1st National Bank Annual Report 2008
For the year ended 31 march 2008
PriceWaterhouseCoopers Pointe Seraphine P.O.Box 195 Castries St. Lucia, West Indies Telephone (758) 456-2600 Facsimile (758) 452-1061
March 24, 2009
Independent Auditors’ Report To the Shareholders of 1st National Bank St. Lucia Limited
Report on the Financial Statements We have audited the accompanying financial statements of 1st National Bank St. Lucia Limited (the Bank) which comprise the balance sheet as of December 31, 2008 and the statements of income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.
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. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
32
Auditor’s report
Involved, Interested, Invested, In You!
For the year ended 31 march 2008
1st National Bank Annual Report 2008
PriceWaterhouseCoopers Pointe Seraphine P.O.Box 195 Castries St. Lucia, West Indies Telephone (758) 456-2600 Facsimile (758) 452-1061
Auditor’s Responsibility ...continued An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s 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, the auditor considers 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 is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as of December 31, 2008 and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
Chartered Accountants
PricewaterhouseCoopers refers to the East Caribbean firm of PricewaterhouseCoopers and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. A full listing of the partners of the East Caribbean firm is available on request at the above address.
Auditor’s report
33
8
1st National Bank Annual Report 2008
Balance Sheet
As of December 31, 2008
(expressed in Eastern Caribbean dollars) 2008 $
2007 $
29,208,566 5,088,351 17,910,470 38,642,361 248,470,227
23,123,390 12,583,177 15,477,411 32,171,428 223,579,753
12,789,462 22,171,742 1,018,873 12,474,455 2,347,028 30,846
10,625,141 19,276,037 5,789 11,683,183 2,777,371 165,691
390,152,381
351,468,371
Due to customers (Note 14) Other liabilities (Note 15) Retirement benefit obligations (Note 16)
329,404,588 3,769,600 739,000
297,509,774 3,892,705 727,000
Total liabilities
333,913,188
302,129,479
Capital and reserves attributable to the Bank’s equity holders Share capital (Note 18) Retained earnings Other reserves
7,971,454 37,539,794 10,727,945
7,971,454 30,421,308 10,946,130
Total equity
56,239,193
49,338,892
390,152,381
351,468,371
Assets Cash and balances with Central Bank (Note 5) Due from other banks (Note 6) Treasury bills (Note 7) Loans and advances to financial institutions (Note 8) Loans and advances to customers (Note 9) Investment securities: (Note 11) - available-for-sale - held-to-maturity Income tax recoverable Property, plant and equipment (Note 12) Other assets (Note 13) Deferred income tax asset (Note 17) Total assets Liabilities
Equity
Total equity and liabilities
Approved by the Board of Directors on March 24, 2009
Director
Director
34
balance sheet
Involved, Interested, Invested, In You!
Statement of Income
For Forthe theYear year Ended ended December 31 march 31,2008 2008 (expressed in Eastern Caribbean dollars)
2008
2007
$
$
29,680,766
25,403,401
(10,762,836)
(9,045,978)
18,917,930
16,357,423
4,056,350
5,645,936
22,974,280
22,003,359
(10,514,717)
(9,028,123)
Impairment losses on loans and advances (Note 10)
(1,248,031)
(129,339)
Profit before income tax
11,211,532
12,845,897
Income tax expense (Note 25)
(2,115,966)
(2,306,467)
9,095,566
10,539,430
1.82
2.17
Interest and similar income (Note 20) Interest expense and similar charges (Note 20) Net interest income Other operating income (Note 21) Operating income Other operating expenses (Note 22)
Net profit for the year Earnings per share for profit attributable to the equity holders of the bank during the year (Note 26) (expressed in EC$ per share) - basic and diluted
statement of income
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1st National Bank Annual Report 2008
Statement of Changes in Equity
For the Year Ended December 31, 2008 (expressed in Eastern Caribbean dollars)
2008 $
2007 $
Share capital (Note 18) At beginning of year Issued during the year
7,971,454 –
6,877,088 1,094,366
At end of year
7,971,454
7,971,454
Retained earnings At beginning of year Net profit for the year Dividends on ordinary shares (Note 27) Transfer to statutory reserve (Note 19) Transfer from revaluation reserve
30,421,308 9,095,566 (1,999,986) – 22,906
22,575,651 10,539,430 (1,622,312) (1,094,366) 22,905
At end of year
37,539,794
30,421,308
Statutory reserve (Note 19) At beginning of year Transfer from retained earnings
7,971,454 –
6,877,088 1,094,366
At end of year
7,971,454
7,971,454
Revaluation reserve At beginning of year Transfer to retained earnings
2,285,636 (22,906)
2,308,541 (22,905)
At end of year
2,262,730
2,285,636
Revaluation reserve - Investment securities: available-for-sale At beginning of year (Decrease)/ increase in fair value
689,040 (195,279)
438,783 250,257
493,761
689,040
Total reserves
10,727,945
10,946,130
Equity, end of year
56,239,193
49,338,892
Reserves
At end of year
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statement of changes in equity
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Statement of Cash Flows
For Forthe theYear year Ended ended December 31 march 31,2008 2008 (expressed in Eastern Caribbean dollars)
2008 $
2007 $
11,211,532
12,845,897
834,094 – 1,248,031 12,000 (50,810) (29,680,766) 10,762,836
714,068 (1,984) 129,339 (2,000) (96,840) (25,403,401) 9,045,978
(5,663,083)
(2,768,943)
(4,770,570) (6,625,331) (24,653,415) 310,337 32,010,267 (160,608)
355,000 (3,321,736) (18,178,774) (1,402,851) 27,134,923 186,840
Cash (used in)/generated from operations
(9,552,403)
2,004,459
Interest and similar income received Interest expense and similar charges paid Income taxes paid
28,268,360 (10,878,289) (2,874,199)
25,452,512 (8,185,211) (4,010,133)
4,963,469
15,261,627
Cash flows from investing activities Purchase of treasury bills, net (Purchase)/sale of investment securities, net Dividends received Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment
(2,380,738) (5,225,912) 50,810 (1,625,366) –
(6,646,483) 5,203,151 113,090 (3,698,821) 15,000
Net cash used in investing activities
(9,181,206)
(5,014,063)
Cash flows from financing activities Proceeds from issuance of ordinary shares Dividends paid on ordinary shares
– (1,962,483)
1,094,366 (1,576,083)
Net cash used in financing activities
(1,962,483)
(481,717)
Net (decrease)/increase in cash and cash equivalents
(6,180,220)
9,765,847
Cash and cash equivalents, beginning of year
21,033,567
11,267,720
Cash and cash equivalents, end of year (Note 28)
14,853,347
21,033,567
Cash flows from operating activities Profit before income tax Adjustments for: Depreciation (Note 12) Gain on disposal of property, plant and equipment Impairment losses on loans and advances Retirement benefit obligations Dividend income Interest and similar income Interest expense and similar charges Cash flow before changes in operating assets and liabilities (Increase)/decrease in mandatory reserve deposits with Central Bank Increase in loans and advances to financial institutions Increase in loans and advances to customers Decrease/(increase) in other assets Increase in due to customers (Decrease)/increase in other liabilities
Net cash from operating activities
statement of cash flows
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1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 1 General information 1st National Bank St. Lucia Limited, (the Bank) was incorporated in Saint Lucia on December 1937 and continued under the Companies Act of 1996. In addition to compliance with the Companies Act 1996, the Bank is also subject to the provisions of the Banking Act of Saint Lucia No. 34 of 2006. The Bank commenced trading in January 1938 and provides retail banking services including the acceptance of deposits, granting of loans, the provision of foreign exchange services and commercial banking services. The Bank has four branches and two bureaux de change. The registered office and principal place of business of the Bank is 21 Bridge Street, Castries, Saint Lucia. 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards (IFRS). The financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings and available-for-sale financial assets. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Bank’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. (a) Interpretation to existing standard effective in 2008 • IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’, provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. This interpretation does not have any impact on the Bank’s financial statements, as the Bank has a pension deficit and is not subject to any minimum funding requirements. (b) Interpretations to existing standards effective in 2008 but not relevant The following interpretations to existing standards are mandatory for accounting periods beginning on or after 1 January, 2008 but they are not relevant to the Bank’s operations: • IFRIC 11, ‘IFRS 2 – Company and treasury share transactions’; and • IFRIC 12, ‘Service concession arrangements’.
