GUARANTY TRUST BANK LIMITED Consolidated Financial Statements For The Year Ended December 31, 2017 And Independent Auditors Report
GUARANTY TRUST BANK LIMITED TABLE OF CONTENTS Page INDEPENDENT AUDITORS REPORT 1-2 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017: Consolidated Statement of Financial Position 3 Consolidated Statement of Comprehensive Income 4 Consolidated Statement of Changes in Equity 5 Consolidated Statement of Cash Flows 6 Notes to Consolidated Financial Statements 7-24
GUARANTY TRUST BANK LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2017 (Expressed in United States dollars) 1. GENERAL Guaranty Trust Bank Limited (the Bank ) was incorporated under the laws of The Commonwealth of The Bahamas on June 15, 1962. The Bank provides trust, company management, international investment and merchant banking services and has an unrestricted licence under the Banks and Trust Companies Regulation Act of 2000, as amended. The registered office of the Bank is located at Lyford Manor, Lyford Cay, West Bay Street, P.O. Box N-4918, Nassau, Bahamas. The consolidated financial statements of the Bank for the year ended December 31, 2017, were authorized for issue by the Board of Directors on April 24, 2018. 2. ADOPTION OF NEW AND AMENDED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) AND INTERNATIONAL ACCOUNTING STANDARDS (IAS) In the current year, the Bank has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the IASB ) and the International Financial Reporting Interpretations Committee (the IFRIC ) of the IASB that are relevant to its operations and effective for the year ended December 31, 2017. The adoption of the following standards and interpretations has not led to any changes in the Bank s accounting policies: a. New Accounting Standards / Amendments And IFRS Interpretations That Are Effective For The Year Ended December 31, 2017 Amended standards IFRS 12 Amendments from annual improvements to IFRSs 2014-2016 cycle (clarifying scope) IAS 7 Disclosure initiatives Amendments to enable users to evaluate changes in liabilities arising from financing activities. b. New Accounting Standards And IFRS Interpretations That Are Not Yet Effective The following standards, amendments and interpretations are only effective for accounting periods, beginning on or after the date mentioned against each of them. - 7 -
New and amended Standards Effective for annual periods beginning on or after IFRS 2 Amendments to clarify the classification 1 January 2018 and measurement of share-based payment transactions IFRS 4 & IFRS 9 Amendments regarding the interaction 1 January 2018 of IFRS 4 and IFRS 9 IFRS 7 Additional disclosures Concurrent with (and consequential amendments) adoption of resulting from IFRS 9 IFRS 9 IFRS 9 Financial Instruments 1 January 2018 IFRS 15 Revenue from contracts 1 January 2018 with customers IFRS 10 & IAS 28 Sale or contribution of assets between (*) an investor and its associate or joint venture IFRS 15 Clarification to IFRS 15 1 January 2018 IFRS 16 Leases 1 January 2019 IFRS 17 Insurance contracts 1 January 2021 (*) The IASB decided in December 2015 to defer the effective date indefinitely; nevertheless, the amendments are available for earlier adoption. The directors anticipate that all of the relevant standards and interpretations will be adopted in the Bank s financial statements in the relevant periods but have not yet had the opportunity to consider the potential impact of the adoption of the amendments in future periods. 3. SIGNIFICANT ACCOUNTING POLICIES Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards. Basis of preparation The consolidated financial statements have been prepared on the historical cost basis except for certain properties and financial instruments that are measured at revalued amounts or fair values at the end of each reporting period, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. - 8 -
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Bank takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36. In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. The principal accounting policies are set out below. a. Basis of consolidation - The consolidated financial statements incorporate the financial statements of the Bank and entities (including structured entities) controlled by the Bank and its subsidiaries. The Bank s three wholly-owned subsidiaries are Administrative Directors Limited, Administrative Holdings Limited and Administrative Managers Limited (collectively, the Companies ). All of the subsidiaries are non-trading nominee companies, which hold assets of less than $10,000 and do not have any liabilities, incorporated and registered in accordance with the laws of The Commonwealth of The Bahamas. On July 16, 2008, each of the Companies was granted a restricted trust company licence by The Central Bank of The Bahamas. Each of the Companies has share capital of $10,000 (10,000 issued and outstanding shares at par value of $1.00). The financial statements of the subsidiaries are prepared for the same reporting period as the Bank, using consistent accounting policies. Control is achieved when the Bank: has power over the investee; is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to use its power to affect its returns. - 9 -
