1st National Bank Annual Report 2007

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al Bank Annual Report of 2007 • 1st National Bank Annual Report of 2007 • 1st National Bank Annual Report of 2007 • 1st National Bank Annual Report of 2007 • 1st National Bank Annual Report of 2007 • 1st N

Circular Di-cut 2.25 inches diameter

Contents Notice of Meeting

2

Mission & Vision

3

70 Years of Service & Progress

4

Financial Highlights

5

Report of the Board of Directors

6

Board of Directors 1st National Bank St. Lucia Limited

8

Managing Director’s Review

10

Management Team

15

Organisational Chart

16

A Bright Future Rooted in an Enlightened Past

17

Auditor’s Report

20

Balance Sheet

22

Statement of Income

23

Statement of Changes in Shareholder Equity

24

Statement of Cash Flows

25

Notes to Financial Statement

26

Notes

67

Corporate Data

68

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Notice of Meeting Notice is hereby given that the 70th Annual Meeting of Shareholders of the 1st National Bank St. Lucia Limited will be held at the National Insurance Corporation Conference Room, Francis Compton Building, Waterfront, Castries, on Thursday, 29th May, 2008 at 4:45 p.m.

Agenda 1.

2.

3.

4.

5.

6.

7.

8.

Tabling of Proxies To confirm the Minutes of the Annual Meeting of Shareholders of 26th April, 2007 Matters arising out of the Minutes To consider and adopt the 2007 Report of the Board of Directors To consider and adopt the Auditors’ Report to the Shareholders To consider and adopt the Financial Statements for the period ended 31st December, 2007 To sanction a dividend of $0.40 cents per share as recommended by the Board of Directors To elect three Directors.

The three Directors retiring by rotation are:Mrs. Carole Eleuthere-Jn. Marie who has indicated her intention not to stand for re-election Mr. Aidan Floissac who has indicated his intention not to stand for re-election Mr. Joseph Maxwell who is eligible for re-election

Note

Nominations may be made in writing or on the prescribed forms up to five (5) days prior to the holding of the meeting.

9. Special Business

To consider the following Resolution for the amendment of the voting rights of shareholders proposed and seconded in writing by Mr. Vincent Palmer and Mr. William Edgecombe respectively.

That Bye-Law 12.4 of the Bank’s By-Law No. 1 which reads, “Every shareholder shall on a poll have one vote for every share in THE COMPANY by that person, but no shareholder shall be entitled to more than twenty-five votes,” be amended to read:

Every Shareholder shall on a poll have one vote for every share in the company held by that person, but no shareholders shall be entitled to votes in excess of one twentieth of one per cent of the Bank’s Authorized Share capital.

10. To consider any other matters of interest to Shareholders which may be properly brought before the Meeting.

Note

A Shareholder entitled to attend the meeting and vote may appoint a proxy to vote in his/her place. A person appointed by proxy need not be a shareholder. The instrument appointing a proxy shall be in writing under the hand of the appointer or of his/her attorney duly authorized in writing, or if such appointer is a corporation, either under its common seal or under the hand of an officer or authority so authorized. The instrument appointing a proxy and the power of attorney or other authority if any under which it is signed or a notarially certified copy of that power of authority shall be deposited at the registered office of THE COMPANY not less than forty eight hours before the time for holding the meeting at which the person named in the instrument proposes to vote and in default the instrument of proxy shall not be treated as valid.

Notice is also hereby given that the Share Transfer Book of the Bank will be closed from 16th May, 2008 to 29th May, 2008 both dates inclusive.

BY ORDER OF THE BOARD Beryl Carasco-Alleyne – Corporate Secretary

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To contribute to national development by creating value for shareholders through the provision of financial services to local, regional and international individual and corporate clients.

This will be achieved by creating value and satisfaction for our customers through excellent service driven by a highly skilled, empowered, visionary and inspired team using appropriate technology, supported by good corporate governance.

Vision Statement 1st National Bank St. Lucia Limited is the first choice financial services provider and an outstanding corporate citizen, achieving excellent customer satisfaction and sustained financial growth.

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Mission Statement

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70 Years of Service & Progress 70 Years of Service & Progress 70 Years of Service & Progress 70 Years of Service & Progress Great communities are distinguished by their ability to rise resilient and resourceful out of crucibles of change and challenge. Great communities are defined by that set of principles which – over time and in spite of time still symbolize their essential character.

It is in that vein, that the 1st National Bank St. Lucia Limited represents a unique indigenous financial services partner that has metamorphosed over the past 70 years in tandem with the social and economic transformation of the community which it serves.

During that time the Bank has aligned itself within the very fabric of the St. Lucian landscape, mirroring the aspirations of our people.

Seventy years ago, the core principle of our service was a sense of neighbourliness and striving as one family. Enlightened by our founding ethos, customer-centricity remains a strong corporate value, still relevant for today, notwithstanding the shifts in societal values. Indeed, who and what we are as a community and as a bank transcend social and economic times, and continue to speak to the strength and durability of the prevailing St. Lucian brand.

Enlightened by what we have accomplished from infancy to full autonomy, this continued partnership of bank and community heralds the emergence of a brighter tomorrow.

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2007 $ ‘000

2006 $ ‘000

2005 $ ’000

2004 $ ‘000

2003 $ ‘000

25,403 9, 046 16,357 5,646 9,028 10,539

24,015 7,303 16,712 4,468 8,157 9,291

18,332 6,342 11,990 3,479 7,039 5,992

16,318 6,086 10,232 3,238 5,920 4,695

14,594 6,530 7,964 2,485 5,705 2,921

297,510 7,971 49,339 351,468

269,514 6,877 39,077 314,392

223,758 5,599 29,591 260,272

195,084 4,821 23,854 222,298

187,936 4,514 19,504 210,838

5,000

4,635

4,209

3,950

3,847

Performance Dividends Declared Earnings per share Book Value

$ 0.40 2.17 9.87

$ 0.35 2.10 8.43

$ 0.30 1.47 7.03

$ 0.25 1.21 6.04

$ 0.20 0.76 5.07

Return on Assets Return on Equity Net Interest Margin Productivity Average Employees

3.00% 21.36% 4.65% 41.0% 90

2.96% 23.78% 5.32% 38.5% 82

2.30% 20.25% 4.61% 45.5% 80

2.11% 19.68% 4.60% 43.9% 75

1.39% 14.98% 3.78% 54.6% 75

Operating results Interest income Interest expense Net interest income Other income Other operating expenses After tax income Balance sheet data Customer deposits Common shareholder equity Total shareholder equity Total Assets Common shares issued & paid (‘000)

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Financial Highlights

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Report of Board of Directors

T

he 1st National Bank Saint Lucia Limited, for the sixth consecutive year, is proud to report that we have achieved another year of increased earnings, though not at the robust growth rate of 2006. When compared with other financial institutions the Bank’s growth, particularly during the last decade has been impressive. The year 2007 was full of challenges, including the ever increasing energy and commodity price levels that have impinged on the international financial system, and the somewhat disappointing returns generated from the World Cup Cricket tournament that did not provide the much anticipated impetus to help spur the growth of our small nations.

Notwithstanding these challenges, our Bank this year was still able to achieve profits before tax of $12.9 million and an after tax profit of $10.5 million, this latter amount representing an increase of 13% over that reported for 2006.

