INDUSTRIAL AND COMMERCIAL BANK OF CHINA (CANADA)

Transcription

1 Financial Statements of INDUSTRIAL AND COMMERCIAL BANK OF CHINA (CANADA)

2 KPMG LLP Telephone (416) Chartered Accountants Fax (416) Bay Adelaide Centre Internet Bay Street Suite 4600 Toronto ON M5H 2S5 Canada INDEPENDENT AUDITORS' REPORT To the Shareholders of Industrial and Commercial Bank of China (Canada) We have audited the accompanying financial statements of Industrial and Commercial Bank of China (Canada), which comprise the statements of financial position as at December 31, 2011, December 31, 2010 and January 1, 2010, the statements of comprehensive income, changes in shareholders' equity and cash flows for the years ended December 31, 2011 and December 31, 2010, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of 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 financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the 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. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Industrial and Commercial Bank of China (Canada) as at December 31, 2011, December 31, 2010 and January 1, 2010, and its financial performance and its cash flows for the years ended December 31, 2011 and December 31, 2010 in accordance with International Financial Reporting Standards. Chartered Accountants, Licensed Public Accountants March 27, 2012 Toronto, Canada KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP

3 Statement of Financial Position (In thousands of dollars) December 31, 2011 December 31, December 31, January 1, Note Assets Cash on hand $ 1,558 $ 1,409 $ 1,814 Deposits with banks 4 47,730 56,129 43,711 Derivative assets held for risk management Loans and advances to banks 6 1,250 Loans and advances to customers 7 541, , ,138 Investment securities 8 42,212 63,997 63,669 Current tax assets Property and equipment 9 8,007 2,268 1,318 Intangible asset Deferred tax assets 11 1,263 1,329 1,738 Other assets 12 2,759 2, Total assets $ 647,738 $ 630,080 $ 581,489 Liabilities Derivative liabilities held for risk management 5 $ 592 $ 1,382 $ 1,819 Deposits from banks , , ,584 Deposits from customers , , ,049 Current tax liabilities 315 Other liabilities 16 4,777 5,654 3,847 Total liabilities 549, , ,614 Shareholders' Equity Share capital 17 83,000 58,000 58,000 Retained earnings 15,559 12,836 8,875 Total shareholders' equity 98,559 70,836 66,875 Commitments and contingent liabilities 23 Total liabilities and shareholders' equity $ 647,738 $ 630,080 $ 581,489 See accompanying notes to financial statements. On behalf of the Board: Xiaodong Yang Director and Chief Executive Officer Louisa Chan Director and Audit Committee Member 1

4 Statement of Comprehensive Income (In thousands of dollars) Note Interest income: Loans and advances $ 22,898 $ 19,439 Investment securities Deposits with banks Total interest income 23,786 20,091 Interest expense: Deposits from banks (3,833) (2,671) Deposits from customers (4,843) (4,206) Total interest expense (8,676) (6,877) Net interest income 15,110 13,214 Fee and commission income 18 1,930 1,903 Fee and commission expense 18 (282) (230) Net fee and commission income 1,648 1,673 Net income from other financial instruments at fair value through profit or loss 1, Net gain (loss) from foreign exchange (829) 584 Other income Net impairment recovery on financial assets Operating income 18,097 16,505 Salaries and other staff benefits expenses 20 (8,694) (6,984) Occupancy expenses (2,745) (1,573) Depreciation and amortization 9, 10 (725) (369) Other expenses 21 (1,986) (1,722) (14,150) (10,648) Profit before income tax 3,947 5,857 Income tax expense: Current 22 (1,158) (1,487) Deferred 22 (66) (409) (1,224) (1,896) Profit and comprehensive income for the year $ 2,723 $ 3,961 See accompanying notes to financial statements. 2