38
notes to financial statements
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Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
2 Summary of significant accounting policies …continued (c) Standards and amendment to existing standard not yet effective and relevant to the Bank The following standards and amendment to existing standard have been published and are mandatory for accounting periods beginning on or after 1 January 2009 or later periods, but the Bank has not early adopted: • IAS 1 (Revised), ‘Presentation of financial statements’ (effective from 1 January 2009). The revised standard will prohibit the presentation of items of income and expenses (that is, ‘nonowner changes in equity’) in the statement of changes in equity, requiring ‘non-owner changes in equity’ to be presented separately from owner changes in equity. All non-owner changes in equity will be required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). Where entities restate or reclassify comparative information, they will be required to present a restated balance sheet as at the beginning comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period. The Bank will apply IAS 1 (Revised) from 1 January 2009. • IAS 19 (Amendment), ‘Employee benefits’ (effective from 1 January 2009). The amendment clarifies that a plan amendment that results in a change in the extent to which benefit promises are affected by future salary increases is a curtailment, while an amendment that changes benefits attributable to past service gives rise to a negative past service cost if it results in a reduction in the present value of the defined benefit obligation. - The definition of return on plan assets has been amended to state that plan administration costs are deducted in the calculation of return on plan assets only to the extent that such costs have been excluded from measurement of the defined benefit obligation. - The distinction between short term and long term employee benefits will be based on whether benefits are due to be settled within or after 12 months of employee service being rendered. - IAS 37, ‘Provisions, contingent liabilities and contingent assets’, requires contingent liabilities to be disclosed, not recognised. IAS 19 has been amended to be consistent. The Bank will apply the IAS 19 (Amendment) from 1 January 2009. • IAS 36 (Amendment), ‘Impairment of assets’ (effective from 1 January 2009). Where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculation should be made. The Bank will apply the IAS 36 (Amendment) and provide the required disclosure where applicable for impairment tests from 1 January 2009. (d) Standards, amendments and interpretations to existing standards that are not yet effective and not relevant to the Bank The following standards, amendments and interpretations to existing standards have been published and are mandatory for accounting periods beginning on or after 1 January 2009 or later periods but are not relevant for the Bank’s operations: • IAS 16 (Amendment), ‘Property, plant and equipment’ (and consequential amendment to IAS 7, ‘Statement of cash flows’) (effective from 1 January 2009); • IAS 20 (Amendment), ‘Accounting for government grants and disclosure of government assistance’ (effective from 1 January 2009);
notes to financial statements
39
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 2 Summary of significant accounting policies …continued (d) Standards, amendments and interpretations to existing standards that are not yet effective and not relevant to the Bank …continued •
IAS 23 (Amendment), ‘Borrowing costs’ (effective from 1 January 2009);
•
IAS 27 (Revised), ‘Consolidated and separate financial statements’ (effective from 1 July 2009);
•
IAS 27 (Amendment), ‘Consolidated and separate financial statements’ (effective from 1 January 2009);
•
IAS 28 (Amendment), ‘Investments in associates’ (and consequential amendments to IAS 32, ‘Financial Instruments: Presentation’ and IFRS 7, ‘Financial instruments: Disclosures’) (effective from 1 January 2009);
•
IAS 29 (Amendment), ‘Financial reporting in hyperinflationary economies’ (effective from 1 January 2009);
•
IAS 31 (Amendment), ‘Interests in joint ventures’ (and consequential amendments to IAS 32 and IFRS 7) (effective from 1 January 2009);
•
IAS 32 (Amendment), ‘Financial instruments: Presentation’, and IAS 1 (Amendment), ‘Presentation of financial statements’ – ‘Puttable financial instruments and obligations arising on liquidation’ (effective from 1 January 2009);
•
IAS 38 (Amendment), ‘Intangible assets’, (effective from 1 January 2009);
•
IAS 39(Amendment), ‘Financial instruments: Recognition and measurement’(effective from 1 January 2009);
•
IAS 40 (Amendment), ‘Investment property’ (and consequential amendments to IAS 16) (effective from 1 January 2009);
•
IAS 41 (Amendment), ‘Agriculture’ (effective from 1 January 2009);
•
IFRS 1 (Amendment) ‘First time adoption of IFRS’ and IAS 27 ‘Consolidated and separate financial statements’(effective from 1 January 2009);
•
IFRS 2 (Amendment), ‘Share-based payment’ (effective from 1 January 2009). The amended standard deals with vesting conditions and cancellations;
•
IFRS 3 (Revised), ‘Business combinations’ (effective from 1 July 2009);
•
IFRS 5 (Amendment), ‘Non-current assets held for sale and discontinued operations’ (and consequential amendment to IFRS 1, ‘First-time adoption’) (effective from 1 July 2009);
•
IFRIC 13, ‘Customer loyalty programmes’ (effective from 1 July 2008);
•
IFRIC 15, ‘Agreements for construction of real estates’ (effective from 1 January 2009); and
•
IFRIC 16, ‘Hedges of a net investment in a foreign operation’ (effective from 1 October 2008).
40
notes to financial statements
Involved, Interested, Invested, In You!
Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
2 Summary of significant accounting policies …continued 2.2 Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition including: cash and nonrestricted balances with the Central Bank and deposits with other banks. 2.3 Financial assets The Bank classifies its financial assets in the following categories: loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluates this designation at every reporting date. (a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: (a) those that the bank intends to sell immediately or in the short term, which are classified as held for trading, and those that the bank upon initial recognition designates as at fair value through profit or loss; (b) those that the bank upon initial recognition designates as available for sale; or (c) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration. (b) Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank’s management has the positive intention and ability to hold to maturity. If the Bank were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available-for-sale. (c) Available-for-sale financial assets Available-for-sale financial assets are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Purchases and sales of held-to-maturity and available-for-sale are recognised on trade-date – the date on which the Bank commits to purchase or sell the asset. Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised in equity, until the financial asset is derecognised or impaired at which time the cumulative gain or loss previously recognised in equity should be recognised in profit or loss. However, interest calculated using the effective interest method is recognised in the statement of income. Dividends on available-for-sale equity instruments are recognised in the statement of income when the entity’s right to receive payment is established. The fair values of quoted investments in active markets are based on current bid prices. If there is no active market for a financial asset (and for unlisted securities), the Bank establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, and other valuation techniques commonly used by market participants.
notes to financial statements
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1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 2 Summary of significant accounting policies …continued 2.4 Property, plant and equipment Land and buildings comprise mainly branches and offices. Land and buildings are shown at fair value, based on valuations by external independent valuers, less subsequent depreciation for buildings. Any accumulated depreciation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. All other assets are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of income during the financial period in which they are incurred. Land is not depreciated. Depreciation is calculated using the straight-line method for buildings and the reducing balance method for all other property, plant and equipment to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows:
Buildings Furniture and fixtures Equipment Motor vehicles
2% 10% 15- 25% 20%
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the statement of income. 2.5 Sale and repurchase agreements Securities purchased under agreements to resell (‘reverse repos’) are recorded as loans and advances to financial institutions or customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method. 2.6 Impairment of financial assets (a) Assets carried at amortised cost The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
42
notes to financial statements
Involved, Interested, Invested, In You!
Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
2 Summary of significant accounting policies …continued 2.6 Impairment of financial assets …continued The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: • Delinquency in contractual payments of principal or interest; • Cash flow difficulties experienced by the borrower (for example, equity ratio, net income percentage of sales); • Breach of loan covenants or conditions; • Initiation of bankruptcy proceedings; • Deterioration of the borrower’s competitive position; and • Deterioration in the value of collateral. The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on financial asset has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statement of income. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the statement of income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the statement of income. (b) Assets classified as available for sale The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in equity – is removed from equity and recognised in the statement of income. Impairment losses recognised in the statement of income on equity instruments are not reversed through the statement of income. If in subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the statement of income.
notes to financial statements
43
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 2 Summary of significant accounting policies …continued 2.6 Impairment of financial assets …continued (c) Renegotiated loans Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. In subsequent years, the asset is considered to be past due and disclosed only if renegotiated. 2.7 Impairment of other non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). 2.8 Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 2.9 Guarantees and letters of credit Guarantees and letters of credit comprise undertakings by the Bank to pay bills of exchange drawn on customers. The Bank expects most guarantees and letters of credit to be settled simultaneously with the reimbursement from the customers. Guarantees and letters of credit are accounted for as off-balance sheet transactions and are disclosed in the contingent liabilities and commitments note. 2.10 Provisions Provisions are recognised when: the Bank has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.