The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Bank has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Bank considers all relevant facts and circumstances in assessing whether or not the Bank s voting rights in an investee are sufficient to give it power, including: the size of the Bank s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; potential voting rights held by the Bank, other vote holders or other parties; rights arising from other contractual arrangements; and any additional facts and circumstances that indicate that the Bank has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders' meetings. Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Bank gains control until the date when the Bank ceases to control the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the owners of the Bank and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Bank and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group's accounting policies. b. Financial assets - Financial assets in the scope of IAS 39 are classified as financial assets at fair value through profit or loss or as loans and receivables. The Bank determines the classification of its financial assets at initial recognition and re-evaluates this designation at each financial year end. All financial assets are measured initially at their fair value. All regular way purchases and sales of financial assets are recognized on the trade date, being the date that the Bank commits to purchase or sell the asset. Regular way transactions require delivery of assets within the timeframe generally established by regulation or convention in the market place. The subsequent measurement of financial assets depends on their classification. c. Cash and cash equivalents - For the purposes of the consolidated statement of cash flows, cash and cash equivalents include cash and demand deposits with banks and time deposits with an original maturity of three months or less. - 10 -
d. Loans - Loans are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. These are not entered into with the intention of immediate or short-term resale and are not classified as available-for-sale or financial assets designated as at fair value through profit or loss. After initial measurement, loans are subsequently measured at amortized cost using the effective interest rate (EIR) method less allowance for impairment, if any. Amortized cost is calculated by taking into account the discount or premium on acquisition and fee or cost that are an integral part of the EIR. The EIR amortization is included in interest income in the consolidated statement of profit or loss and other comprehensive income. The losses arising from impairment are recognized in the consolidated statement of profit or loss and other comprehensive income in interest expense. e. Property and equipment - Property and equipment are stated at cost less accumulated depreciation and impairment losses. An impairment loss is recognized whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of assets is the greater of their net selling price and value in use. Impairment losses are recognized in the consolidated statement of profit or loss and other comprehensive income. Depreciation is computed using the straight-line method, at the following annual rates: Furniture and fixtures 25% Equipment 25% Motor vehicles 25% Assets that are subject to depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. The asset s recoverable amount is the higher of the asset s fair value less cost to sell and the value in use. Gains and losses on disposal of fixed assets are determined by reference to their carrying amount and are taken into account in determining net income. Repairs and maintenance are charged to the consolidated statement of profit or loss and other comprehensive income when the expenditure is incurred. f. Impairment and collectability of financial assets - An assessment is made at each statement of financial position date to determine whether there is objective evidence that a financial asset may be impaired. If such evidence exists, the carrying amount of the asset is reduced to its estimated recoverable amount either directly or through the use of an allowance account and the amount of the loss is included in the consolidated statement of profit or loss and other comprehensive income. - 11 -