5 Statement of Changes in Shareholders' Equity (In thousands of dollars) Note Share capital: Balance, beginning of year 17 $ 58,000 $ 58,000 Proceeds from issuance of shares 17 25,000 Balance, end of year 83,000 58,000 Retained earnings: Balance, beginning of year 12,836 8,875 Profit and comprehensive income for the year 2,723 3,961 Balance, end of year 15,559 12,836 Shareholders' equity, end of year $ 98,559 $ 70,836 See accompanying notes to financial statements. 3

6 Statement of Cash Flows (In thousands of dollars) Cash flows from (used in) operating activities Profit for the year $ 2,723 $ 3,961 Adjustments for: Depreciation and amortization Net impairment (recovery) on loans and advances (62) (256) Net interest income (15,110) (13,214) Net loss on sale of property and equipment 3 5 Income tax expense 1,224 1,896 (10,497) (7,239) Change in derivative assets held for risk management (774) 6 Change in loans and advances to banks (1,250) Change in loans and advances to customers (39,749) (33,326) Change in other assets 939 (1,720) Change in derivative liabilities held for risk management (790) (437) Change in deposits from banks (29,634) 24,216 Change in deposits from customers 21,236 19,359 Change in other liabilities (482) 1,476 (61,001) 2,335 Interest received 23,008 19,879 Interest paid (9,071) (6,546) Income tax paid (1,502) (2,017) Net cash from (used in) operating activities (48,566) 13,651 Cash flows from (used in) investing activities Acquisition of investment securities (166,788) (208,369) Proceeds from investment securities received on maturity 188, ,041 Purchase of property and equipment (6,448) (1,301) Purchase of intangible asset (21) (9) Net cash from (used in) investing activities 15,316 (1,638) Cash flows from financing activities Proceeds from issuance of shares 25,000 Net cash from financing activities 25,000 Net increase (decrease) in cash and cash equivalents (8,250) 12,013 Cash and cash equivalents, beginning of year 57,538 45,525 Cash and cash equivalents, end of year $ 49,288 $ 57,538 Represented by: Cash on hand $ 1,558 $ 1,409 Deposits with banks 47,730 56,129 $ 49,288 $ 57,538 See accompanying notes to financial statements. 4

7 Notes to Financial Statements 1. Reporting entity: Industrial and Commercial Bank of China (Canada) (the "Bank") is licensed to operate as a bank in Canada with full banking powers under the Bank Act as a foreign bank subsidiary. The Bank obtained its letters patent as a Canadian chartered bank under its former name, The Bank of East Asia (Canada), on May 16, 1991 and commenced operations on May 15, On June 4, 2009, The Bank of East Asia Limited, Hong Kong (the "shareholder bank" or "BEA") reached an agreement with the Industrial and Commercial Bank of China Limited (the "parent bank") regarding the acquisition by the parent bank of 70% of the issued and outstanding common shares of the Bank ("Acquisition"). Following satisfaction of all the pre-agreed conditions and all the necessary regulatory approvals obtained, the Acquisition was completed on January 28, After obtaining its letters patent to amend the incorporating instrument of the Bank from the Superintendent of Financial Institutions Canada (the "Superintendent" or "OSFI"), on July 2, 2010 the Bank officially changed its name from The Bank of East Asia (Canada) to Industrial and Commercial Bank of China (Canada). By exercising the option entitled in the shareholders' agreement executed for the Acquisition, on August 26, 2011 the parent bank completed an acquisition of a further 10% of the issued and outstanding common shares of the Bank from BEA. Since then, the parent bank and BEA now own 80% and 20% of the Bank, respectively. 2. Basis of preparation: (a) Statement of compliance: These financial statements have been prepared in accordance with Section 308(4) of the Bank Act which states that, except as otherwise specified by the Superintendent, the financial statements are to be prepared in accordance with International Financial Reporting Standards ("IFRSs"). These are the Bank's first financial statements prepared in accordance with IFRSs as issued by the International Accounting Standards Board ("IASB") and IFRS 1, First-time Adoption of International Financial Reporting Standards, has been applied. An explanation of how the transition to IFRSs has affected the reported financial position, financial performance and cash flows of the Bank is provided in note 31. The financial statements were authorized for issue by the Board of Directors on March 27,