44
notes to financial statements
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Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
2 Summary of significant accounting policies ‌continued 2.11 Employee benefits (a) Pension obligation The Bank operates a defined benefit plan for all employees. The assets of the plan are held separately. The pension plan is funded through payments from employees and the Bank, taking account of the recommendations of independent qualified actuaries. A defined benefit plan is a pension plan that defines an amount of pension that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government securities that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to income over the employees’ expected average remaining working lives. Past-service costs are recognised immediately in the statement of income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period. (b) Profit-sharing and bonus plans The Bank recognises a liability and an expense for bonuses and profit-sharing, based on a formula that takes into consideration the profit attributable to the Bank’s shareholders after certain adjustments. The Bank recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. 2.12 Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. The principal temporary differences arise from depreciation of property, plant and equipment. If the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting or taxable profit or loss, it is not accounted for. Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the temporary differences can be utilised. Income tax payable on profits, based on the applicable tax law is recognised as an expense in the period in which profits arise. The tax effects of income tax losses available for carry forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised.
notes to financial statements
45
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 2 Summary of significant accounting policies …continued 2.13 Share capital (a) Share issue costs Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds. (b) Dividends on ordinary shares Dividends on ordinary shares are recognised in equity in the period in which they are approved. Dividends for the year declared after the balance sheet date are disclosed in the notes to the financial statements. 2.14 Interest income and expense Interest income and expense for all interest bearing financial instruments are recognised within “interest income” and “interest expense” in the statement of income using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. 2.15 Fee and commission income Fees and commissions are generally recognised on an accrual basis when the service has been provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan. Performance linked fees or fee components are recognised when the performance criteria are fulfilled. 2.16 Dividend income Dividends are recognised in the statement of income when the Bank’s right to receive payment is established. 2.17 Leases (a) The Bank is the lessee Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of income on a straight-line basis over the period of the lease. (b) The Bank is the lessor When assets are leased out under an operating lease, the assets are included in the balance sheet based on the nature of the assets. Lease income is recognised over the term of the lease on a straight line basis.
46
notes to financial statements
Involved, Interested, Invested, In You!
Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
2 Summary of significant accounting policies …continued 2.18 Foreign currency translation (a) Functional and presentation currency Items in the financial statements are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The financial statements are presented in Eastern Caribbean dollars, which is the Bank’s functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of income. 2.19 Financial instruments Financial instruments carried on the balance sheet include cash resources, investment securities, loans and advances to customers, loans and advance to financial institutions, deposits with other banks, deposits from banks and due to customers. The particular recognition methods adopted are disclosed in the individual policy statement associated with each item. 2.20 Comparatives Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current year. 3 Financial risk management The Bank’s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. The Bank’s aim is therefore to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Bank’s financial performance. The Bank’s risk management policies are designed to identify and analyse these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice. Risk management is carried out by the Finance Department under policies approved by the Board of Directors. Management identifies, evaluates and hedges financial risks in close cooperation with the Bank’s operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk and credit risk. In addition, internal audit is responsible for the independent review of risk management and the control environment. The most important types of risk are credit risk, liquidity risk, market risk and other operational risk. Market risk includes currency risk, interest rate and other price risk.
notes to financial statements
47
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.1 Credit risk The Bank takes on exposure to credit risk, which is the risk that a counterparty will cause a financial loss for the Bank by failing to discharge an obligation. Significant changes in the economy, or in the health of a particular industry segment that represents a concentration in the Bank’s portfolio, could result in losses that are different from those provided for at the balance sheet date. Management therefore carefully manages its exposure to credit risk. Credit exposures arise principally in lending activities that lead to loans and advances, and investment activities that bring debt securities and other bills into the Bank’s asset portfolio. There is also credit risk in off-balance sheet financial instruments such as loan commitments. The credit risk management and control are centralised and reports to the Board of Directors. 3.1.1 Credit risk measurement (a) Loans and advances Eastern Caribbean Central Bank prudential guidelines are embedded in the Bank’s daily operational management. The operational measurements can be contrasted with impairment allowances required under IAS 39, which are based on losses that have been incurred at the balance sheet date (the ‘incurred loss model’). The Bank assesses the probability of default of individual counterparties using the Eastern Caribbean Central Bank prudential guidelines. Clients of the Bank are segmented into five rating classes. The Bank’s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class. This means that, in principle, exposures migrate between classes as the assessment of their probability of default changes. The Bank regularly validates the performance of the rating and their predictive power with regard to default events. Bank’s internal ratings scale Bank’s rating Description of the grade 1 Pass 2 Special Mention 3 Substandard 4 Doubtful 5 Loss (b) Debt securities and other bills For debt securities and other bills, external rating such as Fitch’s rating, Caricris or their equivalents are used by management for managing of the credit risk exposures. 3.1.2 Risk limit control and mitigation policies The Bank manages, limits and controls concentrations of credit risk wherever they are identified − in particular, to individual counterparties and groups, and to industries. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to the industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review by the Board of Directors. The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on- and off-balance sheet exposures, and daily delivery risk limits in relation to trading items. Actual exposures against limits are monitored daily. Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate.
48
notes to financial statements
Involved, Interested, Invested, In You!
Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
3 Financial risk management …continued 3.1.2 Risk limit control and mitigation policies …continued Some other specific control and mitigation measures are outlined below. (a) Collateral The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advances, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are: • • •
Mortgages over residential properties; Charges over business assets such as premises, inventory and accounts receivable; and Charges over financial instruments such as debt securities and equities.
Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured. In addition, in order to minimise the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured. (b) Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit – which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions – are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. 3.1.3 Impairment and provisioning policies The impairment provision shown in the balance sheet at year-end is derived from each of the five internal rating grades. The table below shows the percentage of the Bank’s on- and offbalance sheet items relating to loans and advances and the associated impairment provision for each of the Bank’s internal rating categories: 2008
Bank’s rating 1. Pass 2. Special mention 3. Sub-standard 4. Doubtful 5. Loss notes to financial statements
49
2007
Loans and advances (%)
Impairment provision (%)
Loans and advances (%)
Impairment provision (%)
86.5% 2.3% 5.0% 3.8% 2.4%
26.1% 2.4% 20.4% 23.0% 28.1%
84.4% 2.9% 6.9% 3.5% 2.3%
0.8% 7.4% 14.5% 33.2% 44.1%
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.1.3 Impairment and provisioning policies…continued The internal rating tool assists management to determine whether objective evidence of impairment exists under IAS 39, based on the following criteria set out by the Bank: • • • • • •
Delinquency in contractual payments of principal or interest; Cash flow difficulties experienced by the borrower (eg equity ratio, net income percentage of sales); Breach of loan covenants or conditions; Initiation of bankruptcy proceedings; Deterioration of the borrower’s competitive position; and Deterioration in the value of collateral.
The Bank’s policy requires the review of individual financial assets that are above materiality thresholds at least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of the incurred loss at balance-sheet date on a case-by-case basis, and are applied to all individually significant accounts. The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account. 3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements Credit risk exposures relating to on-balance sheet assets are as follows:
Due from other banks Treasury bills Loans and advances to financial institutions Loans and advances to customers: − Overdraft − Demand loans − Promissory notes − Mortgages − Non-productive loans and overdrafts Investments securities: − available for sale − held to maturity Other assets Credit risk exposures relating to off-balance sheet items are as follows: Financial Guarantees Loan commitments and other credit related liabilities At December 31
Maximum exposure 2008 $
2007 $
5,088,351 17,910,470 38,642,361
12,583,177 15,477,411 32,171,428
11,454,873 101,076,271 7,868,260 107,003,795 21,067,028
9,412,925 97,625,826 9,937,527 91,436,388 15,167,087
9,431,682 22,171,742 1,839,745
5,999,227 19,276,037 2,387,386
3,707,216 25,371,125
3,692,334 26,241,705
372,632,919
341,408,458
The above table represents a worse case scenario of credit risk exposure to the Bank at December 31, 2008 and 2007, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the balance sheet. As shown above, 67% of the total maximum exposure is derived from loans and advances to financial institutions and customers (2007 - 65%); 8% represents investments in debt securities (2007 - 7%).