The Balance Sheet position has grown from $314 million at December 31, 2006 to $351 million this financial year end. With a Tier 1 Capital ratio of 21% and an expanding customer base from our organic growth initiatives, the Bank is therefore well placed to achieve planned strategic growth that will redound to the benefit of shareholders and by extension, the country as a whole.

In the coming year 2008, the 1st National Bank Saint Lucia Limited will mark its 70th year of operations, evolving from humble

“Penny Bank” beginnings. In a 1983 document former Director Sir Vincent Floissac made the following most apposite observation, “In addition, as St. Lucia’s first indigenous Bank, our natural inclination has been to respond to national calls. In the late 1950’s the bank issued substantial loans to Civil Servants at a low rate of interest to enable them to build and own their homes. In 1976 we loaned Government the sum of $ 405,000.00 for the purpose of re-financing Government Accounts and defraying the indebtedness of the St. Lucia Water Authority. In 1978 we loaned Government the sum of $400,000.00 for the purpose of enabling them to make payments to Civil Servants under the Stoby award .In 1979 we loaned Government the sum of $500,000.00 for the dredging of the Castries Harbour and $475,000.00 for the construction of factory shells at Vieux Fort. In many respects up to 1981 we have virtually been operating as the National Bank of St. Lucia.” Prophetically, this illustrates our participation in Saint Lucia’s growth and development as reflected in our new corporate name. At a ceremony in 2007 the Bank launched a commemorative publication chronicling its history to 2005. A series of activities has been planned to commemorate this significant anniversary during the ensuing year.

As the first indigenous Bank established to further the cause of the disadvantaged, our rich history has endowed us with a corporate conscience that we follow in all our activities. Today our client base has widened and now includes a cross section of persons from all socio-economic areas. We are committed to the development of youth, sport, and education through the support of small business enterprises, our sponsorship of the annual under 13 games and assistance given to schools which cater to the less fortunate youth in our society, amongst a host of other initiatives.

1st National Bank also participates in the modernization of our legislative framework through involvement in public policy discussions at both the domestic and regional levels.

Governance Composition The composition and size of the Board remains the same, with ten (10) non executive directors and one (1) executive director. At our last Annual Meeting, Mr. Lionel James was elected to serve on the Board of Directors. Directors have a wide range of experience and training in varied disciplines, including accounting, business, finance, law, engineering and agriculture.

Meetings Board meetings are held regularly, with a total of ten meetings being held for the year. The Board also held one retreat during

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per share.

The number of meetings held by the Board and its sub-committees is as follows:

Dividend

DESCRIPTION

NUMBER OF MEETINGS

Board Meetings

10

Finance Committee

2

Audit Committee

4

Human Resource Committee

2

Loans Committee

3

Corporate Governance Committee

1

Special Committee (Building)

6

Strategy During the year, the Board, management and staff met to review its strategy for the next three years, set out in the Balanced Scorecard system of management, against which the Bank reports key initiatives and progress. We shall remain grounded in our core principles and values of integrity, professionalism and confidentiality. We continue to invest in human resource development, in appropriate technology and in infrastructure, thus creating added value for our staff, customers and shareholders.

We continue to build on our market presence both locally and regionally and our strategic decision to purchase shares in ECIC Holdings Ltd. has afforded us greater opportunities in the regional financial market with all its potential for continued growth. In April 2007, the Bank opened a sub-branch at Marigot Bay bringing the total of its operating units to six, each with a state of the art ATM machine.

Internal control effectiveness is a primary responsibility of the Board; and during the year an Internal Audit Manager was appointed who will report directly to the Audit Committee.

Corporate One of the tenets of this Bank’s existence (and the very reason it commenced operations) is to support our community. The Bank’s policy is to contribute at least 1% of revenue generated, to worthwhile and qualifying projects that focus on the development of youth and talent and also the recognition of meaningful contributions made by elderly persons to their communities.

Our efforts have had a constructive impact on more than one thousand persons in the fields of sports, education, spiritual development, charities the arts and culture.

The year 2007 marked a significant occasion for us as our share offering of 5 million shares was fully subscribed. Shareholder wealth has increased steadily from a dividend yield of 3% in 2001 to 12% last year. The book value of a share now stands at $9.87

The Board has recommended a dividend per share of $0.40 resulting in a yield of 13% and representing a total payout of $2.0 million dollars. This payout is mindful of our plans to resolve our space constraints, the impact of narrowing interest spreads and the guidelines of the Eastern Caribbean Central Bank (ECCB) with regard to economic growth leading to a possible negative impact on assets.

At the last Annual Meeting, it was suggested that the Bank should examine the option to pay dividends bi-annually. The Board of Directors considered this point and agreed to continue the current practice of paying dividends annually as a change will not result in efficiency gains.

Outlook The Bank recognizes that 2008 will present challenges for the financial services sector locally and internationally. We will continue to exercise prudence in 2008 as we cannot predict with certainty what the impact of current global economic conditions will be on our small, open and vulnerable Caribbean economies.

Accordingly, the Board and management will ensure the judicious and diligent supervision of our assets in order to continue our upward growth trend.

Acknowledgements The continued growth of the Bank would not have been possible without the management and staff to whom we express deep appreciation. I take this opportunity to thank my colleague Directors who have been exemplary in their support and contributions towards productive decision making.

This year’s performance is attributable to the unwavering support of our customers, a sure indication that we are adding value. We thank them sincerely as we continue to forge stronger relationships for our mutual benefit.

On behalf of the Board of Directors, I wish to remember and acknowledge all who have served our Bank over the years, and to our loyal shareholders, I thank you for your involvement and participation in the varied aspects of governance.

To our shareholders, your decision to continue your shareholding indicates that our approaches have merit and on behalf of the Board, I thank you for your continued support and interest.

Dr. Charmaine Gardner President, on behalf of the Board of Directors

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the year.

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Board of Directors Board of Directors Board of Directors Board of Directors Board of Directors

1st National Bank Saint Lucia Limited

Charmaine Gardner | President

Cyril Matthew | 1st Vice President

Ferrel V Charles | 2nd Vice President

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Nigel Fulgence | Director

Carole Eleuthere-Jn Marie | Director

Brenda Floissac-Fleming | Director

Joseph Maxwell | Director

Lionel James | Director

Christian Husbands | Director

G Carlton Glasgow | Managing Director

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Aidan Floissac | Director

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Managing Director’s Review

I

am pleased to report on the Bank’s positive financial performance for yet another year. Profit before tax stood at $12.9 million and the balance sheet position increased to $351.5 million. Profit after tax is $10.5 million, increasing by 13% over the year to December 2006.

This is commendable given the slower growth in the local economy and the aggressive competition for available business.

This financial year saw the effects of the crumbling sub-prime mortgage market in the United States and the consequences of the increasing price of oil. The effect of Hurricane Dean on our agricultural sector, the fall in tourist arrivals by 16% in November 2007 (compared to the same period last year), the increased cost of funds and a fall in construction activity all contributed to the less robust performance. Additionally, the onerous reporting and disclosure requirements of our Regulators, Stock Exchanges and the Accounting Bodies, though deemed necessary, impinged on our already stretched resources.

Shareholders Earnings Per Common Share Data

Total Asset Growth

Notwithstanding the challenges, the Bank remained focused on staff development to drive excellent service delivery, maintaining cost effectiveness below the industry level, improving asset quality and steadily increasing our market share through organic growth.

The Bank’s performance can be encapsulated in its earnings per share (EPS) of $2.17 representing an increase of 3% over 2006.