8 2. Basis of preparation (continued): (b) Basis of measurement: The financial statements have been prepared on the historical cost basis except for the derivative financial instruments, which are measured at fair value, and held-to-maturity investment securities, which are carried at amortized cost. (c) Functional and presentation currency: These financial statements are presented in Canadian dollars, which is the Bank's functional currency. Except as otherwise indicated, financial information presented in Canadian dollars has been rounded to the nearest thousand. (d) Use of estimates and judgements: The preparation of the financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements are described in notes 28 and Significant accounting policies: The accounting policies used in the preparation of these financial statements, including the accounting requirements of the Superintendent, are summarized below. These accounting policies have been applied consistently to all periods presented in these financial statements and in preparing the opening IFRS statement of financial position at January 1, 2010 for the purposes of transitioning to IFRSs, and have been applied consistently by the Bank. 6

9 3. Significant accounting policies (continued): (a) Foreign currency: Transactions in foreign currencies are translated into Canadian dollars at the spot exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated into Canadian dollars at the spot exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into Canadian dollars at the spot exchange rate at the date that the fair value was determined. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Income and expenses denominated in foreign currencies are translated into Canadian dollars at average exchange rates for the year. The foreign currency gains or losses arising on retranslation of assets and liabilities denominated in foreign currencies are recognized in other income in the statement of comprehensive income. (b) Interest: Interest income and expense are recognized in profit or loss using the effective interest method. When calculating the effective interest rate, the Bank estimates future cash flows considering all contractual terms of the financial instruments, but not future credit losses. The calculation of the effective interest rate includes all fees paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability. Interest income and expense presented in the statement of comprehensive income include interest on financial assets and financial liabilities measured at amortized cost calculated on an effective interest basis. 7

10 3. Significant accounting policies (continued): (c) Fee and commission: Fee and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fee and commission income is recognized as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognized on a straight-line basis over the commitment period. Other fee and commission expense relates mainly to transaction and service fees, which are expensed as the services are received. (d) Net income from other financial instruments at fair value through profit or loss: Net income from other financial instruments at fair value through profit or loss relates to non-trading derivatives held for risk management purposes that do not form part of qualifying hedge relationships and includes all unrealized fair value changes. (e) Lease payments: Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. (f) Income tax expense: Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. 8

11 3. Significant accounting policies (continued): Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities against current tax assets, and they relate to income taxes levied by the same tax authority on the Bank as the same taxable entity. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. (g) Financial assets and financial liabilities: (i) Recognition: The Bank initially recognizes loans and advances and deposits on the date at which they are originated. Regular way purchases and sales of financial assets are recognized on the trade date at which the Bank commits to purchase or sell the asset. All other financial assets and liabilities are initially recognized on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. (ii) Classification: See notes 3(h), (i), (k) and (l). 9

12 3. Significant accounting policies (continued): (iii) Derecognition: The Bank derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset transferred), and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognized in other comprehensive income is recognized in profit or loss. The Bank does not securitize consumer and commercial financial assets. The Bank derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. (iv) Offsetting: Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Bank has a legal right to set off the recognized amounts and it intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRSs, or for gains and losses arising from a group of similar transactions. (v) Amortized cost measurement: The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment. 10

13 3. Significant accounting policies (continued): (vi) Fair value measurement: Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction on the measurement date. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm's-length basis. If a market for a financial instrument is not active, the Bank establishes fair value using a variety of valuation techniques and models, which are well-recognized in the market and provided by reliable pricing service providers. The prices and valuation parameters are obtained and verified by the back office independently from the trading desk and risk taking unit. Fair values also reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Bank entity and the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Bank believes a third-party market participant would take them into account in pricing a transaction. (vii) Identification and measurement of impairment: At each reporting date the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is (are) impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s), and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably. 11