50
notes to financial statements
Involved, Interested, Invested, In You!
Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
3 Financial risk management …continued 3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements…continued Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loan and advances portfolio based on the following: • • • • •
89% of the loans and advances portfolio is categorised in the top two grades of the internal rating system (2007 - 87%); Mortgage loans which represent the largest percentage of the portfolio, followed by demand loans, are backed by collateral; 57% of the loans and advances portfolio are considered to be neither past due nor impaired (2007 - 55%); The Bank continues to grant loans and advances in accordance with its lending policies and guidelines; and 9% of the investments in debt securities and other bills have at least at A- credit rating. Many issuers in the region are not graded, consequently 59% of investments are not rated, compared to 91% last year.
3.1.5 Loans and advances Loans and advances are summarised as follows: 2008 $
2007 $
Loans and advances to customers Neither past due nor impaired Past due but not impaired Impaired
150,515,962 79,527,603 32,657,984
130,039,415 75,435,871 31,167,369
Gross
262,701,549
236,642,655
Less: allowance for impairment (Notes 9 and 10)
(14,231,322)
(13,062,902)
Net
248,470,227
223,579,753
38,642,361
32,171,428
Loans and advances to financial institutions Neither past due nor impaired (Note 8)
The total impairment provision for loans and advances is $14,231,322 (2007 - $13,062,902). Further information of the impairment allowance for loans and advances to banks and to customers is provided in Notes 9 and 10.
notes to financial statements
51
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.1.5 Loans and advances…continued (a) Loans and advances neither past due or impaired The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the Bank. December 31, 2008 Overdrafts $
Demand loans $
Promissory notes $
Mortgages $
Total Loans and advances to customers $
9,547,239 1,737,367 – – –
61,480,754 1,238,413 – – –
5,325,447 – – – –
70,038,928 1,147,814 – – –
146,392,368 4,123,594 – – –
11,284,606
62,719,167
5,325,447
71,186,742
150,515,962
Overdrafts $
Demand loans $
Promissory notes $
Mortgages $
Total Loans and advances to customers $
Grades 1. Pass 2. Special mention 3. Sub-standard 4. Doubtful 5. Loss
9,428,772 – – – –
55,195,936 445,979 9,231 – –
5,883,541 – 9,674 – –
56,897,479 2,168,803 – – –
127,405,728 2,614,782 18,905 – –
Total
9,428,772
55,651,146
5,893,215
59,066,282
130,039,415
Loans and advances to customers Grades 1. Pass 2. Special mention 3. Sub-standard 4. Doubtful 5. Loss Total December 31, 2007
Loans and advances to customers
Loans and advances to financial institutions Loans and advances to financial institutions were graded 1 (Pass) as at December 31, 2008 and December 31, 2007.
52
notes to financial statements
Involved, Interested, Invested, In You!
Notes to Financial Statements
For December the year 31, ended 2008 31 march 2008 (expressed in Eastern Caribbean dollars)
3 Financial risk management ‌continued 3.1.5 Loans and advances ‌continued (b) Loans and advances past due but not impaired Loans and advances less than 90 days past due are not considered impaired, unless other information is available to indicate the contrary. Gross amount of loans and advances by class to customers net of unearned interest that were past due but not impaired were as follows: Demand loans $
Promissory notes $
Mortgages $
Total Loans and advances to customers $
20,424,112 8,850,958 2,675,937 8,097,336
1,107,753 458,878 317,023 731,009
18,557,205 3,197,194 3,834,521 11,275,677
40,089,070 12,507,030 6,827,481 20,104,022
Total
40,048,343
2,614,663
36,864,597
79,527,603
Fair value of collateral
64,595,029
6,948,529
79,223,069
150,766,627
December 31, 2007 Past due up to 30 days Past due 30-60 days Past due 60-90 days Past due over 90 days
21,809,908 8,721,723 2,159,243 6,540,057
2,326,224 466,351 391,788 836,937
16,117,653 7,886,470 1,667,381 6,512,136
40,253,785 17,074,544 4,218,412 13,889,130
Total
39,230,931
4,021,300
32,183,640
75,435,871
Fair value of collateral
71,557,750
10,400,735
64,099,375
146,057,860
December 31, 2008 Past due up to 30 days Past due 30-60 days Past due 60-90 days Past due over 90 days
Upon initial recognition of loans and advances, the fair value of collateral is based on valuation techniques commonly used for the corresponding assets. In subsequent periods, the fair value is updated by reference to market price or indexes of similar assets. There were no overdrafts past due but not impaired.
notes to financial statements
53
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.1.5 Loans and advances…continued (c) Loans and advances individually impaired The table below shows the gross amount of individually impaired loans and advances to customers by grades before taking into consideration the cash flows from collateral held. 2008 $
2007 $
Grades: 1. Pass 2. Special mention 3. Sub-standard 4. Doubtful 5. Loss
2,146,463 439,447 12,568,058 9,943,439 7,560,577
705,799 530,661 16,106,623 8,400,326 5,423,960
Total
32,657,984
31,167,369
Fair value of collateral
58,550,849
49,238,788
Individually impaired loans
(d) Loans and advances renegotiated Restructuring activities include extended payment arrangements, approved external management plans, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgment of local management, indicate that payment will most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans, in particular customer finance loans. There were no renegotiated loans that would otherwise be past due or impaired at December 31, 2008 and 2007. 3.1.6 Debt securities, treasury bills and other eligible bills The table below presents an analysis of debt securities, treasury bills and other eligible bills by rating agency designation at December 31, 2008, based on Fitch, Caricris or their equivalent: Investment securities
AA- to AA+ A- to A+ Lower than AUnrated Total
Treasury bills $
Available-for-sale $
Held-to-maturity $
Total $
– – 6,255,217 11,655,253
262,800 496,425 625,000 11,405,237
4,066,257 – 10,067,975 8,037,510
4,329,057 496,425 16,948,192 31,098,000
17,910,470
12,789,462
22,171,742
52,871,674
54
notes to financial statements
Involved, Interested, Invested, In You!
Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
3 Financial risk management ‌continued 3.1.7 Repossessed collateral During 2008, the Bank obtained assets by taking possession of collateral held as security, as follows:
Nature of assets
Carrying amount $ 994,850
Vehicles
Repossessed vehicles are sold as soon as practicable with the proceeds used to reduce the outstanding indebtedness. Repossessed vehicles are classified in the balance sheet within other assets. 3.1.8 Concentration of risks of financial assets with credit risk exposure (a) Geographical sectors The Bank operates primarily in St. Lucia and the exposure to credit risk is concentrated in this area.
notes to financial statements
55
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 3 Financial risk management…continued 3.1.8 Concentration of risks of financial assets with credit risk exposure…continued (b) Industry sectors The following table breaks down the Bank’s main credit exposure at their carrying amounts, as categorised by the industry sectors of our counterparties.
Financial institutions $
Manufacturing $
Tourism $
Government $
Professional and other services $
Personal $
Other industries $
Total $
– 38,642,361
– –
– –
17,910,470 –
– –
– –
– –
17,910,470 38,642,361
– – – – –
684,607 2,866,251 5,146 538,530 157,445
47,095 1,702,885 2,145,327 251,033
– – – – –
3,407,227 16,174,781 87,074 7,764,041 2,858,178
2,884,097 44,351,020 6,732,523 83,642,381 16,117,067
4,543,587 37,672,417 1,084,181 13,966,986 13,017,670
11,566,613 102,767,354 7,908,924 108,057,265 32,401,393
7,656,695 8,609,583 799,538
– – –
– – –
– 13,458,992 –
– – –
– – –
5,132,767 103,167 1,040,207
12,789,462 22,171,742 1,839,745
As at December 31, 2008
55,708,177
4,251,979
4,146,340
31,369,462
30,291,301
153,727,088
76,560,982
356,055,329
As at December 31, 2007
47,999,113
2,168,094
3,258,082
25,655,305
26,259,907
139,086,556
72,153,001
316,580,058
Treasury bills Loans and advances to financial institutions Loans and advances to customers: - Overdraft - Demand loans - Promissory notes - Mortgages - Non-productive loans and overdrafts Investment securities: - available-for-sale - held-to-maturity Other assets
56
notes to financial statements
Involved, Interested, Invested, In You!
Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
3 Financial risk management …continued 3.2 Market risk The Bank takes on exposure to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks arise from open positions in interest rate and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates, credit spreads, foreign exchange rates and equity prices. The Bank exposures to market risks arise from its non-trading portfolios. Non-trading portfolios primarily arise from the interest rate management of the Bank’s retail and commercial banking assets and liabilities. Non-trading portfolios also consist of equity risks arising from the Bank’s held-to-maturity and available-for-sale investments. 3.2.1 Price risk The Bank is exposed to equity securities price risk because of investments held by the Bank and classified on the balance sheet as available for sale. To manage its price risk arising from investments in equity securities, the Bank diversifies its portfolio. At December 31, 2008 if equity securities prices had been 5% higher/lower with all variable held constant equity for the year would have been $46,875 higher/lower as a result of the increase/decrease in fair value of available for sale equity securities. 3.2.2 Foreign exchange risk The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total which are monitored daily. The Bank’s exposure to currency risk is minimal since most of its assets and liabilities in foreign currencies are held in United States dollars. The exchange rate of the Eastern Caribbean dollar (EC$) to the United States dollar (US$) has been formally pegged at EC$2.70 = US$1.00 since 1976. The following table summarises the Bank’s exposure to foreign currency exchange rate risk at December 31, 2008. Included in the table are the Bank’s financial instruments at carrying amount, categorised by currency.
notes to financial statements
57
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.2.2 Foreign exchange risk…continued Concentration of currency risk – on and off balance sheet financial instruments ECD
CAD
EURO
USD
GBP
TTD
BD
TOTAL
26,271,308 1,609,084 17,910,470 38,642,361 248,470,227
63,488 102,005 – – –
695,083 560,269 – – –
1,644,470 1,951,670 – – –
158,367 806,315 – – –
187,925 10,692 – – –
187,925 48,316 – – –
29,208,566 5,088,351 17,910,470 38,642,361 248,470,227
8,238,753 22,171,742 1,839,745
– – –
– – –
4,550,709
– – –
– – –
– – –
12,789,462 22,171,742 1,839,745
Total financial assets
365,153,690
165,493
1,255,352
8,146,849
964,682
198,617
236,241
376,120,924
Liabilities Due to customers Other liabilities
328,087,379 3,769,600
– –
2,516 –
1,314,693 –
– –
– –
– –
329,404,588 3,769,600
Total financial liabilities
331,856,979
–
2,516
1,314,693
–
–
–
333,174,188
Net on-balance sheet positions
33,296,711
165,493
1,252,836
6,832,156
964,682
198,617
236,241
42,946,736
Credit commitments
29,078,341
–
–
–
–
–
–
29,078,341
325,230,777 300,405,911
239,716 –
1,073,251 2,633
9,748,750 993,935
2,718,397 –
13,387 –
199,445 –
339,223,723 301,402,479
Net on-balance sheet positions
24,824,866
239,716
1,070,618
8,754,815
2,718,397
13,387
199,445
37,821,244
Credit commitments
29,934,039
–
–
–
–
–
–
29,934,039
As at December 31, 2008 Assets Cash and balances with Central Bank Due from other banks Treasury bills Loans and advances to financial institutions Loans and advances to customers Investment securities - available-for-sale - held-to-maturity Other assets
As at December 31, 2007 Total financial assets Total financial liabilities
58
notes to financial statements
Involved, Interested, Invested, In You!
Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
3 Financial risk management ‌continued 3.2.3 Interest rate risk Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but may reduce losses in the event that unexpected movements arise. The Board sets limits on the level of mismatch of interest rate repricing that may be undertaken.
notes to financial statements
59
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.2.3 Interest rate risk The table below summarises the Bank’s exposure to interest rate risks. It includes the Bank’s financial instruments at carrying amounts, categorized by the earlier of contractual repricing or maturity dates. Up to 1 month $
1-3 months $
3-12 months $
1-5 years $
Over 5 years $
Non-interest bearing $
Total $
– 4,113,432 1,307,232 4,575,878 14,710,552
– – 13,706,971 25,931,650 1,142,268
– – – 8,134,833 7,666,349
– – – – 54,568,904
– – 2,896,267 – 170,382,154
29,208,566 974,919 – – –
29,208,566 5,088,351 17,910,470 38,642,361 248,470,227
9,431,682 579,274 –
– 2,003,068 –
– 11,468,474 –
– 5,072,844 –
– 3,048,082 –
3,357,780 – 1,839,745
12,789,462 22,171,742 1,839,745
34,718,050
42,783,957
27,269,656
59,641,748
176,326,503
35,381,010
376,120,924
Liabilities Due to customers Other liabilities
197,959,963 –
35,962,807 –
68,750,388 –
2,077,130 –
– –
24,654,300 3,769,600
329,404,588 3,769,600
Total financial liabilities
197,959,963
35,962,807
68,750,388
2,077,130
–
28,423,900
333,174,188
(163,241,913)
6,821,150
(41,480,732)
57,564,618
176,326,503
47,165,269 170,358,792
23,940,770 36,722,204
16,084,513 58,106,410
68,399,408 1,731,181
151,701,507 –
31,932,256 34,483,892
339,223,723 301,402,479
(123,193,523)
(12,781,434)
(42,021,897)
66,668,227
151,701,507
As at December 31, 2008 Assets Cash and balances with Central Bank Due from other banks Treasury bills Loans and advances to financial institutions Loans and advances to customers Investment securities: - available-for-sale - held-to-maturity Other assets Total financial assets
Total interest repricing gap As at December 31, 2007 Total financial assets Total financial liabilities Total interest repricing gap
60
notes to financial statements
Involved, Interested, Invested, In You!
Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
3 Financial risk management …continued 3.2.3 Interest rate risk…continued The Bank’s fair value interest rate risk arises from debt securities classified as available for sale. At December 31, 2008 if market interest rates had been 100 basis points higher/lower with all variables held constant, equity for the year would have been $64,479 lower/$126,552 higher as a result of the decrease/increase in fair value of available for sale debt securities. Cash flow interest rate risk arises from loans and advances to customers at variable rates. At December 31, 2008 if variable interest rates had been 100 basis points higher/lower with all other variables held constant, post-tax profit for the year would have been $1,552,262 higher/lower, mainly as a result of higher/lower interest income on variable rate loans. 3.3 Liquidity risk Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay depositors and fulfill commitments to lend. 3.3.1 Liquidity risk management process The Bank’s liquidity is managed and monitored by the Finance Department. This includes: •
Daily to weekly monitoring to ensure that requirements can be met. This includes the replenishment of funds as they mature or are borrowed by customers. The Bank ensures that sufficient funds are held in the one to thirty day maturity bucket to satisfy liquidity requirements.
•
Maintaining a portfolio of marketable assets that can easily be liquidated as protection against any unforeseen liquidity problems. Additionally, the investment portfolio is diversified by currency, geography, provider, product and term.
•
Weekly monitoring of the balance sheet liquidity ratios against internal and regulatory requirements.
•
Managing the concentration and profile of debt maturities.
The Bank is looking to formalize arrangements with indigenous Banks in the Eastern Caribbean, to fund any liquidity needs that may arise 3.3.2 Funding approach Sources of liquidity are regularly reviewed to maintain a wide diversification by currency, geography, provider, product and term.
notes to financial statements
61
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.3.3 Non-derivative cash flows The table below presents the cash flows payable by the Bank under non-derivative financial assets and liabilities by remaining contractual maturities at the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows, whereas the Bank manages the inherent liquidity risk based on expected undiscounted cash inflows.