Financial Review Financial Condition At the end of this financial year, the balance sheet position increased from $314.4 million in 2006 to $351.5 million, an increase of $37.1 million or 12%. This was fueled in the main by growth in customer deposits, indicative of the continued trust placed in us by our customers.

Loans & Advances

Assets Cash assets held during the year satisfied regulatory, safety and liquidity requirements. The investment portfolio is diversified to avoid risk of default, maximize returns and to manage the liquidity position. In so doing, the Bank extends short term credit facilities to Banks and other financial institutions to manage the liquidity position. 13% of the Bank’s assets were held in investments, of which 54% is liquid (under three months).

Loans and advances form the largest category (73%) of the Bank’s assets

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increasing over 2006 by 9%. Personal loans continue to dominate the economic sector distributions and comprise 59% of total loans, followed by professional services (11.1%) and transportation and storage (10.6%).

Credit quality has improved to 12%, down from 14% in 2006. The management of the non performing loan portfolio will be reviewed with the aim of reducing the non performing loan portfolio to the regulatory limit of 5% for the time being.

Pursuant to organic growth goals, the Bank acquired land and building on #18 Bridge Street to address its space constraints and to enhance the customer experience. Additionally, $1.3 million was allocated to information technology improvements to enhance service delivery.

Deposit Growth

Liabilities Customer deposits form the major source of funding our core profit generating activities. Competition for term deposits was fierce throughout the year. However, total deposits grew by 10% to $298 million. Savings deposit growth is the most consistent of core deposits and grew by approximately 7% for the year.

The Bank’s shares continued to be in high demand. A total of 364,789 shares were sold this year, bringing the total number of shares sold to 4,999,966. The Board took a strategic decision to close the sale of shares.

Prudent and strategic decision making has resulted in an increase in the Bank’s equity base by 26% to $49.3 million. Such prudence ensures safety of capital and allows the Bank to grant higher value credit to maximize returns. The capital adequacy ratio at December 31, 2007 is 21%.

After Tax Income

Profitability Despite the higher funding costs and the lower credit interest rates, the Bank was able to record profit before tax of $12.9 million, up by 3% over the results for 2006. Profit after tax for 2007 is $10.5 million.

In all the circumstances, Management is pleased with the year’s profit performance, although the rate of increase is slower than the previous period.

Income Gross income stood at $31 million, increasing by 9% over 2006. The Bank’s income is derived mainly from loan and investment interest, commission and foreign exchange. Interest income from loans and advances to customers comprised 69% of total income and is generally in line with set targets.

Net interest income was $16.4 million and was less than that recorded for 2006 by $0.3 million or 2%. This result derives mainly from the additional interest expense required to maintain and attract term deposits to fund the Bank’s core business.

Non interest expenses

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Non-Performing Loans

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Operating expenses increased reasonably over 2006 by 11%, due to efforts to maintain our image and staff engagement. Cost containment continues to be a priority area for the Bank as is evident in our cost efficiency ratio of 41%.

Operating Expenses

Key performance indicators The narrowing interest margin had significant impact on our performance, though our key performance indicators are comparable to and in many instances are better than the industry standards. The financial highlights indicate that return on assets (ROA), earnings per share (EPS) and book value per share were better than the previous year.

Customer Service & Delivery Channels Customer service excellence remains our major focus in all our strategies to build the business. During the last quarter of 2007, we commenced initiatives to inform our customer strategies for decision making and implementation. A roll out of new products is planned for the new year, to include home ownership and retirement plans. Tactical advertising and promotions will be utilized to achieve the desired results.

The Bank launched its website www.1stnationalbankonline.com mainly as a marketing initiative to inform customers and the general public, both local and foreign. This medium was used to highlight the Bank’s role in the past 70 years which has been inextricably entwined with St. Lucia’s political, economic, and social history. Due to our severe space constraints, plans to implement a marketing department and related initiatives have been postponed. Instead, this service is outsourced as needed.

Return on Assets/Equity

The Bank remains committed to utilizing cutting edge and appropriate technology for excellent delivery of its products and services. New card services software was implemented to enhance the production of ATM cards, to facilitate the payment of utility bills at our ATMs, and to expedite the daily servicing and maintenance of all ATMs. Early in 2007, the Bank’s core system was also upgraded to make it system-ready for another delivery channel, internet banking. Internet banking (both web based and informational) was introduced later in the year, to widen customers’ access to and management of their funds.

Congruent with our organic growth goals, a new business unit was commissioned in Marigot Bay, complete with ATM services. This unit, though small, offers a wide range of the Bank’s products and services.

A new ATM was installed at George F.L. Charles Airport during the first quarter and was welcomed by the travelling public and staff of the service providers to the Airport. The screen-savers of all ATMs were upgraded to display views of the Bank’s products as an advertising initiative.

Construction work will commence this year to transform #18 Bridge Street to an ultra modern four storey building as well as to improve the aesthetics of the all units island wide. In order to provide easy, convenient and safe access to the Bank, a ramp was constructed at the Bank’s main entrance to accommodate its wheelchair-bound customers.

During the last quarter, the Bank committed to the acquisition of new software that will improve operational efficiency by automating and

enhancing all payment processing activities to include standing orders, automated posting, compliance filtering, swift payments and cheque printing. Full implementation is expected during the second quarter of 2008. Initiatives to launch other high technology products commenced during 2007 with implementation to be completed in 2008.

Our commitment to the development of the country extends to assisting in the prevention of criminal activity and money laundering and to this end, sophisticated anti-money laundering software will be installed in 2008.

Outlook We heed the call for caution from our Regulators and the international

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If this trend continues, we can expect a negative effect on the growth of the local economy and by extension our asset quality. This forecasted sluggish growth trend has guided our planning. We stand ready to execute planned and emergent initiatives in response to political, economic, social and environmental challenges with the aim of attaining our growth goals.

Human Resources The Bank acknowledges that staff engagement constitutes a significant determinant of its performance in any year.

In 2007 therefore the Bank sought to continue to involve its personnel at several critical levels within the institution including participation in:• The strategic management consultative process.

• The leadership development programme.

• The thrust towards service excellence & heightened productivity.

The Strategic Management Consultative Process During the year under review, the Bank engaged the services of Growth Facilitators out of Jamaica to assist with the process of developing and implementing the Balanced Scorecard (BSC) approach within the Bank.

The BSC is a recognized tool for strategy development, communication, measurement and execution.

Through a process of mobilization workshops, focus groups and strategic planning sessions involving directors, management and staff, a Threeyear institutional Strategic Plan was formulated. The plan incorporates strategic objectives, targets, initiatives and measures. With the articulation of a shared vision and mission, staff were able to appreciate the value associated with achieving the strategy, and the required commitment to do so.

It is planned that the implementation of the BSC will be fully cascaded to all staff in 2008.

Leadership Development Programme In 2007, the focus continued on leadership development throughout the Bank, but particularly at key supervisory levels. In this regard, supervisory personnel benefitted from training opportunities in appraisal of employee performance, customer relations and operational procedures.

In tandem with the enhancement in 2007 of the Bank’s sub-Branch network and the re-organizing of ‘back office’ support functions at the Castries Branch, the Bank also effected a number of promotions and transfers of employees within the supervisory grades, thus facilitating the exposure and development of staff in leadership and decision-making positions.

The Transformational Coaching Workshop planned for early 2008, with its emphasis on applied leadership, is expected to empower team members, build relationships, increase accountability and ultimately improve

performance.