14 3. Significant accounting policies (continued): Objective evidence that financial assets are impaired can include significant financial difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. The Bank considers evidence of impairment for loans and advances at both a specific asset and collective level. All loans and advances found to be specifically impaired are individually assessed for specific impairment. All individually significant loans and advances are assessed for specific impairment. All individually significant loans and advances found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances that are not individually significant are collectively assessed for impairment by grouping together loans and advances with similar risk characteristics. The Bank classifies a loan as impaired when, in the opinion of management, there is no longer reasonable assurance as to the timely collection of the full amount of principal and interest. Loans and advances where interest or principal is contractually past due 90 days are automatically recognized as impaired, unless management determines that they are fully secured, in the process of collection and the collection efforts are reasonably expected to result in either repayment of the loan or restoring it to a current status within 180 days from the date the payment has become in arrears. All loans are classified as impaired when interest or principal is past due 180 days, except for loans guaranteed or insured by the Canadian government, the provinces or a Canadian government agency, which are classified as impaired when interest or principal is contractually 365 days in arrears. In assessing collective impairment, the Bank uses statistical modelling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modelling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. 12

15 3. Significant accounting policies (continued): All held-to-maturity investment securities are assessed individually for specific impairment. Impairment losses on assets carried at amortized cost are measured as the difference between the carrying amount of the financial asset and its estimated realizable amount, which is the present value of estimated future cash flows discounted at the asset's original effective interest rate. When the amounts and timing of future cash flows cannot be measured with reasonable reliability, either the fair value of any security underlying the asset net of any expected realization costs, or the observable market price for the asset is used to measure the estimated realizable amount. Impairment losses are recognized in profit or loss and reflected in an allowance account against loans and advances. Interest on impaired assets continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. The Bank writes off the loans and advances and investment securities when they are determined to be uncollectible. (viii) Designation at fair value through profit or loss: The Bank does not have any financial asset or liability designated at fair value through profit or loss. (h) Cash and cash equivalents: Cash and cash equivalents include notes and coins on hand, unrestricted balances held with other banks and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and used by the Bank in the management of its short-term commitments. Cash and cash equivalents are carried at amortized cost in the statement of financial position. 13

16 3. Significant accounting policies (continued): (i) Trading assets and liabilities: The Bank does not designate any financial asset or liability as held-for-trading. (j) Derivatives held for risk management purposes: Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets or liabilities. Derivatives held for risk management purposes are measured at fair value in the statement of financial position. They are reported as assets where they have a positive fair value and as liabilities where they have a negative fair value. All changes in the fair value of the derivatives are recognized immediately in profit or loss as a component of net income from other financial instruments at fair value through profit or loss. (i) Hedging instruments: The Bank does not designate certain derivatives held for risk management as well as non-derivative financial instruments as hedging instruments. (ii) Embedded derivatives: Derivatives may be embedded in another contractual arrangement (a "host" contract). The Bank accounts for an embedded derivative separately from the host contract when the host contract is not itself carried at fair value through profit or loss, the terms of the embedded derivative would meet the definition of a derivative if they contained a separate contract, and the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract. Separated embedded derivatives are accounted for depending on their classification, and are presented in the statement of financial position together with the host contract. (k) Loans and advances: Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Bank does not intend to sell immediately or in the near term. Loans and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortized cost using the effective interest method. 14