Up to1 month $
1-3 months $
3-12 months $
1-5 years $
Total $
Liabilities Due to customers Other liabilities
222,635,987 3,769,600
36,206,105 –
70,534,136 –
2,293,200 –
331,669,428 3,769,600
Total liabilities (Contractual maturity dates)
226,405,587
36,206,105
70,534,136
2,293,200
335,439,028
Liabilities Due to customers Other liabilities
200,949,979 3,892,705
36,722,204 –
58,106,410 –
1,843,587 –
297,622,180 3,892,705
Total liabilities (Contractual maturity dates)
204,842,684
36,722,204
58,106,410
1,843,587
301,514,885
As at December 31, 2008
As at December 31, 2007
Assets available to meet all of the liabilities and to cover outstanding loan commitments include cash, central bank balances, items in the course of collection and treasury and other eligible bills; loans and advances to financial institutions; and loans and advances to customers. In the normal course of business, a proportion of customer loans contractually repayable within one year will be extended. The Bank would also be able to meet unexpected net cash outflows by selling securities and accessing additional funding sources.
62
notes to financial statements
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Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
3 Financial risk management …continued 3.3.4 Off-balance sheet items (a) Loan commitments The dates of the contractual amounts of the Bank’s off-balance sheet financial instruments that commit it to extend credit to customers and other facilities (Note 30), are summarised in the table below. (b) Financial guarantees and other financial facilities Financial guarantees (Note 30), are also included below based on the earliest contractual maturity date.
As at December 31, 2008 Loan commitments Guarantees, acceptances and other financial facilities Total As at December 31, 2007 Loan commitments Guarantees, acceptances and other financial facilities Total
1 year $
1-5 years $
Over 5 years $
Total $
15,965,251
9,400,678
5,196
25,371,125
3,707,216
–
–
3,707,216
19,672,467
9,400,678
5,196
29,078,341
24,551,521
1,690,184
–
26,241,705
3,692,334
–
–
3,692,334
28,243,855
1,690,184
–
29,934,039
3.4 Fair values of financial assets and liabilities Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable willing parties who are under no compulsion to act and is best evidenced by a quoted market value, if one exists. The following methods and assumptions were used to estimate the fair value of financial instruments. The fair values of cash resources, other assets and liabilities, cheques and other items in transit and due to other banks are assumed to approximate their carrying values due to their short term nature. The fair value of off balance sheet commitments are also assumed to approximate the amounts disclosed in Note 30 due to their short term nature. (a) Loans and advances to customers Loans and advances are net of provisions for impairment. The estimated fair values of loans and advances represent the discounted amount of estimated future cash flow expected to be received. Expected cash flows are discounted at current market rate to determine fair value. (b) Investment securities Investment securities include only interest bearing assets held to maturity; assets classified as available for sale are measured at fair value. The fair value for held-to-maturity assets is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit maturity and yield characteristics. notes to financial statements
63
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.4 Fair values of financial assets and liabilities…continued (c) Due to customers The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand. Deposits payable on a fixed date are at rates, which reflect market conditions and are assumed to have fair values which approximate carrying values. The table below summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s balance sheet at their fair value. Carrying value
Fair value
2008 $
2007 $
2008 $
2007 $
38,642,361 248,470,227 11,454,873 101,076,271 7,868,260 107,003,795 21,067,028
32,171,428 223,579,753 9,412,925 97,625,826 9,937,527 91,436,388 15,167,087
38,642,361 250,853,268 11,454,873 104,741,555 8,445,030 107,215,744 18,996,066
32,171,428 232,843,067 9,412,925 102,878,852 10,595,064 95,168,647 14,787,579
22,171,742
19,276,037
21,863,698
18,170,791
329,404,588 120,722,596 173,451,589 35,230,403
297,509,774 107,016,083 158,846,641 31,647,050
329,404,588 120,722,596 173,451,589 35,230,403
297,509,774 107,016,083 158,846,641 31,647,050
Financial assets Loans and advances to financial institutions Loans and advances to customers: − Overdraft − Demand loans − Promissory notes − Mortgages − Non-productive loans and overdrafts Investment securities − Held to maturity Financial liabilities Due to customers: − Time deposits − Savings accounts − Demand accounts
3.5 Capital management The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of balance sheets, are: • To comply with the capital requirements set by the Eastern Caribbean Central Bank; • To safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and • To maintain a strong capital base to support the development of its business. Capital adequacy and the use of regulatory capital are monitored daily by the Bank’s management, employing techniques based on the guidelines developed by the East Caribbean Central Bank (‘the Authority’) for supervisory purposes. The required information is filed with the Authority on a quarterly basis. The Authority requires each bank or banking group to: (a) hold the minimum level of the regulatory capital of $5,000,000 and (b) maintain a ratio of total regulatory capital to the riskweighted asset (the ‘Basel ratio’) at or above the internationally agreed minimum of 8%.
64
notes to financial statements
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Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
3 Financial risk management …continued 3.5 Capital management…continued The Bank’s regulatory capital as managed by management is divided into two tiers: • Tier 1 capital: share capital, retained earnings and reserves created by appropriations of retained earnings. • Tier 2 capital: qualifying subordinated loan capital, collective impairment allowances and unrealised gains arising on the fair valuation of equity instruments held as available for sale. The risk-weighted assets are measured by means of a hierarchy of five risk weights classified according to the nature of − and reflecting an estimate of credit, market and other risks associated with − each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for off-balance sheet exposure, with some adjustments to reflect the more contingent nature of the potential losses. The table below summarises the composition of regulatory capital and the ratios of the Bank for the years ended December 31, 2008 and 2007. During those two years, the Bank complied with all of the externally imposed capital requirements to which they are subject.
Tier 1 capital Share capital Statutory reserve Retained earnings
2008 $
2007 $
7,971,454 7,971,454 37,539,794
7,971,454 7,971,454 30,255,220
Total qualifying Tier 1 capital
53,482,702
46,198,128
Tier 2 capital Revaluation reserve – available-for-sale investments Revaluation reserve – property, plant and equipment
493,761 2,262,730
689,040 2,285,636
Total qualifying Tier 2 capital
2,756,491
2,974,676
56,239,193
49,172,804
Risk-weighted assets: On-balance sheet Off-balance sheet
279,562,292 5,815,668
213,921,000 5,987,000
Total risk-weighted assets
285,377,960
219,908,000
19%
21%
Total regulatory capital
Basel ratio
notes to financial statements
65
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 4 Critical accounting estimates, and judgements in applying accounting policies The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) Impairment losses on loans and advances 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 statement of income, the Bank makes judgement as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extent that the net present value of estimated cash flows differs by +/-5%, the provision would be estimated $618,745 lower or $642,842 higher. (b) Impairment of available-for-sale equity investments The Bank determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgement. In making this judgment, the Bank evaluates among other factors, when there is evidence of deterioration in the financial health of the investee industry and sector performance, changes in technology and operational and financing cash flows. There were no declines in fair value below cost considered significant or prolonged as at December 31, 2008. (c) Held-to-maturity investments The Bank follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgement. In making this judgement, the Bank evaluates its intention and ability to hold such investments to maturity. If the Bank fails to keep these investments to maturity other than for the specific circumstances – for example, selling an insignificant amount close to maturity – it will reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value not amortised cost. If the entire held-to-maturity investments are tainted, the fair value would decrease by $308,044 with a corresponding entry in the fair value reserve in equity.
66
notes to financial statements
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Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
5 Cash and balances with Central Bank
2008 $
2007 $
Cash in hand Balances with Central Bank other than mandatory reserve deposits
7,991,839 1,773,157
8,081,378 369,012
Included in cash and cash equivalents (Note 28)
9,764,996
8,450,390
19,443,570
14,673,000
29,208,566
23,123,390
Mandatory reserve deposits with Central Bank
Pursuant to Section 17 of the Banking Act of St. Lucia No.34 of 2006, the Bank is required to maintain in cash and deposits with the Central Bank reserve balances in relation to the deposit liabilities of the institution. Mandatory reserve deposits are not available for use in the Bank’s day-to-day operations. The balances with the Central Bank are non-interest bearing.
6 Due from other banks
2008 $
2007 $
Items in the course of collection from other banks Placements with other banks
566,838 4,521,513
1,632,832 10,950,345
Included in cash and cash equivalents (Note 28)
5,088,351
12,583,177
The weighted average effective interest rate in respect of interest bearing deposits at December 31, 2008 was 1.47% (2007 – 2.49%).