Service Excellence and Heightened Productivity The continuous training of staff throughout the year was specifically geared towards improving their knowledge and skills base for better service delivery and increased productivity. Training included an emphasis on mortgage underwriting, anti-money laundering, counterfeit detection, property insurance, business perspectives, orientation to information system upgrades and coaching of front-line personnel.

Staff were also motivated to strive for excellence by the recognition of achievers at the Bank’s annual awards function; as well as through the increased profit share and performance- based salary increments received in 2007.

As part of the new Strategic Plan, the conducting of a staff satisfaction survey and a comprehensive review of the Bank’s Performance Management and Development System (PMDS) will be undertaken in 2008 to determine the extent of employee satisfaction with the organization, their level of alignment with institutional goals and the effectiveness of the Bank’s performance appraisal process.

The feedback provided will help to inform the design of a PMDS to enhance staff motivation, productivity, performance and achievement.

Community Outreach 1st National Bank has a long tradition of support to community. This year was no exception and accordingly, the Bank partnered with organizations to support positive social transformation, human resource capacity building, cultural development and preservation and sporting activities.

The Bank has been in the forefront in its contribution to sports and 2007 marked its fourteenth year of sponsorship of the Under 13 Games in collaboration with the St Lucia Athletics Association. The games have become a veritable nurturing ground for athletic talent on the island, having produced medalists at the level of the CARIFTA, CAC Games and the World Youth Championship. We feel proud to have contributed to the development of an athlete who qualified for the 2008 Summer Olympics.

In collaboration with the St. Lucia Swimming Association, the Bank contributed to the revival of the National Schools Swimming Championships. This year saw the participation of ten local secondary schools, all displaying a very high level of discipline and skill. The Bank was pleased with the organization of the event and has committed its support to the tournament in 2008.

A number of organizations benefited from our donations in the field of sport. These include the St. Lucia Netball Association, the St. Lucia Boxing Association and the Castries Cricket Association.

Contribution to art, culture and entertainment tourism is an important component of our community relations. Accordingly, the Bank was a title sponsor of the 2007 Fond d’Or Jazz activities, one of the main projects of the annual St. Lucia Jazz Festival. This was done in conjunction with the

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community as prices increase unabated. Growth in the global economy is expected to decelerate during 2008 as a result of a combination of factors to include the effects of sub-prime lending crisis. The country experienced a slow down in economic activity in 2007 and the growth rate declined to 1%.

Inflation increased in 2007 to 2.8% from 2.3% in 2006. Already, the rate of inflation reported for January 2008 is 4.9%.

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Annual

community. Since its formation, the group has performed at the Bank’s Annual Christmas Dinner and Staff Awards, the launch of the commemorative magazine, the launch of noted author/poet John Robert Lee’s book entitled “Canticles”, the launch of Journen St. Omer in honour of Dunstan St. Omer’s 80th birthday. The choir drummed up the Christmas feeling and spirit with powerful and melodious renditions at the Bank’s main entrance.

Shareholder Information

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At December 31, 2007, the Bank had a total of 1,332 shareholders on record.

No single or related group of shareholders owns more than 20% of the Bank’s shares, with the shares being widely held.

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Caribbean Regional Environmental Program (CREP) and the Fond d’Or Foundation. The event which was held at the Fond d’Or historical park is well patronized and contributes to the preservation of historical artifacts and the environment. The venture generates revenue for sustainable economic activity in the community.

The Bank was the title sponsor of the annual and increasingly popular Word Alive poetry competition and the Royal St. Lucia Police Force Calypso competition as well as the Police Band. Donations were made to support artists and selected bands during the Carnival celebrations.

This year, the Bank launched its commemorative magazine (1938 – 2005) which chronicled the history of the Bank alongside the historical milestones of St. Lucia. Copies of the magazine were made available to the St. Lucia National Archives, St. Lucia Archeological and Historical Society, The University of the West Indies and Distance Education Centre, Folk Research Centre, libraries, schools, shareholders and customers. The booklet was hailed as a first of its kind and well received by the literary public.

The Bank’s 2007 Calendar, also very well received by the public, recognized some of St. Lucia’s most distinguished women and highlighted their notable contributions to the political, socio-economic and cultural landscape.

All shareholders who held shares at December 31 2007 should expect to receive their dividend payment during the period June to July 2008. We apologize to shareholders who have received late payment and assure you that the position is being addressed. In December 2007, we committed to software that will significantly enhance the dividend payment process.

Implementation is expected to be complete during the latter half of 2008, in time for the 2009 dividend payment.

Acknowledgements This year’s success would not be achieved were it not for the hard work and resilience of management and staff and I thank them sincerely. Each and every one of us play a role in the growth and results of the Bank and I urge that we all continue to live by our core values.

On behalf of management and staff, I thank our customers who have continued to demonstrate their loyalty and trust in us. We are grateful for the support to this truly indigenous institution and we will continue to strive to earn your respect and confidence by providing the best quality service and appropriate products available.

Looking back, the year’s results and growth would not have been possible without the support of the Board of Directors and shareholders. I thank you all and look forward to yet another successful year in 2008.

Our support to community extended to allowing staff time off from work to participate in community projects like disaster preparedness and mitigation conducted by the St. Lucia Chamber of Commerce Industry and Agriculture as well as the National Emergency Management Organization (NEMO).

The Bank has pledged its support to the philanthropic work of the National Community Foundation, the St. Lucia Sickle cell Association, the St. Lucia Arthritis and Lupus Association and many other similar organizations. Additionally the work of the Centre for Adolescent Renewal and Education (CARE), among many others, in rehabilitating youth and developing capacity has been lauded by many and considered worthy of our support.

G. Carlton Glasgow | Managing Director

• 2007

Special mention must be made of the Bank’s choir and of its efforts to contribute to

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G. Carlton Glasgow Managing Director

Aurea LaFeuillee Finance Manager

Beryl Carasco-Alleyne HR Manager & Corporate Secretary

Valery Marshall-St. Omer Assistant Operations Manager

Joseph Fedee Operations Manager

Robert Fevrier Manager, Projects & Services

Sylvia Alcee Manager, Rodney Bay Sub Branch

Denise Holden-Pierre Manager, Internal Audit

Clarette Auguste-Taylor Manager Lendings

Patricia Howell Assistant Manager, Recoveries

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Management Team Management Team Management Team Management Team Management Team

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Officer-in-Charge Vieux Fort Sub Branch Naomi Promesse-Edward

Manager, Internal Audit Denise Holden-Pierre

Manager, Rodney Bay Sub Branch Sylvia Alcee

Assistant Manager Operations Valery Marshall-St. Omer

Officer-in-Charge Marigot Sub Branch Bridget Sutherland

Finance Manager Aurea Lafeuillee

Operations Manager Joseph Fedee

Managing Director G. Carlton Glasgow

Board of Directors

Management Organisational Chart

Assistant Manager, Recoveries Patricia Howell

Manager, Lendings Clarette Auguste-Taylor

Human Resource Manager/ Corporate Secretary Beryl Carasco-Alleyne

Manager, Projects & Services Robert Fevrier

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A Bright Future A Bright Future A Bright Future A Bright Future Rooted in an Enlightened Past ...