17 3. Significant accounting policies (continued): (l) Investment securities: Investment securities are initially measured at fair value plus, in the case of investment securities not at fair value through profit or loss, incremental direct transaction costs, and subsequently accounted for depending on their classification as either held to maturity, fair value through profit or loss or available for sale. The Bank has designated all investment securities as held-to-maturity ("HTM") investments. HTM investments are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity, and which are not designated as at fair value through profit or loss or as available for sale. HTM investments are carried at amortized cost using the effective interest method. A sale or reclassification of a more than insignificant amount of HTM investments would result in the reclassification of all HTM investments as available for sale, and would prevent the Bank from classifying investment securities as held to maturity for the current and the following two financial years. However, sales and reclassifications in any of the following circumstances would not trigger a reclassification: sales or reclassifications that are so close to maturity that changes in the market rate of interest would not have a significant effect on the financial asset's fair value; sales or reclassifications after the Bank has collected substantially all of the asset's original principal; and sales or reclassifications attributable to non-recurring isolated events beyond the Bank's control that could not have been reasonably anticipated. 15

18 3. Significant accounting policies (continued): (m) Property and equipment: (i) Recognition and measurement: Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment, and are recognized net within other income in profit or loss. (ii) Subsequent costs: The cost of replacing a part of an item of property or equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property and equipment are recognized in profit or loss as incurred. (iii) Depreciation: Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leasehold improvements are depreciated over the shorter of the lease term and their estimated useful lives. 16

19 3. Significant accounting policies (continued): The estimated useful lives for the current and comparative periods are as follows: bank premises: 50 years furniture and fixtures: range from 10 to 20 years equipment: range from 4 years to 160 months leasehold improvements: 10 years or the remaining lease term, whichever is less Depreciation methods, useful lives and residual values are reassessed at each financial year end and adjusted if appropriate. (n) Intangible asset: The intangible asset comprises computer software acquired by the Bank. It is stated at cost less accumulated amortization and accumulated impairment losses. Subsequent expenditure on software asset is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortization is recognized in profit or loss on a straight-line basis over the estimated useful life of the software, from the date that it is available for use since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful life of software is four years. Amortization methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. 17

20 3. Significant accounting policies (continued): (o) Impairment of non-financial assets: The carrying amounts of the Bank's non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognized if the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognized in profit or loss. (p) Deposits: Deposits are the Bank's sources of debt funding. Deposits are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortized cost using the effective interest method. (q) Provisions: A provision is recognized if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments the time value of money and, where appropriate, the risks specific to the liability. A provision for onerous contracts is recognized when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognizes any impairment loss on the assets associated with that contract. 18

21 3. Significant accounting policies (continued): (r) Financial guarantees: Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. These financial guarantees include standby letters of credit, letters of guarantee and other similar contracts. Financial guarantee liabilities are recognized initially at their fair value and included within other liabilities, and the initial fair value is amortized over the life of financial guarantee. The fair value is normally based on the discounted cash flow of the premium to be received for the guarantee, resulting in a corresponding other asset. The financial guarantee liability is subsequently carried at the higher of this amortized amount and the present value of any expected payment when a payment under the guarantee has become probable. (s) Acceptances: The Bank's potential liability under acceptances is recognized within other liabilities and recorded at fair value. The Bank's recourse against the customer in the event of a call on any of these commitments is recognized as an offsetting other asset of the same amount. (t) Employee benefits: The Bank has a defined contribution plan providing pension benefits for its salaried employees. A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to the defined contribution plan are recognized an expense in profit or loss based on the contributions required to be made each year. 19

22 3. Significant accounting policies (continued): (u) New standards and interpretations not yet adopted: A number of new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2011, and have not been applied in preparing these financial statements. None of these will have an effect on the financial statements of the Bank, with the exception of: IFRS 9, Financial Instruments, published on November 12, 2009 as part of phase I of the IASB's comprehensive project to replace IAS 39, Financial Instruments - Recognition and Measurement, deals with classification and measurement of financial assets. The requirements of this standard represent a significant change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets: amortized cost and fair value. A financial asset would be measured at amortized cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset's contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value. The standard eliminates the existing IAS 39 categories of held to maturity, available for sale and loans and receivables. The standard requires that derivatives embedded in contracts with a host that is a financial asset within the scope of the standard are not separated; instead the hybrid financial instrument is assessed in its entirety as to whether it should be measured at amortized cost or fair value. The standard is effective for annual periods beginning on or after January 1, There is an IASB exposure draft that may potentially delay the effective date to January 1, Earlier application is permitted. The Bank is currently in the process of evaluating the potential effect of this standard. Given the nature of the Bank's operations, this standard is expected to have a pervasive impact on the Bank's financial statements. 20