Loans and deposits with banks - The Bank reviews its problem loans at each reporting date to assess whether an allowance for impairment should be recorded in the consolidated statement of profit or loss and other comprehensive income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about a number of factors such as the Bank s past credit loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower s ability to repay, and the estimated value of the underlying collateral and current economic conditions. In a subsequent year, the amount of the recognized impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the credit loss expense. Financial assets - A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized where: The rights to receive cash flows from the asset have expired; or The Bank has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement; and Either (a) the Bank has transferred substantially all the risks and rewards of the asset, or (b) the Bank has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay. g. Customers deposits - Customers deposits represent demand and time deposits held by the Bank for the benefit of third parties. h. Financial liabilities - A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statement of profit or loss and other comprehensive income. i. Offsetting of financial instruments - Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. - 12 -
j. Provisions - Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow or resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the obligation amount. k. Statutory loan loss reserve - This amount represents a general provision that is required to meet the Bank s statutory requirements. Changes to this amount are reflected as appropriations of retained earnings. l. Recognition of income and expenses - Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. Expenses are recognized on the accrual basis. The following specific recognition criteria must also be met before revenue is recognized: i. Interest and similar income and expense - For all financial instruments measured at amortized cost, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the original effective interest rate applied to the new carrying amount. ii. Fees and commission income - The Bank earns fees and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: Fee income earned from services that are provided over a certain period of time - Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Fee income from providing transaction services - Fees arising from negotiating or participating in the negotiation of a transaction for a third party are recognized on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognized after fulfilling the corresponding criteria. - 13 -
m. Leases - Leases where the lessor retains substantially all the risks and benefits or ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense on the consolidated statement of profit or loss and other comprehensive income on a straight-line basis over the lease term. n. Related party balances and transactions - All balances and transactions with related parties, including associated companies, are disclosed in the notes to the consolidated financial statements (See Note 8) and carried at cost. o. Foreign currency translation - The Bank s consolidated financial statements are presented in US dollars, which is the Bank s functional and presentation currency; however, it transacts business in other currencies. Monetary assets and liabilities denominated in foreign currencies are translated into US dollars at the rate of exchange in effect at the statement of financial position date. Income and expenses items denominated in other currencies are translated at the rate of exchange in effect at the date the transaction occurred. Resulting gains and losses from such transactions are reported in the consolidated statement of profit or loss and other comprehensive income. p. Going concern - The Bank s management has made an assessment of the Bank s ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, Management is not aware of any material uncertainties that may cast a significant doubt upon the Bank s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis. q. Taxation - There are no income taxes imposed on the Bank in The Commonwealth of The Bahamas. Value Added Tax (VAT) - On January 1, 2015, the Government of The Bahamas implemented Value Added Tax (VAT). Output VAT related to sales of goods and services is payable to the Government upon its delivery to customers. Input VAT related to expenses incurred to facilitate the provision of goods to be sold and services to be provided, generally recoverable against output VAT. VAT related to sales / purchases and services provision/receipt which are outstanding at the statement of financial position date is recognized in the consolidated statement of financial position on a net basis and disclosed within current liabilities. r. Fiduciary activities and assets under administration - The Bank acts as trustee and in other fiduciary or custodial capacities that result in the holding or placing of assets on behalf of individuals, trusts and other institutions. These assets are excluded from these consolidated financial statements as they do not belong to the Bank. - 14 -