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Mr. George Palmer 1st President 1937 - 1939

Mr. J.B.D. Osbourne Secretary/Manager 1937 - 1954

Mr. Clive Beaubrun Director 1937 - 1959 President 1939 -1959

Mr . JQ Charles Director 1937 - 1980 President 1973 -1979

Mr. Joseph Devaux Director 1937 - 1939

Mr. John H. Pilgrim Director 1937 - 1973

First Premises of 1st National Bank formerly St Lucia Cooperative Bank

After the Fire of 1948

The Bank takes up residence on Bridge Street

Mr. Allen Lewis Company Solicitor 1937 - 1959

1938

1949

1950

1951

1958

1959

1960

1961

1963

1964

1967

1968

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Section of guests at the Bank’s Launch event in 2005

Bank receives ECCB good corporate citizen award in 2000

Board of Directors 1989

Interior of newly renovated Bank 1989

Board Meeting of St Lucia Cooperative Bank in the 1970s

ECCB Governer delivers feature address at Bank re-imaging

Building acquired by bank in 1987 for future expansion

Mrs. Rose Marius 30 years of service

Bridge Street 1920 Eventual location of Bank Premises

1979

1980

1981

1982

1984

1988

1990

1999

2000

2001

2005

2008

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Bank’s Shareholder Education forum in 2006

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Balance Sheet

As of December 31, 2007 (expressed in Eastern Caribbean dollars)

Assets

2007 $

2006 $

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)

23,123,390 12,583,177 15,477,411 32,171,428 223,579,753

21,465,689 4,830,031 8,851,687 28,578,213 205,222,313

10,625,141 19,276,037 5,789 11,683,183 2,777,371 165,691

6,082,515 29,379,393 – 8,711,446 1,270,764 –

Total assets

351,468,371

314,392,051

Due to customers (Note 14) Other liabilities (Note 15) Current income tax liability Retirement benefit obligations (Note 16) Deferred income tax liability (Note 17)

297,509,774 3,892,705 – 727,000 –

269,514,084 3,659,636 1,139,627 729,000 272,553

Total liabilities

302,129,479

275,314,900

Capital and reserves attributable to the Bank’s equity holders Share capital (Notes 18 & 19) Retained earnings Other reserves

7,971,454 30,421,308 10,946,130

6,877,088 22,575,651 9,624,412

Total equity

49,338,892

39,077,151

351,468,371

314,392,051

Director

Director

Liabilities

Equity

Total equity and liabilities Approved by the Board of Directors on April 2, 2008

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For the year ended December 31, 2007 (expressed in Eastern Caribbean dollars)

Interest and similar income (Note 20)

2007 $ 25,403,401

2006 $ 24,015,086

Interest expense and similar charges (Note 20)

(9,045,978)

(7,303,121)

Net interest income

16,357,423

16,711,965

5,645,936

4,467,865

Operating income

22,003,359

21,179,830

Other operating expenses (Note 22)

(9,028,123)

(8,156,524)

(129,339)

(573,045)

Profit before income tax

12,845,897

12,450,261

Income tax expense (Note 25)

(2,306,467)

(3,159,124)

Net profit for the year

10,539,430

9,291,137

2.17

2.10

Other operating income (Note 21)

Impairment losses on loans and advances (Note 10)

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

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Statement of Income

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Statement of Changes in Equity For the year ended December 31, 2007 (expressed in Eastern Caribbean dollars)

2007 $

2006 $

Share capital (Notes 18 & 19) At beginning of year Issued during the year

6,877,088 1,094,366

5,599,244 1,277,844

At end of year

7,971,454

6,877,088

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

22,575,651 10,539,430 (1,622,312) (1,094,366) 22,905

15,801,910 9,291,137 (1,262,769) (1,277,844) 23,217

At end of year

30,421,308

22,575,651

Reserves Statutory reserve (Note 19) At beginning of year Transfer from retained earnings

6,877,088 1,094,366

5,599,244 1,277,844

At end of year

7,971,454

6,877,088

Revaluation reserve At beginning of year Transfer to retained earnings

2,308,541 (22,905)

2,331,758 (23,217)

At end of year

2,285,636

2,308,541

Revaluation reserve – Investment securities: available-for-sale At beginning of year Increase in fair value

438,783 250,257

259,096 179,687

At end of year

689,040

438,783

Total reserves

10,946,130

9,624,412

Equity, end of year

49,338,892

39,077,151

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For the year ended December 31, 2007 (expressed in Eastern Caribbean dollars)

Cash flows from operating activities Profit before income tax Adjustments for: Depreciation 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

Decrease/(increase) in mandatory reserve deposits with Central Bank Increase in loans and advances to financial institutions Increase in loans and advances to customers (Increase)/decrease in other assets Increase in due to customers Increase/(decrease) in other liabilities

2007 $

2006 $

12,845,897

12,450,261

714,068 (1,984) 129,339 (2,000) (96,840) (25,403,401) 9,045,978

605,895 (4,848) 573,045 – (139,132) (24,015,086) 7,303,121

(2,768,943)

(3,226,744)

355,000 (3,321,736) (18,178,774) (1,402,851) 27,134,923 186,840

(2,135,000) (22,994,517) (36,845,369) 649,628 45,502,543 (1,493,335)

Cash generated from/(used in) operations

Interest and similar income received Interest expense and similar charges paid Income taxes paid

2,004,459

(20,542,794)

25,452,512 (8,185,211) (4,010,133)

23,766,350 (7,049,660) (2,785,828)

Net cash generated from/(used in) operating activities

15,261,627

(6,611,932)

Cash flows from investing activities Purchase of treasury bills, net Purchase of investment securities, net Dividends received Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment

(6,646,483) 5,203,151 113,090 (3,698,821) 15,000

(5,826,164) 7,241,061 155,382 (903,998) 59,999

Net cash (used in)/generated from investing activities

(5,014,063)

726,280

Cash flows from financing activities Proceeds from issuance of ordinary shares Dividends paid on ordinary shares

1,094,366 (1,576,083)

1,277,844 (1,264,751)

Net cash (used in)/generated from financing activities

(481,717)

13,093

Net increase/(decrease) in cash and cash equivalents

9,765,847

(5,872,559)

Cash and cash equivalents, beginning of year

11,267,720

17,140,279

Cash and cash equivalents, end of year (Note 28)

21,033,567

11,267,720

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Statement of Cashflows

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Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

1 General information 1st National Bank of St. Lucia Limited, (the Bank) was incorporated in Saint Lucia in December 1937 and continued under the Companies Act of 1996. In addition to compliance with the Companies Act of 1996, the Bank is also subject to the provisions of the Banking Act of St. 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 and the provision of foreign exchange services.

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) Standard, amendment and interpretation effective in 2007 IFRS 7, ‘Financial instruments: Disclosures’, and the complementary amendment to IAS 1, ‘Presentation of financial statements – Capital disclosures’, introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of the Bank’s financial instruments.

IFRIC 8, ‘Scope of IFRS 2’, requires consideration of transactions involving the issuance of equity instruments, where the identifiable considerations received is less than the fair value of the equity instruments issued in order to establish whether or not they fall within the scope of IFRS 2. This standard does not have any impact on the Bank’s financial statements. (b) Standard, amendment and interpretations effective in 2007 but not relevant The following standard and interpretations to published standards are mandatory for accounting periods beginning on or after January 1, 2007 but they are not relevant to the Bank’s operations: • IFRS 4, ‘Insurance contracts’; • IFRIC 7, ‘Applying the restatement approach under IAS 29, Financial reporting in hyperinflationary economies’; • IFRIC 9, ‘Reassessment of embedded derivatives; and • IFRIC 10, ‘Interim financial reporting and impairment.