23 4. Deposits with banks: The money market placements with other banks all mature within 90 days and have an average effective yield of 1.29% ( %). 5. Derivatives held for risk management: Assets Liabilities Assets Liabilities Instrument type: Foreign exchange forward contracts $ 836 $ 294 $ 48 $ 495 Interest rate swap contracts $ 836 $ 592 $ 62 $ 1,382 In the ordinary course of business, the Bank enters into various derivative contracts, including foreign exchange forwards and interest rate swaps. The Bank enters into such contracts to manage its exposures to currency and interest rate risks as part of the Bank's asset liability management program. 21

24 5. Derivatives held for risk management (continued): (a) An analysis of the Bank's derivative portfolio and related credit exposure is as follows: Current Credit Risk- Current Credit Risk- Notional replacement equivalent weighted Notional replacement equivalent weighted amount cost amount balance amount cost amount balance Foreign exchange forward contracts $ 59,343 $ 836 $ 1,429 $ 661 $ 41,533 $ 48 $ 463 $ 130 Interest rate swap contracts 20, , All foreign exchange forward contracts mature in less than one year. All interest rate swap contracts mature within five years. 22

25 5. Derivatives held for risk management (continued): (b) The following table summarizes the fair value of the Bank's derivative portfolio at December 31, segregating derivative instruments between those that are in a favourable or receivable position from those in an unfavourable or payable position: Favourable Unfavourable Net Net position position position position Foreign exchange forward contracts $ 836 $ (294) $ 542 $ (447) Interest rate swap contracts (298) (298) (873) Fair values of foreign exchange forward contracts are based on quoted market prices or dealer quotes. The fair values of interest rate swap contracts are represented by the marked-to-market values derived from market quotes or widely recognized and approved valuation models. These amounts are generally calculated as the net present value of contractual cash flows using prevailing market rates for derivative instruments with similar characteristics. (c) The Bank follows a fair value hierarchy to categorize the inputs used to measure fair value. The fair value hierarchy is based on quoted prices in active markets (Level 1), models using inputs that are directly or indirectly observable from market data (Level 2), or models using inputs that are not based on observable market data (Level 3). The table below analyzes the derivative instruments measured at fair value at December 31 by the level in the fair value hierarchy into which the fair value measurement is categorized: Level 2 Total Level 2 Total Derivative assets held for risk management: Foreign exchange forward contracts $ 836 $ 836 $ 48 $ 48 Interest rate swap contracts $ 836 $ 836 $ 62 $ 62 Derivative liabilities held for risk management: Foreign exchange forward contracts $ 294 $ 294 $ 495 $ 495 Interest rate swap contracts $ 592 $ 592 $ 1,382 $ 1,382 23

26 6. Loans and advances to banks: Loans and advances to banks $ 1,250 $ Less specific allowance for impairment $ 1,250 $ 7. Loans and advances to customers: (a) An analysis of the Bank's loan portfolio, net of unearned income and the allowances for impairment, by category and by location of ultimate risk is as follows: Loans and advances to customers at amortized cost: Canada: Residential mortgages $ 74,864 $ 72,467 Consumer loans 26,909 32,012 Business loans: Industrial and commercial 139, ,570 Property development and investment 182, , , ,392 Specific allowance for impairment (217) (44) 423, ,348 Foreign countries: Residential mortgages 5,475 6,118 Consumer loans Business loans: Industrial and commercial 102,774 28,782 Property development and investment 14,244 61, ,673 97,150 Specific allowance for impairment 122,673 97,150 Collective allowance for impairment (4,778) (4,778) Carrying amount, net of allowances for impairment $ 541,531 $ 501,720 The carrying amount, net of allowances for impairment, includes loans and advances to customers of $63,898 ( $1,460) denominated in foreign currencies. 24