4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Bank s accounting policies, which are described in Note 3, the Directors are required to make judgments, estimates, and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The 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, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods. Impairment loss on loans - The Bank reviews its loan portfolio to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the consolidated statement of comprehensive income, the Bank makes judgments as to whether there is any observable data indicating an impairment trigger. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the Bank. Furthermore, the Bank believes it maintains sufficient collateral over its loans, obviating the need for any impairment loss. 5. CASH AND DEMAND DEPOSITS WITH BANKS Cash and demand deposits with banks are analyzed by geographical area as follows: 2017 2016 Latin America and the Caribbean $ 3,311,975 $ 3,774,944 North America 7,657,032 10,255,711 6. LOANS Loans comprises the following: $ 10,969,007 $ 14,030,655 2017 2016 Corporate $ 77,541,932 $ 83,879,464 Individual 917,248 1,019,524 $ 78,459,180 $ 84,898,988-15 -
The Bank s loans comprised borrowers domiciled in the following geographical locations: 2017 2016 Latin America $ 49,815,433 $ 49,946,278 North America 28,643,747 34,952,710 The Bank s loans maturity analysis comprises the following: $ 78,459,180 $ 84,898,988 2017 2016 Up to 1 month $ 6,877,934 $ 7,787,911 Over 1-3 Months - - Over 3-6 Months 5,131,554 16,761,647 Over 6-12 Months 28,571,581 42,619,430 Over 1-5 Years 37,878,111 17,730,000 $ 78,459,180 $ 84,898,988 The Bank s loans are secured by cash, securities and other financial assets that have a value of $141,537,688 (2016: $150,694,954). 2017 2016 Loans $ 78,459,180 $ 84,898,988 Cash collateral 7 (32,150,220) (41,547,339) Non-cash collateralized loans $ 46,308,960 $ 43,351,649 The Bank has established a statutory reserve of 1% as required by The Central Bank of The Bahamas, guidelines for the management of credit risk based on the unsecured loans. As at December 31, 2017, the Bank s statutory loan loss reserve is $464,000 (2016: $434,000). The maximum credit exposure to any counterparty, before accounting for cash collateral, as at December 31, 2017 was $20,816,666 (2016: $26,609,702), and $5,400,000 (2016: $5,400,000) net of such cash collateral. As at December 31, 2017 and 2016, there were no loans on which interest was suspended. There were no provisions recorded as at December 31, 2017 and 2016, except for the statutory reserve. - 16 -
7. CUSTOMERS DEPOSITS Customers demand, call and time deposits analyzed by geographical area, based on the domicile of the depositor, are as follows: 2017 2016 Demand and call: Latin America and the Caribbean $ 14,417,360 $ 15,787,822 North America 2,275,326 2,209,153 Europe 29,648 120,835 16,722,334 18,117,810 Time: Latin America and the Caribbean 31,312,186 42,387,707 North America 1,920,000 302,959 Europe 40,592 40,387 $ 33,272,778 $ 42,731,053 Deposits from customers of $32,150,220 (2016: $41,547,339) are held as security against loans (See Note 6). 8. RELATED PARTY BALANCES AND TRANSACTIONS The Bank had the following balances and transactions with related parties at and during the year ended December 31, 2017. a. Related parties: 2017 2016 Assets and liabilities Loans $ 74,711,246 $ 81,947,922 Customers' deposits - Time $ 28,602,186 $ 29,560,666 - Demand and call 13,093,493 14,635,380 Income and expenses $ 41,695,679 $ 44,196,046 Interest income on loans $ 7,232,941 $ 8,355,909 Management fees income $ 923,700 $ 946,300 Interest expense on customers' deposits $ 783,143 $ 1,584,377 General and administrative expenses - rent $ 264,114 $ 252,106-17 -