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(c) Standard, amendment and interpretation to existing standards that are not yet effective and have not been early adopted by the Bank The following amendment and interpretations to existing standards have been published and are mandatory for the Bank’s accounting periods beginning on or after January 1, 2008 or later periods, but the Bank has not early adopted: •

IAS 23 (Amendment), ‘Borrowing costs’ (effective from January 1, 2009). The amendment to the standard is still subject to endorsement by the European Union. It requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. The Bank will apply IAS 23 (Amended) from January 1, 2009 but is currently not applicable to the Bank as there are no qualifying assets.

•

IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’ (effective from January 1, 2008). IFRIC 14 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. The Bank will apply IFRIC 14 from January 1, 2008, but it is not expected to have any impact on the Bank’s accounts.

•

IFRS 8, ‘Operating Segments’ (effective from January 1, 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirement of the US Standard SFAS 131, Disclosures about segments of an enterprise and related information’.

The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. Management is in the process of assessing the impact of this standard in the Bank’s financial statements.

(d) Interpretations to existing standards that are not yet effective and not relevant for the Bank’s operations The following interpretations to existing standards have been published and are mandatory for the Bank’s accounting periods beginning on or after January 1, 2008 or later periods but are not relevant for the Bank’s operations: •

IFRIC 12, ‘Service concession arrangements’ (effective from January 1, 2008). IFRIC 12 applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services.

•

IFRIC 13, ‘Customer loyalty programmes’ (effective for annual periods beginning on or after July 1, 2008). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement in using fair values.

•

IFRIC 11, ‘IFRS 2 – Group and treasury share transactions’ (effective for annual periods beginning on or after March 1, 2007). IFRIC 11 provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent’s shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. The Bank will apply IFRIC 11 from January 1, 2008, but it is not expected to have any impact on the Bank’s accounts.

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Notes to Financial Statements

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Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

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 non-restricted 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 investments 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-tomaturity 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.

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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.

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.

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Notes to Financial Statements

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Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

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 availablefor-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-forsale 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. (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).

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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.

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.

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Notes to Financial Statements

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Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

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.

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

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December 31, 2007

(expressed in Eastern Caribbean dollars)

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.

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 co-operation 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.

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Notes to Financial Statements

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34

Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

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 1 2 3 4 5

Description of the grade Pass Special Mention Substandard Doubtful Loss

(b) Debt securities and other bills For debt securities and other bills, external rating such as Standard & Poor’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.

Some other specific control and mitigation measures are outlined below.

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December 31, 2007

(expressed in Eastern Caribbean dollars)

(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; • 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. However, the majority of the impairment provision comes from the bottom three gradings. The table below shows the percentage of the Bank’s on- and off-balance sheet items relating to loans and advances and the associated impairment provision for each of the Bank’s internal rating categories:

Bank’s rating 1. Pass 2. Special mention 3. Sub-standard 4. Doubtful 5. Loss

Loans and advances %

2007 Impairment provision %

84.4% 2.9% 6.9% 3.5% 2.3%

0.8% 7.4% 14.5% 33.2% 44.1%

2006 Loans and Impairment advances provision % % 81.6% 3.1% 8.1% 4.8% 2.4%

0.5% 0.2% 14.5% 40.4% 44.4%

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Notes to Financial Statements

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36

Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

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 2007 2006 $ $ 12,583,177 15,477,411 32,171,428

4,830,031 8,851,687 28,578,213

9,428,772 97,749,990 9,954,171 91,454,633 28,055,089

7,792,290 83,887,340 12,248,914 84,086,899 30,140,433

10,625,141 19,276,037 2,387,386

6,082,515 29,379,393 893,131

3,692,334 26,241,705

3,980,308 22,343,256

359,097,274

323,094,410

The above table represents a worse case scenario of credit risk exposure to the Bank at December 31, 2007 and 2006, 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, 75% of the total maximum exposure is derived from loans and advances to financial institutions and customers (2006 – 76%); 8% represents investments in debt securities (2006 – 11%).

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December 31, 2007

(expressed in Eastern Caribbean dollars)

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: • • • • •

55% of the loans and advances portfolio is categorised in the top two grades of the internal rating system (2006 – 58%); Demand loans which represent the largest percentage of the portfolio, followed by mortgages, are backed by collateral; 55% of the loans and advances portfolio are considered to be neither past due nor impaired (2006 – 58%); Of the $24 million loans and advances assessed on an individual basis, approximately 34% is impaired; An improvement in the credit quality of loans and advances has resulted in a lower impairment charge in the statement of income, showing a 77% decrease; • 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. Since most issuers in the region are not graded, 91% of the Bank’s investments are not graded.

3.1.5 Loans and advances Loans and advances are summarised as follows:

Loans and advances to customers Neither past due nor impaired Past due but not impaired Impaired

2007 $

2006 $

130,039,415 75,435,871 31,167,369

125,672,977 59,074,053 33,408,846

Gross

236,642,655

218,155,876

Less: allowance for impairment (Notes 9 & 10)

(13,062,902)

(12,933,563)

Net

223,579,753

205,222,313

32,171,428

28,578,213

Loans and advances to financial institutions Neither past due nor impaired (Note 8)

The total impairment provision for loans and advances is $13,062,902 (2006 – $12,933,563). Further information of the impairment allowance for loans and advances to banks and to customers is provided in Notes 9 and 10.

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Notes to Financial Statements

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38

Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

(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, 2007

Demand

Overdrafts loans

$ $

Total Loans Promissory and advances notes Mortgages to customers $ $ $

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 – –

56,897,479 127,405,728 2,168,803 2,614,782 – 18,905 – – – –

Total

9,428,772

55,651,146

5,893,215

59,066,282 130,039,415

Demand loans and promissory notes in the sub-standard class were considered not to be impaired after taking into consideration the recoverability from collateral.

December 31, 2006 Total Loans

Demand Promissory and advances

Overdrafts loans notes Mortgages to customers

$ $ $ $ $ Loans and advances to customers Grades 1. Pass 2. Special mention 3. Sub-standard 4. Doubtful 5. Loss

7,792,290 – – – –

53,856,702 706,398 48,762 – –

7,529,731 – 7,374 – –

Total

7,792,290

54,611,862

7,537,105 55,731,720 125,672,977

53,537,077 122,715,800 2,153,730 2,860,128 40,913 97,049 – – – –

Loans and advances to financial institutions Loans and advances to financial institutions were graded 1 (Pass) as at December 31, 2007 and December 31, 2006.

2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual R

December 31, 2007

(expressed in Eastern Caribbean dollars)

(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:

Total Loans

Demand Promissory and advances

loans notes Mortgages to customers

$ $ $ $ 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

Past due up to 30 days Past due 30-60 days Past due 60-90 days Past due over 90 days

18,234,172 3,696,870 1,968,958 2,267,803

2,894,621 780,564 377,547 551,434

18,520,297 3,716,420 3,902,968 2,162,399

39,649,090 8,193,854 6,249,473 4,981,636

Total

26,167,803

4,604,166

28,302,084

59,074,053

December 31, 2006

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.

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Notes to Financial Statements

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40

Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

(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.

