent Accounting Guidance In May 2014, the FASB issued ASU , Revenue from Contracts with Customers (Topic 606). ASU implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core 13

18 NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU is effective for the Company on January 1, The Company is still evaluating the potential impact on its financial statements. In November 2015, FASB voted to set the effective date of its planned guidance on the Current Expected Credit Loss model (CECL). Under the CECL model, an entity would reserve for all contractual cash flows not expected to be collected from a recognized financial asset (or group of financial assets) or commitment to extend credit. The estimate of expected credit losses would consider all contractual cash flows over the life of the asset. The estimate would be developed based on historical loss experience for similar assets as well as management s assessment of current conditions and reasonable and supportable forecasts about the future. FASB expects to publish a final ASU on credit losses in early The planned guidance will be effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, Early application of the guidance will be permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still evaluating the potential impact on its financial statements. Reclassifications Certain reclassifications have been made in the 2014 consolidated financial statements to conform to the method of presentation used in NOTE 2: FAIR VALUE MEASUREMENTS At December 31, 2015 and 2014, the only items carried at fair value in the accompanying consolidated statements of financial position were investment securities, certain collateraldependent impaired loans and certain foreclosed property. Investment securities are measured at fair value on a recurring basis with changes in fair value recognized as a change in net assets, whereas impaired loans and foreclosed property are carried at the lower of cost or fair value on a non recurring basis and are written down to fair value upon initial recognition or subsequent impairment. Fair value amounts for collateral dependent loans are generally based on internally developed collateral valuations. These valuations incorporate measures such as recent sales prices for comparable properties or customized discounting criteria. 14

19 NOTE 2: FAIR VALUE MEASUREMENTS (Continued) The fair value measurements by input level follow: Hope Enterprise Corporation December 31, 2015 Total Level 1 Level 2 Level 3 Impaired loans $ 3,181,929 $ 3,181,929 Foreclosed property 68,657 68,657 Investment securities 5,803,936 2,944 5,800,992 December 31, 2014 Total Level 1 Level 2 Level 3 Impaired loans $ 5,940,798 $ 5,940,798 Foreclosed property 92,842 92,842 NOTE 3: GRANTS RECEIVABLE The Company s management anticipates grants receivable will be received and available for support of the Company s programs as follows: December 31, Receivable in less than one year $ 1,386,500 $ 275,000 Receivable in one to five years 100, ,000 Receivable in six to eight years 60,000 1,546, ,000 Less adjustment to reflect grants receivable at fair value at the date of grant, based on 1.25% discount rate in 2015 and 2014 (22,764) (8,120) $ 1,523,736 $ 366,880 NOTE 4: INVESTMENT SECURITIES Investment securities, presented in the financial statements at fair value, are categorized as follows: Amortized December 31, 2015 Cost Fair Value Government agencies 2,510,527 2,499,203 Residential mortgage backed securities 2,505,242 2,492,837 Municipal bonds 804, ,007 Equity securities 2,889 2,889 Total $ 5,823,280 $ 5,803,936 15

20 NOTE 4: INVESTMENT SECURITIES (Continued) Hope Enterprise Corporation The amortized cost and approximate fair value of debt securities, by expected maturity, are shown below. Amortized December 31, 2015 Cost Fair Value Due after one year through five years $ 2,815,149 $ 2,803,160 Due after five years through ten years 2,256,140 2,252,347 Due after ten years through fifteen years 749, ,540 $ 5,820,391 $ 5,801,047 NOTE 5: LOANS AND COMMITMENTS The Company makes loans to small businesses located in rural, economically disadvantaged areas of Mississippi, Louisiana and Arkansas. Such loans, the proceeds of which normally provide working capital and equipment financing to undercapitalized businesses that may be unable to obtain credit from conventional financing sources, have a higher than typical degree of risk. Loans other than consumer mortgage loans held for sale consisted of the following: December 31, Commercial loans $ 65,399,936 $ 71,244,693 Forgivable mortgage loans 2,821,781 3,055,929 Other consumer mortgage loans not held for sale 5,049 6,108 Allowance for loan losses (4,417,598) (2,170,702) $ 63,809,168 $ 72,136,028 Included in commercial loans are New Market Tax Credit program loans originated by community development entities which aggregated approximately $49,025,000 and $56,074,000 at December 31, 2015 and 2014, respectively. These loans typically have seven year repayment terms and include interest only loans of approximately $49,025,000 and $50,641,000 at December 31, 2015 and 2014, respectively, which will begin to mature in