b. Key management personnel: The remuneration to directors and other members of key management during the period was as follows: 2017 2016 Salary and other benefits $ 1,126,732 $ 1,078,857 Directors' fees $ 40,000 $ 40,000 The remuneration to members of key management is determined having regard to the performance of the Bank and the respective individuals. 9. RISK MANAGEMENT General - Risk is inherent in the Bank s activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. The process of risk management is critical to the Bank s ongoing profitability and each individual within the Bank is accountable for the risk exposures related to their responsibilities. The Bank is exposed to credit risk, liquidity risk and market risk. The Bank is also subject to general operating risks. The independent risk control process does not include business risks such as changes in the environment, technology and industry. These risks are managed through the Bank s strategic management processes. Risk management structure - The Board of Directors is ultimately responsible for identifying and controlling risks; however, there are separate independent bodies for managing risks including: the Risk Committee, the Credit Committee, Executive Management, and the Compliance Department. Each of the individual bodies is empowered to implement risk strategies for maintaining controls over the portions of the Bank s operations for which they are responsible. Risk measurement and reporting systems - The Bank s risks are measured using a method which reflects both expected and unexpected losses. The risk measurements are based on historical experiences, adjusted for changes in the banking industry and other environmental factors. The Bank also operates within the limits provided by its Board of Directors and its regulators. Each of the committees provides reports to the Board of Directors which include information on credit exposure, interest rate exposure, and liquidity exposures. In addition, the Bank monitors its aggregate risk exposure across all risk types and activities. Risk mitigation - The Bank uses collateral to reduce its credit risks. Excessive risk concentrations - Concentrations arise when a number of counterparties are engaged in similar business activities, similar geographic regions or have similar economic features which may cause their ability to meet contractual obligations to be similarly affected by changes in economic, political and other conditions. Concentrations indicate the relative sensitivity of the Bank s performance to developments in a particular industry or geographic region. - 18 -
In order to avoid excessive concentrations of risk, the Bank s policies and procedures include specific guidelines to focus on maintaining diversified portfolios. In addition to the Bank s own policies and procedures, regulatory guidance related to the concentration of risks must also be adhered to. Credit risk - Credit risk is the risk that a customer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Bank. Customer credit risk is monitored on a daily basis by Management. The Bank s Board of Directors receives regular reports on credit exposures, levels of bad debt provisioning and Bank exposure limits. Credit risk arises principally from lending, investments and to a lesser degree, trading activity. The Board of Directors is responsible for setting book, portfolio and individual credit limits and these are monitored on an ongoing intra-day basis. To ensure a consistent and unified approach, with appropriate checks and balances, all loans up to USD $6.00 million, whether cash collateralized or not, are approved by the executive officers. Amounts over USD $6.00 million are subject to The Board of Directors approval. The size of the consolidated statement of financial position is such that it is possible to examine each individual exposure to evaluate if specific provisions are necessary or adequate. The maximum exposure to credit risk is the carrying value of the assets. The Bank makes guarantees available to its customers, which may require that the Bank make payments on the customer s behalf. Such payments are collected from customers based on the terms of their letter of credit. Guarantees expose the Bank to risks similar to other loans, and these are mitigated by similar control processes and procedures. Maximum exposure to credit risk without taking account of any collateral and other credit enhancements The table below shows the maximum exposure to credit risk for the components of the consolidated statement of financial position. The maximum exposure is shown gross, before the effect of mitigation through the use of collateral agreements. Gross Gross Maximum Maximum Exposure at Exposure at 2017 2016 Bank Cash and demand deposit with banks $ 10,969,007 $ 14,030,655 Loans 78,459,180 84,898,988 Total credit risk exposure $ 89,428,187 $ 98,929,643 Where financial instruments are recorded at fair value, the amounts shown above represent the current credit risk exposure but not the maximum risk that could arise in the future as a result of changes in value. - 19 -