27 7. Loans and advances to customers (continued): (b) The following table analyzes the Bank's loan portfolio by the contractual repricing or maturity dates, whichever is earlier. This analysis excludes loans classified as impaired having a net carrying amount of $3,706 ( $740) under note 7(c) below Within 3 months 1 to 5 Over 5 Floating 3 months to 1 year years years Total Total Canada: $ 293,513 $ 29,566 $ 55,307 $ 41,544 $ $ 419,930 $ 408,608 Average effective yield 4.54% 2.50% 3.95% 4.70% 4.34% 4.67% Foreign countries: 55,306 26,715 40, ,673 97,150 Average effective yield 3.44% 3.55% 2.20% 3.01% 3.53% Total $ 348,819 $ 56,281 $ 95,959 $ 41,544 $ $ 542,603 $ 505,758 Average effective yield 4.37% 2.90% 3.21% 4.70% 4.04% 4.45% Average effective yields are based on book values and contractual interest rates adjusted for the amortization of any deferred income. 25

28 7. Loans and advances to customers (continued): (c) An analysis of impaired loans and advances to customers and the related allowance for impairment is as follows: Gross Specific Carrying Carrying amount allowance amount amount Consumer loans $ 374 $ $ 374 $ 3 Business loans: Industrial and commercial 3,549 (217) 3, $ 3,923 $ (217) $ 3,706 $ 740 (d) Allowances for impairment: Specific allowance for impairment: Balance, beginning of year $ 44 $ 218 Impairment loss for the year: Charge for the year Written-backs (44) (116) Write-offs (104) Balance, end of year Collective allowance for impairment: Balance, beginning of year 4,778 4,778 Impairment loss for the year: Charge for the year Written-backs Balance, end of year 4,778 4,778 Total allowances for impairment $ 4,995 $ 4,822 26

29 8. Investment securities: Investment securities are all classified as HTM where the Bank has the intention and ability to hold the investment until its maturity date HTM investment securities: Debt securities issued by financial institutions $ 25,233 $ 37,019 Government bonds 16,979 26,978 Less specific allowance for impairment Debt securities $ 42,212 $ 63,997 (a) An analysis of the carrying value of securities by remaining term to maturity is as follows: Within 1 to 5 1 year years Total Total Debt securities $ 42,212 $ $ 42,212 $ 63,997 The total carrying value of investment securities includes amounts denominated in foreign currencies of nil ( $23,867). (b) An analysis of the average effective yields of securities, by the earlier of contractual repricing or maturity dates, is as follows: Within 3 months 1 to 5 3 months to 1 year years Total Total Debt securities $ 31,972 $ 10,240 $ $ 42,212 $ 63,997 Average effective yield 1.11% 1.84% 1.29% 1.05% Average effective yields are based on book values and contractual interest rates adjusted for amortization of premiums and discounts. All debt securities held by the Bank pay interest at a fixed rate. 27

30 9. Property and equipment: Furniture Leasehold Bank and fixtures Equipment improvements premises Total Cost: Balance at January 1, 2010 $ 1,267 $ 1,958 $ 2,879 $ 299 $ 6,403 Acquisitions ,301 Disposals (1) (58) (1) (60) Balance at December 31, 2010 $ 1,641 $ 2,362 $ 3,342 $ 299 $ 7,644 Balance at January 1, 2011 $ 1,641 $ 2,362 $ 3,342 $ 299 $ 7,644 Acquisitions ,313 3,418 6,520 Disposals (13) (93) (1,902) (2,008) Balance at December 31, 2011 $ 1,974 $ 2,712 $ 3,753 $ 3,717 $ 12,156 Depreciation and impairment losses: Balance at January 1, 2010 $ 1,035 $ 1,586 $ 2,418 $ 46 $ 5,085 Depreciation for the year Impairment losses Disposals (1) (53) (1) (55) Balance at December 31, 2010 $ 1,080 $ 1,691 $ 2,553 $ 52 $ 5,376 Balance at January 1, 2011 $ 1,080 $ 1,691 $ 2,553 $ 52 $ 5,376 Depreciation for the year Impairment losses Disposals (13) (89) (1,831) (1,933) Balance at December 31, 2011 $ 1,162 $ 1,850 $ 1,073 $ 64 $ 4,149 Carrying amounts: Balance at January 1, 2010 $ 232 $ 372 $ 461 $ 253 $ 1,318 Balance at December 31, ,268 Balance at December 31, ,680 3,653 8,007 There were no capitalized borrowing costs related to the acquisition of property and equipment during 2011 and