7 Treasury bills Treasury bills
2008 $
2007 $
17,910,470
15,477,411
Treasury bills are debt securities issued by the Government of Saint Lucia, Saint Vincent, Grenada and Antigua. The weighted average effective interest rate of bills in 2008 was 6.15% (2007 – 6.10%). All treasury bills have fixed interest rates.
notes to financial statements
67
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 8 Loans and advances to financial institutions
Reverse repos
2008 $
2007 $
38,642,361
32,171,428
Reverse repos are securities purchased under agreements to resell. The weighted average effective interest rate of the reverse repos in 2008 was 5.78% (2007 – 5.75%). Allowance account for losses on loans and advances to financial institutions as at December 31, 2008 and 2007 was nil. 9 Loans and advances to customers
2008 $
2007 $
11,566,613 102,767,354 7,908,924 108,057,265 32,401,393
9,428,772 97,749,990 9,954,171 91,454,633 28,055,089
262,701,549
236,642,655
(14,231,322)
(13,062,902)
248,470,227
223,579,753
Current Non-current
23,519,169 224,951,058
18,672,256 204,907,497
Total
248,470,227
223,579,753
Overdraft Demand loans Promissory notes Mortgages Non-productive loans and overdrafts
Less provision for impairment of loans and advances (Note 10)
Loans and advances with fixed rates are $40,310,317 (2007 - $38,009,260) and those with variable rates are $222,391,232 (2007 - $198,633,395). The weighted average effective interest rate on productive loans stated at amortised cost at December 31, 2008 was 9.8% (2007 - 10.14%) and productive overdraft stated at amortised cost was 12.25% (2007 - 12.37%).
68
notes to financial statements
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Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)
10 Provision for impairment of loans and advances Reconciliation of allowance account for losses on loans and advances by class is as follows: Overdraft $
Demand loans $
Promissory notes $
Mortgage $
Non-productive loans $
Total $
Balance at January 1, 2008 Provision for loan impairment Loans written off during the year
15,847 102,551 (6,658)
124,163 1,584,466 (17,546)
16,644 45,582 (21,562)
18,245 1,069,070 (33,845)
12,888,003 (1,553,638) –
13,062,902 1,248,031 (79,611)
At December 31, 2008
111,740
1,691,083
40,664
1,053,470
11,334,365
14,231,322
Balance at January 1, 2007 Provision for loan impairment Loans written off during the year Amounts recovered during the year
15,847 – – –
149,622 – (25,459) –
24,386 – (7,742) –
21,050 – (2,805) –
12,722,658 129,339 – 36,006
12,933,563 129,339 (36,006) 36,006
At December 31, 2007
15,847
124,163
16,644
18,245
12,888,003
13,062,902
11 Investment securities
2008 $
2007 $
912,500 2,445,280
2,180,634 2,445,280
5,004,192 4,427,490
5,013,537 985,690
Total securities: available-for-sale
12,789,462
10,625,141
Held-to-maturity Debt securities - at amortised cost: - Listed - Unlisted
10,078,086 12,093,656
10,093,348 9,182,689
Total securities: held-to-maturity
22,171,742
19,276,037
Current Non-current
23,482,498 8,120,926
10,081,846 15,193,418
Total
31,603,424
25,275,264
Available-for-sale Equity securities - at fair value: - Listed - Unlisted Debt securities: - Listed - Unlisted
notes to financial statements
69
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 11 Investment securities‌continued All debt securities have fixed interest rates. The weighted average effective interest rate on securities held-to-maturity stated at amortised cost at December 31, 2008 was 6.91% (2007 - 6.55%). The movement in available-for-sale and held-to-maturity financial asset during the year is as follows: Available for sale $
Held to maturity $
At January 1, 2008 Additions Disposals (sale and redemption) Losses from changes in fair value
10,625,141 7,490,432 (5,130,832) (195,279)
19,276,037 37,546,945 (34,651,240) –
At December 31, 2008
12,789,462
22,171,742
At January 1, 2007 Additions Disposals (sale and redemption) Gains from changes in fair value
6,082,515 10,296,152 (6,003,783) 250,257
29,379,393 11,677,146 (21,780,502) –
At December 31, 2007
10,625,141
19,276,037
70
notes to financial statements
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Notes to Financial Statements
For December the year 31, ended 2008 31 march 2008 (expressed in Eastern Caribbean dollars) 12 Property, plant and equipment
Land and Building $
Furniture and Fixtures $
Equipment $
Motor Vehicles $
Total $
7,844,355 (1,731,051)
1,203,602 (800,252)
7,910,375 (5,867,663)
186,920 (34,840)
17,145,252 (8,433,806)
6,113,304
403,350
2,042,712
152,080
8,711,446
Opening net book amount Additions in the year Disposals in the year Depreciation charge (Note 22)
6,113,304 2,939,356 (12,500) (151,128)
403,350 44,931 – (42,590)
2,042,712 714,534 (516) (489,933)
152,080 – – (30,417)
8,711,446 3,698,821 (13,016) (714,068)
Closing net book amount
8,889,032
405,691
2,266,797
121,663
11,683,183
10,771,211 (1,882,179)
1,248,533 (842,842)
8,624,359 (6,357,562)
186,920 (65,257)
20,831,023 (9,147,840)
8,889,032
405,691
2,266,797
121,663
11,683,183
Opening net book amount Additions in the year Depreciation charge (Note 22)
8,889,032 24,510 (156,244)
405,691 40,258 (43,363)
2,266,797 1,560,598 (610,155)
121,663 – (24,332)
11,683,183 1,625,366 (834,094)
Closing net book amount
8,757,298
402,586
3,217,240
97,331
12,474,455
10,795,721 (2,038,423)
1,288,791 (886,205)
10,184,957 (6,967,717)
186,920 (89,589)
22,456,389 (9,981,934)
8,757,298
402,586
3,217,240
97,331
12,474,455
December 31, 2006 Cost or valuation Accumulated depreciation Net book amount Year ended December 31, 2007
At December 31, 2007 Cost or valuation Accumulated depreciation Net book amount Year ended December 31, 2008
At December 31, 2008 Cost or valuation Accumulated depreciation Net book amount
In 2003, land and buildings were revalued by an independent valuer based on open market value. The valuation indicated that the market value was below the carrying amount of the respective assets in the books of the Bank. As a result, the carrying amounts were reduced by $309,290, with a corresponding reduction in the revaluation reserves in equity. notes to financial statements
71
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 12 Property, plant and equipment ‌continued The historical cost of land and buildings are:
Cost Accumulated depreciation based on historical cost Depreciated historical cost
2008 $
2007 $
8,044,398 (1,608,309)
8,019,878 (1,507,610)
6,436,089
6,512,268
2008 $
2007 $
1,839,745 156,800 350,483
2,387,386 113,266 276,719
2,347,028
2,777,371
2008 $
2007 $
120,722,596 173,451,589 35,230,403
107,016,083 158,846,641 31,647,050
329,404,588
297,509,774
13 Other assets
Accounts receivable Inventories of stationery and supplies Prepayments
14 Due to customers
Time deposits Savings accounts Demand amounts
All deposits carry fixed interest rates. The weighted average effective interest rate of customers’ deposits at December 31, 2008 was 3.56% (2007 - 3.58%).
72
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Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars) 15 Other liabilities
Manager’s cheques outstanding Accounts payable and accrued expenses Dividends payable on ordinary shares
2008 $
2007 $
1,242,654 2,199,478 327,468
1,820,570 1,782,170 289,965
3,769,600
3,892,705
16 Retirement benefit obligations Pension benefits The amount recognised in the balance sheet at December 31, 2008 is determined as follows: 2008 $
2007 $
2,378,000 (2,613,000)
2,536,000 (2,253,000)
Unrecognised actuarial loss
(235,000) 974,000
283,000 444,000
Liability in the balance sheet
739,000
727,000
2008 $
2007 $
At beginning of year Current service cost Interest cost Members’ contributions Actuarial (gain)/loss Benefits paid
2,536,000 139,000 152,000 36,000 (468,000) (17,000)
2,219,000 141,000 133,000 31,000 29,000 (17,000)
At end of year
2,378,000
2,536,000
Present value of funded obligations Fair value of plan assets
The movement in defined benefit obligations is as follows:
notes to financial statements
73
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 16 Retirement benefit obligations…continued The movement in fair value of plan assets for the year is as follows:
Movement in the liability recognised in the balance sheet:
2008 $
2007 $
At beginning of year Expected return on plan assets Actuarial gain/(loss) Bank’s contributions Members’ contributions Benefits paid
2,253,000 139,000 75,000 127,000 36,000 (17,000)
1,993,000 124,000 (11,000) 133,000 31,000 (17,000)
At end of year
2,613,000
2,253,000
At beginning of year Pension expense Contributions paid At end of year
2008 $
2007 $
727,000 139,000 (127,000)
729,000 131,000 (133,000)
739,000
727,000
The principal actuarial assumptions used were as follows: The amounts recognised in the statement of income are as follows:
Current service cost Interest cost Net actuarial gains recognised in the year Expected return on plan assets Total included in staff costs (Note 24)
2008 $
2007 $
139,000 152,000 (13,000) (139,000)
141,000 133,000 (19,000) (124,000)
139,000
131,000
Discount rate Expected return on plan assets Future salary increases Future pension increases
2008 %
2007 %
7 7 5.5 –
6 6 5.5 –
The actual return on plan assets was $214,000 (2007 - $113,000).