Additional information on the maximum credit exposure related to the classes of financial assets noted above may be found in the specific notes related to each of the assets. Risk concentrations of the maximum exposure to credit risk The maximum credit exposure to any client or counterparty as at December 31, 2017, before taking account of any credit enhancements are the amounts due from banks, which are held with Intercredit Bank NA for $7.6 million as at December 31, 2017 (2016: Intercredit Bank NA for $10.2 million), and loans of $20.8 million (2016: $ 26.6 million) (Note 5 and note 6). The amount and type of collateral required depends on an assessment of the counterparty s credit risk. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. Credit quality per class of financial assets - The credit quality of financial assets is managed by the Bank using internal credit ratings, which are based on the Asset Classification Rating System according to the guidelines for the Management of Credit Risks issued by The Central Bank of The Bahamas for loans. The Bank s loan portfolio as at December 31, 2017, is fully collateralized by cash, asset pledges and real estate properties. All amounts due from banks are considered high grade, and loans to customers are classified as standard grade. As at December 31, 2017, there were no loans that were considered past due and impaired (2016: Nil). Credit risk exposure for each internal risk rating - The purpose of credit rating is to provide a simple, but effective and ongoing system of credit risk gradation by which relative credit worthiness of borrowers may be identified. Accordingly, the level of credit enhancements, degree of monitoring, frequency of reviews, level of provisioning and pricing can be determined. Credit rating would reflect both the likelihood of default and any possibility of financial loss suffered in the event of default. The Bank conducts an impairment assessment on each of its loans quarterly. The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue by more than 90 days or there are any known difficulties in cash flows of counterparties or the quality of collateral. The Bank addresses impairment on an individual basis, assessing each individual credit facility. Liquidity risk management - Liquidity risk is the risk that the Bank will encounter difficulty in realizing assets or otherwise raising funds to meet commitments. The Bank monitors expected cash outflow on a daily basis. Its policy throughout the year has been to ensure liquidity by maintaining at all times sufficient high quality liquid assets to cover expected net cash outflow. - 20 -
Analysis of financial assets and financial liabilities of remaining contractual maturities: Due Due Due Due On Within 3 Between Between After 2017 Demand Months 3-12 Months 1 and 5 year 5 years Total Assets: Cash and demand deposits with banks $ 10,969,007 $ - $ - $ - $ - $ 10,969,007 Loans and advances 2,695,687 4,182,247 33,703,135 37,878,111-78,459,180 Other assets 2,818 128,539 51,706 15,000 73,330 271,393 Total financial assets $ 13,667,512 $ 4,310,786 $ 33,754,841 $ 37,893,111 $ 73,330 $ 89,699,580 Liabilities Customers' deposits: Demand and call $ 16,722,334 $ - $ - $ - $ - $ 16,722,334 Time - 4,252,558 7,681,554 21,338,666-33,272,778 Accrued interest payable and other liabilities 76,235 12,201 255,152-21,000 364,588 Total financial liabilities $ 16,798,569 $ 4,264,759 $ 7,936,706 $ 21,338,666 $ 21,000 $ 50,359,700 Total gap as at December 31, 2016 $ (3,131,057) $ 46,027 $ 25,818,135 $ 16,554,445 $ 52,330 $ 39,339,880 Due Due Due Due On Within 3 Between Between After 2016 Demand Months 3-12 Months 1 and 5 year 5 years Total Assets: Cash and demand deposits with banks $ 14,030,655 $ - $ - $ - $ - $ 14,030,655 Loans and advances 7,787,911-59,381,077 17,730,000-84,898,988 Other assets 5,333 73,915 17,405 69,170-165,823 Total financial assets $ 21,823,899 $ 73,915 $ 59,398,482 $ 17,799,170 $ - $ 99,095,466 Liabilities Customers' deposits: Demand and call $ 18,117,810 $ - $ - $ - $ - $ 18,117,810 Time 4,002,000 1,183,714 29,315,339 8,230,000-42,731,053 Accrued interest payable and other liabilities 40,000 129,143 121,489 - - 290,632 Total financial liabilities $ 22,159,810 $ 1,312,857 $ 29,436,828 $ 8,230,000 $ - $ 61,139,495 Total gap as at December 31, 2016 $ (335,911) $ (1,238,942) $ 29,961,654 $ 9,569,170 $ - $ 37,955,971 Fair value of financial instruments All the financial assets and liabilities are carried at amortised cost. The Directors consider that carrying amount of such financial assets and liabilities are approximates the fair value. - 21 -