31 10. Intangible asset: Computer software purchased Cost: Balance at January 1, 2010 $ 789 Acquisitions 9 Disposals (2) Balance at December 31, 2010 $ 796 Balance at January 1, 2011 $ 796 Acquisitions 21 Disposals Balance at December 31, 2011 $ 817 Amortization and impairment losses: Balance at January 1, 2010 $ 744 Amortization for the year 23 Impairment losses Disposals (2) Balance at December 31, 2010 $ 765 Balance at January 1, 2011 $ 765 Amortization for the year 19 Impairment losses Disposals Balance at December 31, 2011 $ 784 Carrying amounts: Balance at January 1, 2010 $ 45 Balance at December 31, Balance at December 31, There were no capitalized borrowing costs related to the acquisition of computer software during 2011 and

32 11. Deferred tax assets and liabilities: (a) Recognized deferred tax assets and liabilities: Deferred tax assets and liabilities are attributable to the following: Assets Liabilities Net Assets Liabilities Net Property and equipment and computer software $ $ (109) $ (109) $ $ (55) $ (55) Allowances for loan losses 1,245 1,245 1,330 1,330 Other Net tax assets (liabilities) $ 1,372 $ (109) $ 1,263 $ 1,384 $ (55) $ 1,329 (b) Movements in temporary differences during the year: Balance at Recognized in Balance at January 1 profit or loss December : Property and equipment and computer software $ (55) $ (54) $ (109) Allowances for loan losses 1,330 (85) 1,245 Other $ 1,329 $ (66) $ 1, : Property and equipment and computer software $ 229 $ (284) $ (55) Allowances for loan losses 1,461 (131) 1,330 Other $ 1,738 $ (409) $ 1,329 30

33 12. Other assets: Customers' liability under acceptances $ $ 625 Accrued interest receivable 1, Prepaid expenses Other 894 1,188 $ 2,759 $ 2, Deposits from banks: Money market deposits $ 162,638 $ 199,943 Other deposits from banks 8, $ 171,166 $ 200,800 The money market deposits taken from other banks all mature within one year and have an average effective interest rate of 1.80% ( %). The other deposits from banks are non-interest-bearing deposits payable on demand. 31

34 14. Deposits from customers: (a) The following is an analysis of the deposits by category: Payable on demand Interest- Non-interest- Payable after Payable on bearing bearing notice a fixed date Total Total Canada: Individuals $ 13,907 $ $ 16,393 $ 179,943 $ 210,243 $ 208,607 Businesses 6 32,377 79, ,258 80,722 13,913 32,377 16, , , ,329 Average effective interest rate 0.07% 0.01% 1.87% 1.50% 1.65% Foreign countries: Individuals 851 3,747 44,434 49,032 56,140 Businesses 83 1,028 1,111 5, ,747 45,462 50,143 62,079 Average effective interest rate 0.04% 0.01% 1.21% 1.10% 1.13% Total deposits $ 14,764 $ 32,460 $ 20,140 $ 305,280 $ 372,644 $ 351,408 Average effective interest rate 0.06% 0.01% 1.77% 1.45% 1.56% 32