74
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Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008
(expressed in Eastern Caribbean dollars) 16 Retirement benefit obligations…continued Plan assets allocation is as follows:
Debt securities Others
2008 %
2007 %
86 14
75 25
100
100
The expected rate of return on plan assets set by reference to estimated long-term returns on the plan’s strategic asset allocation. Allowance is made for some performance from the plan’s portfolio. The Bank’s expected contributions for the year 2009 is estimated at $149,000. The amount of pension plan for the year is as follows:
Defined benefit obligation Fair value of plan assets (Surplus)/deficit Experience adjustment on plan liabilities Experience adjustment on plan assets
17 Deferred income tax
At beginning of year Statement of income charge/(recovery) for the year (Note 25) Deferred tax asset at end of year
The deferred tax asset comprises of the following temporary differences:
Accelerated capital allowances notes to financial statements
75
2008 $
2007 $
2,378,000 (2,613,000)
2,536,000 (2,253,000)
(235,000)
283,000
(43,000) 75,000
29,000 (11,000)
2008 $
2007 $
(165,691) 134,845
272,553 (438,244)
(30,846)
(165,691)
2008 $
2007 $
(102,820)
(552,304)
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 18 Share capital No. of Shares
2008 $
No. of Shares
2007 $
4,999,966 –
7,971,454 –
4,635,177 364,789
6,877,088 1,094,366
4,999,966
7,971,454
4,999,966
7,971,454
Authorized: 5,000,000 ordinary shares Issued and fully paid: At beginning of year Issued during the year At end of year
19 Statutory reserve Pursuant to Section 14(1) of the Banking Act of St. Lucia No. 34 of 2006, the Bank shall, out of its net profits of each year transfer to that reserve a sum equal to not less than twenty percent of such profits whenever the amount of the fund is less than one hundred percent of the paid-up capital of the Bank.
20 Net interest income
Interest and similar income Loans and advances Deposits with banks Investment securities
Interest expense and similar charges Time deposits Savings deposits Demand deposits
Net interest income
2008 $
2007 $
24,427,048 75,398 5,178,320
21,415,093 276,483 3,711,825
29,680,766
25,403,401
5,229,080 5,487,550 46,206
3,933,619 5,064,629 47,730
10,762,836
9,045,978
18,917,930
16,357,423
76
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Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars) 21 Other operating income
2008 $
2007 $
1,747,447 1,531,602 306,491 420,000 50,810
2,495,828 2,039,334 698,934 315,000 96,840
4,056,350
5,645,936
2008 $
2007 $
5,220,735 4,245,162 834,094 214,726 –
4,637,472 3,507,517 714,068 171,050 (1,984)
10,514,717
9,028,123
2008 $
2007 $
Other operating expenses Postage, telephone and telexes Audit and professional fees Utilities Security expenses Equipment expenses Repairs and maintenance Insurance Directors’ fees and expenses Stationery Bank licence Legal fees Rates and taxes
1,101,378 634,408 546,506 438,276 348,847 291,304 261,589 192,143 138,712 137,484 120,000 18,890 15,625
915,305 454,582 334,256 347,102 231,163 303,908 197,409 196,998 187,290 147,879 120,000 56,000 15,625
Total
4,245,162
3,507,517
Foreign exchange Commission income Fees income Rental income Dividend income
22 Other operating expenses
Staff costs (Note 24) Administrative expenses (Note 23) Depreciation (Note 12) Operating lease rental Gain on disposal of property, plant and equipment
23 Administrative expenses
notes to financial statements
77
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 24 Staff costs
Salaries and wages Profit sharing Other employee benefits Social security costs Pension costs (Note 16)
2008 $
2007 $
3,774,844 511,717 637,465 157,709 139,000
3,456,935 501,560 400,037 147,940 131,000
5,220,735
4,637,472
The average number of employees during the year was 94 (2007 - 90). 25 Income tax expense Current Tax under accrued in prior years Deferred (Note 17)
2008 $
2007 $
1,861,115 120,006 134,845
2,744,711 – (438,244)
2,115,966
2,306,467
Tax on the Bank’s income before income tax differs from the theoretical amount that would arise using the statutory tax rate of 30% (2007 - 30%) as follows: 2008 $
2007 $
Profit before income tax
11,211,532
12,845,897
Tax calculated at the statutory tax rate of 30% (2007 - 30%) Tax effect of exempt income Tax effect of expenses not deductible for tax purposes Tax under accrued in prior year Tax effect of timing differences in existing buildings
3,363,460 (1,411,583) 44,083 120,006 –
3,853,769 (1,097,619) 27,701 – (477,384)
2,115,966
2,306,467
26 Earnings per share Basic and diluted The calculation of basic and diluted earnings per share is based on the net profit attributable to shareholders of $9,095,566 (2007 - $10,539,430) divided by the weighted average number of shares in issue ranking for dividend during the year of 4,999,966 (2007 - 4,852,385). notes to financial statements
78
Involved, Interested, Invested, In You!
Notes to Financial Statements
For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars) 27 Dividends
In the financial statements for the year ended December 31, 2008, $1,999,986 was appropriated from retained earnings relating to the 2007 dividend. At a meeting on March 24, 2009, the Board of Directors declared a dividend of $0.40 per share in respect of 2008 amounting to a total of $1,999,986. This dividend will be accounted for in equity as an appropriation of retained earnings in the year ended December 31, 2009.
28 Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents comprise the following balances with less than 3 months maturity:
Cash and balances with Central Bank (Note 5) Due from other banks (Note 6)
2008 $
2007 $
9,764,996 5,088,351
8,450,390 12,583,177
14,853,347
21,033,567
29 Related party transactions Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. A number of banking transactions are entered into with related parties in the normal course of business. These transactions were carried out on commercial terms and conditions, at market rates. The volume of related-party transactions, outstanding balances at the year-end and related expenses and income for the year are as follows: Loan and advances to Directors and other key management personnel 2008 $
2007 $
Loans outstanding at beginning of year Net loans issued for the year
3,112,842 (120,513)
3,242,979 (130,137)
Loans outstanding at end of year
2,992,329
3,112,842
237,312
241,484
Interest income earned
notes to financial statements
79
1st National Bank Annual Report 2008
Notes to Financial Statements December 31, 2008
(expressed in Eastern Caribbean dollars) 29 Related party transactions…continued Deposits from Directors and other key management personnel
Deposits at beginning of year Net deposits received during the year Deposits outstanding at end of year Interest expense on deposits
2008 $
2007 $
920,046 (210,068)
1,085,938 (165,892)
709,978
920,046
23,201
31,882
2008 $
2007 $
832,036 64,885
791,664 140,800
896,921
932,464
Key management compensation and Directors’ fees
Salaries and other short-term benefits Post and other employment benefits
30 Contingent liabilities and commitments (a) Loans commitment, guarantee and other financial facilities At December 31, 2008, the bank had the contractual amounts of the Bank’s off-balance sheet financial instruments that commit it to extend credit to customers, guarantee and other facilities as follow:
Loan commitments Guarantees and standby letters of credit Acceptances Documentary and commercial letters of credit
2008 $
2007 $
25,371,125 3,707,216 – –
26,241,705 3,358,086 30,230 304,018
29,078,341
29,934,039
80
notes to financial statements