21 NOTE 5: LOANS AND COMMITMENTS (Continued) Hope Enterprise Corporation A summary of the commercial loans and related allowance for loan losses evaluated for impairment both individually and collectively is as follows: Loans Allowance December 31, 2015 Individually Collectively Individually Collectively Net Commercial loans secured by: Commercial real estate $ 5,575,919 $ 17,124,285 $ 2,945,488 $ 200,991 $ 19,553,725 Single family real estate 79,569 10,221, ,754 9,993,686 Multi family real estate 644,451 1,642, ,557 29,210 2,148,015 Other business assets 370,033 23,183,457 88, ,951 22,813,236 Construction 6,220,872 38,395 6,182,477 Unsecured commercial loans 24, ,091 16,970 28, ,199 Totals $ 6,694,029 $ 58,705,907 $ 3,160,318 $ 1,257,280 $ 60,982,338 December 31, 2014 Commercial loans secured by: Commercial real estate $ 5,499,804 $ 20,384,574 $ 528,470 $ 240,654 $ 25,115,254 Single family real estate 11,898 10,102, ,895 9,806,469 Multi family real estate 678,309 1,536, ,445 29,957 2,042,529 Other business assets 449,648 25,386,105 76, ,803 25,069,767 Construction 294,508 5,820,000 57,208 29,100 6,028,200 Unsecured commercial loans 40,530 1,040,229 19,714 49,273 1,011,772 Totals $ 6,974,697 $ 64,269,996 $ 824,020 $ 1,346,682 $ 69,073,991 Transactions in the allowance for loan losses are summarized as follows: December 31, Balance at beginning of year $ 2,170,702 $ 2,029,726 Provisions charged to program expense 2,255, ,977 Loans charged off and foreclosed (50,601) (264,963) Loan recoveries 41, ,962 Balance at end of year $ 4,417,598 $ 2,170,702 17

22 NOTE 5: LOANS AND COMMITMENTS (Continued) Hope Enterprise Corporation Changes in the allowance for loans losses by portfolio class were as follows: Balance at Year ended December 31, 2015 Beginning of Year Charge offs Recoveries Provision for Loan Losses Balance at End of Year Commercial loans secured by: Commercial real estate $ 769,124 $ $ 41,910 $ 2,335,445 $ 3,146,479 Single family real estate 307,895 (19,650) 19, ,754 Multi family real estate 172,402 (33,635) 138,767 Other business assets 765,986 (17,794) (7,938) 740,254 Construction 86,308 (47,913) 38,395 Unsecured commercial loans 68,987 (13,157) (9,881) 45,949 $ 2,170,702 $ (50,601) $ 41,910 $ 2,255,587 $ 4,417,598 Year ended December 31, 2014 Commercial loans secured by: Commercial real estate $ 271,544 $ (264,963) $ 134,962 $ 627,581 $ 769,124 Single family real estate 323,767 (15,872) 307,895 Multi family real estate 583,772 (411,370) 172,402 Other business assets 723,874 42, ,986 Construction 29,627 56,681 86,308 Unsecured commercial loans 97,142 (28,155) 68,987 $ 2,029,726 $ (264,963) $ 134,962 $ 270,977 $ 2,170,702 Loan commitments are made to accommodate the financial needs of the Company s customers. These arrangements have credit risk essentially the same as that involved in extending loans to customers of commercial banks and are subject to the Company s normal credit practices. The Company uses the same credit policies in making these commitments and conditional obligations as it does for on balance sheet instruments. The Company s maximum exposure to credit loss in the event of nonperformance by the other party for loan commitments (including unused lines of credit) was approximately $295,000 and $1,448,000 at December 31, 2015 and 2014, respectively. Approximately $329,000 and $253,000 of the allowance for loan losses relates to non accrual loans at December 31, 2015 and 2014, respectively. The Company had non accrual loans with 14 customers totaling approximately $1,613,000 at December 31, The Company had nonaccrual loans with 12 customers totaling approximately $1,465,000 at December 31, There were no loans past due 90 days or more and still accruing interest at December 31, 2015 and

23 NOTE 5: LOANS AND COMMITMENTS (Continued) Hope Enterprise Corporation The Company had impaired loans of approximately $6,694,000 and $6,975,000 as of December 31, 2015 and 2014, respectively. There was approximately $3,160,000 and $824,000 in the allowance for loan losses specifically allocated to these impaired loans at December 31, 2015 and 2014, respectively. Impaired loans approximating $352,000 and $210,000 at December 31, 2015 and 2014, respectively, have no allowance for loan losses specifically allocated to these loans. The average balance of impaired loans was approximately $6,856,000 in 2015 and $6,996,000 in Income recognized on impaired loans was approximately $84,000 in 2015 and $119,000 in Information relative to impaired loans is as follows: December 31, 2015 Unpaid Principal Balance Total Loans with No Specific Allowance Total Loans with a Specific Allowance Specific Allowance Commercial loans secured by: Commercial real estate $ 5,575,919 $ 191,362 $ 5,384,557 $ 2,945,488 Single family real estate 79,569 79,569 Multi family real estate 644, , ,557 Other business assets 370,033 80, ,182 88,303 Construction Unsecured commercial loans 24,057 24,057 16,970 Total impaired loans $ 6,694,029 $ 351,782 $ 6,342,247 $ 3,160,318 December 31, 2014 Commercial loans secured by: Commercial real estate $ 5,499,804 $ 197,981 $ 5,301,823 $ 528,470 Single family real estate 449, ,648 Multi family real estate 11,898 11, ,445 Other business assets 678, ,309 76,183 Construction 294, ,508 57,208 Unsecured commercial loans 40,530 40,530 19,714 Total impaired loans $ 6,974,697 $ 209,879 $ 6,764,818 $ 824,020 19