Market risk - Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market variables such as interest rates or foreign exchange rates. Except for the concentrations within foreign currency, the Bank has no significant concentration of market risk. Market risk, including interest rate and currency is encountered during the Bank s normal operating activities. The Board of Directors is responsible for setting market risk limits and for managing and monitoring these limits. The Bank monitors market risk on a day-to-day basis. Interest rate risk - Exposure to interest rate risk is the risk that arises when there is an imbalance between rate and non-rate sensitive assets and liabilities. The Bank s policy is to maintain the interest rate risk within prescribed limits. Interest rate risk is monitored on a daily basis and reviewed by Management. As at December 31, 2017, 100 % (2016: 100%) of loans are based on fixed interest rates. As at December 31, 2017, if interest rates at that date had been 10 basis points higher or lower with all other variables held constant, net income for the year would have been $7,589 (2016: $8,676) higher or lower. Foreign currency risk - Foreign currency risk is the risk that the value of a financial instrument will fluctuate because of changes in foreign exchange rates. The Bank s foreign exchange exposure arises from providing services to customers. The Bank s policy is to manage against foreign exchange risk by matching currency liabilities with currency assets. Currency exposure is monitored on a daily basis and reviewed by Management. The Bank s assets and liabilities are denominated primarily in US dollars. The Bank s exposures to other currencies are minimal. Operational risk - Operational risk is the risk of loss arising from system failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but through a control framework and by monitoring and responding to potential risk, the Bank is able to manage the risks. The identification and control of these risks are the responsibilities of executives of the Bank. Controls over these risks include effective segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes, including the use of the Compliance Department. The Bank s Managing Director, Board of Directors and Compliance Officer carry out a regular review of all operational areas to ensure operational risks are being properly controlled and reported to the Audit Committee. Fiduciary risk - Fiduciary risk is the risk of loss arising from factors such as failure to maintain safe custody or negligence in the administration or management of assets on behalf of other parties. - 22 -
10. CAPITAL MANAGEMENT The Bank maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the Bank s capital is monitored using, among other measures, the rules and ratios established by The Central Bank of The Bahamas. As a part of the Bank s regulatory requirements, the Bank increased its statutory loan loss reserve by $30,000 (2016: decreased by $61,000) to $464,000 (2016: $434,000) for the risk of credit losses with an appropriation of its retained earnings. During the past year, the Bank has complied in full with all its externally imposed capital requirements. The primary objectives of the Bank s capital management are to ensure that the Bank complies with externally imposed capital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders value. The Bank manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years. During the year, the Bank paid dividends of $5,000,000 ($.24 per share) (2016: $5,000,000 ($0.24 per share)). Regulatory capital Actual Required Actual Required 2017 2017 2016 2016 Tier 1 capital $ 38,893,411 $ 3,373,997 $ 37,533,415 $ 3,460,583 Risk weighted assets $ 42,174,959 $ 43,257,282 Total capital ratio 92% 87% Required ratio 8% 8% Regulatory capital consists of Tier 1 capital, which comprises share capital and retained earnings including current year profit. The other component of regulatory capital is Tier 2 capital, which includes subordinate long-term debt and other similar financial liabilities. The Bank did not have any Tier 2 capital as at December 31, 2017 and 2016. - 23 -
11. COMMITMENTS AND LEASE AGREEMENT The Bank leases premises from a related party with an expiration date of June 30, 2020. Rent expense, included under general and administrative expenses in the consolidated statement of comprehensive income, was $264,114 as at December 31, 2017 (2016: $252,106). Future minimum lease payments under non-cancelable operating lease are as follows: 2017 2016 Within 1 year $ 109,508 $ 109,508 Greater than 1 year 164,262 273,770 Total $ 273,770 $ 383,278 12. EMPLOYEES BENEFIT The Bank has a defined contribution pension plan. The Bank s liability for eligible employees is calculated at a rate of 5% of an employee s gross salary. As of December 31, 2017, the Bank made pension contributions to this plan totaling $137,181 (2016: $113,861), which are included in staff costs in the consolidated statement of comprehensive income. 13. SUBSEQUENT EVENT There have been no events subsequent to December 31, 2017 that requires adjustments to or disclosure in the financial statements. We have evaluated subsequent events through April 24, 2018, the date on which the financial statements were authorised to issue. * * * * * * - 24 -