Regulatory Disclosures

Credit risk is the risk that a financial loss will be incurred due to the failure of a counterparty to discharge its contractual commitment or obligation to the Company.  Credit risk may arise principally in lending activities that lead to loans and advances, and investment in securities, cash and cash equivalents, accounts receivable and other investments in the Company’s asset portfolio.

Credit risk is incurred through acquisition of investments related to liquidity management.  The Company manages risk in the securities portfolio through adherence to prudent investment management policies that consider the risk and reward associated with each investment and that are based on a philosophy of safety of principal, rate of return and flexibility of the instrument.

The Company employs a risk measurement process for its loan portfolio. Credit risk rating systems are designed to assess and quantify the risk inherent in credit activities in an accurate and consistent manner.  Risk is measured by reviewing exposure to individual borrowers and by reviewing qualitative and quantitative factors that impact the loan portfolios. Qualitative and quantitative analysis of a borrower’s financial information is an important factor used in determining the financial state of counterparties.

Loan exposures are managed and monitored through facility limits for individual borrowers and a credit review process. These reviews ensure that the borrower complies with internal policy and underwriting standards.  The Company relies on collateral security, typically in the form of a fixed and floating charge over the assets of its borrowers.  Credit risk is also managed through regular analysis of the ability of customers and potential customers to meet interest and capital repayment obligations and by changing the lending limits where appropriate.  Credit risk for Company’s counterparties in other financial instruments, such as investments, is assessed through published credit ratings.

Market risk is the impact on earnings resulting from changes in financial market variables, such as interest rates and foreign exchange rates. Market risk arises when making loans, taking deposits and making investments. The company does not undertake trading activities and therefore, does not have risks related to activities such as market making, arbitrage or proprietary trading. The Company does not hold or trade in foreign currencies and, consequently, is not exposed to foreign exchange risk. The Company’s material market risk is confined to interest rates.

Interest rate risk arises from changes in interest rates that affect the securities and net interest income.  Exposure to this risk directly impacts the Company’s income from its securities and loan and deposit portfolios.  The Company’s objective is to earn an acceptable return on these portfolios, without taking unreasonable risk, while meeting customer needs.

The Company’s risk position is measured based on rates charged to customers. Senior management manages day-to-day interest rate risk within approved policies and reports to management’s Asset/Liability Committee (ALCO) to ensure policy compliance.  Management provides reports on these matters to the Board of Directors.  Tools to measure this risk include gap analysis, which shows the sensitivity between interest sensitive assets and interest sensitive liabilities, duration analysis and income sensitivity analysis.

Senior management is responsible for managing the Company’s interest rate risk, monitoring approved limits and compliance with policies.  The Company manages interest rate risk by developing and implementing asset and liability management policies. The policies are approved by the Board of Directors and monitored by the ALCO.  The Company’s goal is to achieve satisfactory and consistent profits, liquidity and safety. The Company makes use of financial modeling based on possible scenarios and matching analysis to measure and manage its market risk.  At least annually, the Board of Directors reviews the Company’s investment and interest rate risk policies.

Liquidity risk is the risk that the Company will not have sufficient cash to meet its obligations as they come due.  This risk arises from fluctuations in cash flows from lending, deposit taking, investing and other activities.  Effective liquidity management ensures that adequate cash is available to honour all cash outflow obligations while limiting the opportunity cost of holding short-term assets.  Maintenance of a prudent liquidity base also provides flexibility to fund loan growth and react to other market opportunities.

Operational risk is inherent in all business activities.  It is the potential for loss as a result of internal or external events, human error or inadequacy, or failure of processes, procedures or controls. Its impact can be financial loss, loss of reputation, loss of competitive position or regulatory penalties.  The Company is exposed to operational risk from internal business activities, external threats and activities that are outsourced.  While operational risk cannot be completely eliminated, proactive operational management is a key strategy to mitigate this risk. The financial measure of operational risk is actual losses incurred.