Individually impaired loans

2007 $

2006 $

Grades: 1. Pass 2. Special mention 3. Sub-standard

4. Doubtful 5. Loss

705,799 530,661 16,106,623 8,400,326 5,423,960

77,070 123,040 17,714,234 10,357,171 5,137,331

31,167,369

33,408,846

Fair value of collateral of individually impaired loans as at December 31, 2007 totalled $49,238,788. (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, 2007 (2006 - $5,559,850).

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, 2007, based on Standard & Poor’s ratings, Caricris or their equivalent: Treasury bills $

Investment securities $

Total $

A– to A+ Lower than A– Unrated

2,207,124 13,270,287

1,749,384 28,151,794

3,956,508 41,422,081

Total

15,477,411

29,901,178

45,378,589

2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual R

December 31, 2007

(expressed in Eastern Caribbean dollars)

3.1.7 Repossessed collateral During 2007, the Bank obtained assets by taking possession of collateral held as security, as follows: Nature of assets

Vehicles

Carrying amount $ 307,381

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.

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Notes to Financial Statements

41

Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007

2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual R 428,856 1,095,604 18,857 388,811 235,966 – – –

– – – – – 4,986,604 9,098,143 1,742,938 47,999,113 51,478,348

As at December 31, 2007

As at December 31, 2006

3,269,876

2,168,094

– –

– 32,171,428

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

3,096,464

3,258,082

– – –

6,344 828,569 – 2,163,857 259,312

– –

21,512,344

25,655,305

– 10,177,894 –

– – – – –

15,477,411 –

Financial

institutions Manufacturing Tourism Government

$ $ $ $

– –

– – –

5,638,537 – 644,448

2,661,895 3,032,850 41,268,642 41,715,448 8,206,319 1,597,708 74,195,388 7,588,156 12,754,312 11,935,854

– –

10,625,141 19,276,037 2,387,386

9,428,772 97,749,990 9,954,171 91,454,633 28,055,089

15,477,411 32,171,428

Other industries Total $ $

20,745,973 141,046,831 50,792,330 291,942,166

26,259,907 139,086,556 72,153,001 316,580,058

– – –

3,298,827 12,841,727 131,287 7,118,421 2,869,645

– –

Professional and other services Personal $ $

(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.

(expressed in Eastern Caribbean dollars)

December 31, 2007

Notes to Financial Statements

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December 31, 2007

(expressed in Eastern Caribbean dollars)

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, 2007 if equity securities prices had been 10% higher/lower with all variable held constant equity for the year would have been $218,000 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, 2007. Included in the table are the Bank’s financial instruments at carrying amount, categorised by currency.

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Notes to Financial Statements

43

Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007

2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual R 26,323,565

29,934,039

Credit commitments

Credit commitments

24,824,866

Net on-balance sheet positions

31,843,289

300,405,911

Total liabilities

Net on-balance sheet positions

296,513,206 3,892,705

Liabilities Due to customers Other liabilities

294,660,163 262,816,874

325,230,777

Total financial assets

As at December 31, 2006 Total assets Total liabilities

– – –

9,500,757 19,276,037 2,387,386

–

153,206

153,206 –

–

239,716

–

– –

239,716

87,860 151,856 – – –

CAD

20,135,052 2,702,953 15,477,411 32,171,428 223,579,753

ECD

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

Concentration of currency risk – on and off balance sheet financial instruments

(expressed in Eastern Caribbean dollars)

December 31, 2007

Notes to Financial Statements

–

337,243

337,243 –

–

1,070,618

2,633

2,633 –

1,073,251

– – –

784,339 288,912 – – –

EURO

–

(1,803,893)

8,552,953 10,356,846

–

8,754,815

993,935

993,935 –

9,748,750

1,124,384 – –

1,611,017 7,013,349 – – –

USD

–

1,821,535

1,821,535 –

–

2,718,397

–

– –

2,718,397

– – –

308,440 2,409,957 – – –

GBP

–

28,314

28,314 –

–

13,387

–

– –

13,387

– – –

– 13,387 – – –

TTD

TOTAL

10,625,141 19,276,037 2,387,386

29,934,039

37,821,244

–

127,191

26,323,565

32,506,885

127,191 305,680,605 – 273,173,720

–

199,445

– 301,402,479

– 297,509,774 – 3,892,705

199,445 339,223,723

– – –

196,682 23,123,390 2,763 12,583,177 – 15,477,411 – 32,171,428 – 223,579,753

BD

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44

December 31, 2007

(expressed in Eastern Caribbean dollars)

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.

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Notes to Financial Statements

45

Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007

2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual R 170,358,792 – 170,358,792

Liabilities Due to customers Other liabilities

Total financial liabilities

Total interest repricing gap

As at December 31, 2006 Total financial assets Total financial liabilities

(117,161,468)

41,195,346 158,356,814

(123,193,523)

47,165,269

Total financial assets

Total interest repricing gap

– – –

6,215,553 528,105 –

(317,498)

9,601,732 9,919,230

(12,781,434)

36,722,204

36,722,204 –

23,940,770

– – 13,246,669 10,083,512 610,589

1–3 months $

– 10,571,285 – 15,929,212 13,921,114

Up to 1 month $

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

(24,406,139)

23,301,958 47,708,097

(42,021,897)

58,106,410

58,106,410 –

16,084,513

– 3,554,514 –

– – 2,230,742 6,158,704 4,140,553

3–12 months $

52,921,155

63,049,049 10,127,894

66,668,227

1,731,181

1,731,181 –

68,399,408

– 12,146,752 –

– – – – 56,252,656

1–5 years $

136,652,432

136,652,432 –

151,701,507

–

– –

151,701,507

– 3,046,666 –

– – – – 148,654,841

Over 5 years $

31,880,088 47,061,685

34,483,892

30,591,187 3,892,705

31,932,256

4,409,588 – 2,387,386

23,123,390 2,011,892 – – –

Non-interest bearing $

Total $

305,680,605 273,173,720

301,402,479

297,509,774 3,892,705

339,223,723

10,625,141 19,276,037 2,387,386

23,123,390 12,583,177 15,477,411 32,171,428 223,579,753

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.

(expressed in Eastern Caribbean dollars)

December 31, 2007

Notes to Financial Statements

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46

December 31, 2007

(expressed in Eastern Caribbean dollars)

The Bank’s fair value interest rate risk arises from debt securities classified as available for sale. At December 31, 2007 if market interest rates had been 100 basis points higher/lower with all variables held constant, equity for the year would have been $46,296 lower/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, 2007 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 $1,318,834 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: • Day to day monitoring to ensure that requirements can be met to include daily monitoring of the internal and reserve cash position. This involves the replenishment of funds as they mature or are borrowed by customers. The Bank also ensures that some funds are held in a money market account as well as funds with maturities of one week to satisfy liquidity requirements.

• Maintaining a portfolio of marketable assets that can easily be liquidated as protection against any unforeseen liquidity problems. The majority of marketable assets are held short term, under one year.

• Weekly monitoring of the balance sheet liquidity ratios against internal and regulatory requirements.

• Managing the concentration and profile of debt maturities.

3.3.2 Funding approach Sources of liquidity are regularly reviewed to maintain a wide diversification by currency, geography, provider, product and term.

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Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

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 to 1 month 1–3 months 3–12 months 1–5 years $ $ $ $

Total $

As at December 31, 2007 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

Liabilities Due to customers Other liabilities

201,758,863 3,659,636

9,919,230 –

47,708,097 –

10,566,769 –

269,952,959 3,659,636

Total liabilities (Contractual maturity dates)

205,418,499

9,919,230

47,708,097

10,566,769

273,612,595

As at December 31, 2006

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.

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December 31, 2007

(expressed in Eastern Caribbean dollars)

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, 2007 Loan commitments Guarantees, acceptances and other financial facilities Total At December 31,2006 Loan commitments Guarantees, acceptances and other financial facilities Total

1 Year $

1–5 Years $

Over 5 Years $

Total $

24,551,521

1,690,184

–

26,241,705

3,692,334

–

–

3,692,334

28,243,855

1,690,184

–

29,934,039

21,841,399

501,857

–

22,343,256

3,969,180

11,128

–

3,980,308

25,810,579

512,985

–

26,323,564

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.

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Notes to Financial Statements

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Notes to Financial Statements December 31, 2007 (expressed in Eastern Caribbean dollars)

(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

2007 2006 2007 2006

$ $ $ $ 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

32,171,428 28,578,213 223,579,753 205,222,313 9,412,925 7,776,443 97,625,826 83,737,718 9,937,527 12,224,528 91,436,388 84,065,849 15,167,087 17,417,775 19,276,037

29,379,393

32,171,428 28,578,213 232,843,067 212,668,165 9,412,925 7,776,443 102,878,852 87,600,969 10,595,064 12,742,959 95,168,647 87,565,843 14,787,579 16,981,951 18,170,791

22,994,524

Financial liabilities Due to customers: − Time deposits − Savings accounts − Demand accounts

297,509,774 269,514,084 107,016,083 74,600,069 158,846,641 147,852,329 31,647,050 47,061,686

297,509,774 269,514,084 107,016,083 74,600,069 158,846,641 147,852,329 31,647,050 47,061,686

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 Authority of the banking markets where the Bank operates; • 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 risk-weighted asset (the ‘Basel ratio’) at or above the internationally agreed minimum of 8%.

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December 31, 2007

(expressed in Eastern Caribbean dollars)

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, 2007 and 2006. During those two years, the Bank complied with all of the externally imposed capital requirements to which they are subject.

2007 $

2006 $

Tier 1 capital Share capital General bank reserves Statutory reserve Retained earnings

7,971,454

6,877,088

7,971,454 30,255,220

6,877,088 22,575,654

Total qualifying Tier 1 capital

46,198,128

36,329,830

Tier 2 capital Revaluation reserve – available-for-sale investments Revaluation reserve – property, plant and equipment

689,040 2,285,636

438,783 2,308,541

Total qualifying Tier 2 capital

2,974,676

2,747,324

49,172,804

39,077,154

Risk-weighted assets: On-balance sheet Off-balance sheet

213,921,000 5,987,000

174,371,500 5,227,800

Total risk-weighted assets

219,908,000

179,599,300

21%

20%

Total regulatory capital

Basel ratio

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Notes to Financial Statements

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Notes to Financial Statements December 31, 2007

(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 $288,759 lower or $296,338 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, 2007. (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 $1,105,246 with a corresponding entry in the fair value reserve in equity.

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December 31, 2007

(expressed in Eastern Caribbean dollars) 5 Cash and balances with Central Bank 2007 $

2006 $

Cash in hand Balances with Central Bank other than mandatory reserve deposits

8,081,378 369,012

6,425,855 11,834

Included in cash and cash equivalents (Note 28)

8,450,390

6,437,689

Mandatory reserve deposits with Central Bank

14,673,000

15,028,000

23,123,390

21,465,689

Pursuant to Section 17 of the Banking Act of St. Lucia No.7 of 1991, 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

2007 $

2006 $

Items in the course of collection/(payment) from other banks Placements with other banks

1,632,832 10,950,345

(2,922,209) 7,752,240

Included in cash and cash equivalents (Note 28)

12,583,177

4,830,031

The weighted average effective interest rate in respect of interest bearing deposits at December 31, 2007 was 2.49% (2006 – 1.60%).

7 Treasury bills

Treasury bills

2007 $

2006 $

15,477,411

8,851,687

Treasury bills are debt securities issued by the Government of Saint Lucia. The weighted average effective interest rate of bills in 2007 was 6.10% (2006 – 5.73%). All treasury bills have fixed interest rates.

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Notes to Financial Statements

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Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

8 Loans and advances to financial institutions

Reverse repos

2007 $

2006 $

32,171,428

28,578,213

Reverse repos are securities purchased under agreements to resell. The weighted average effective interest rate of the reverse repos in 2007 was 5.75% (2006 – 5.90%).

Allowance account for losses on loans and advances to financial institutions as at December 31, 2007 was nil (2006 – nil).

9 Loans and advances to customers 2007 $

2006 $

9,428,772 97,749,990 9,954,171 91,454,633 28,055,089

7,792,290 83,887,340 12,248,914 84,086,899 30,140,433

236,642,655

218,155,876

Less provision for impairment of loans and advances (Note 10)

(13,062,902)

(12,933,563)

223,579,753

205,222,313

Current Non-current

18,672,256 204,907,497

15,599,567 189,622,746

Overdraft Demand loans Promissory notes Mortgages Non-productive loans and overdrafts

Loans and advances with fixed rates are $38,009,260 and those with variable rates are $198,633,395.

The weighted average effective interest rate on productive loans stated at amortised cost at December 31, 2007 was 10.14% (2006 –10.43%) and productive overdraft stated at amortised cost was 12.37% (2006 – 12.39%).

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December 31, 2007

(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:

Non Demand Promissory productive

Overdrafts loans notes Mortgages loans

$ $ $ $ $

Total $

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 12,722,658 12,933,563 – 129,339 129,339 (2,805) – (36,006) – 36,006 36,006

At December 31, 2007

15,847

124,163

16,644

18,245 12,888,003 13,062,902

Balance at January 1, 2006 Provision for loan impairment Loans written off during the year Amounts recovered during the year

15,847 – – –

149,622 – – –

24,386 – – –

21,050 15,413,092 15,623,997 – 573,045 573,045 – (3,264,329) (3,264,329) – 850 850

At December 31, 2006

15,847

149,622

24,386

21,050 12,722,658 12,933,563

11 Investment securities

Available-for-sale Equity securities – at fair value: – Listed – Unlisted Debt securities: – Listed – Unlisted

2007 $

2006 $

2,180,634 2,445,280

1,870,450 2,445,280

5,013,537 985,690

– 1,766,785

Total securities: available-for-sale

10,625,141

6,082,515

Held-to-maturity Debt securities - at amortised cost: – Listed – Unlisted

10,093,348 9,182,689

8,022,182 21,357,211

Total securities: held-to-maturity

19,276,037

29,379,393

2007 $

2006 $

14,707,760 15,193,418

25,383,174 10,078,734

Current Non-current

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Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

11 Investment securities …continued 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, 2007 was 6.55% (2006 - 5.48%).

Available for sale $

Held to maturity $

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) –

10,625,141

19,276,037

At January 1, 2006 Additions Disposals (sale and redemption) Gains from changes in fair value

9,466,124 3,859,480 (7,422,776) 179,687

33,007,248 14,687,120 (18,314,975) –

6,082,515

29,379,393

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December 31, 2007

(expressed in Eastern Caribbean dollars) 12 Property, plant and equipment

Land and Building $

Furniture and Fixtures Equipment $ $

7,829,330 (1,621,063)

1,068,716 7,351,227 (762,360) (5,452,683)

Motor Vehicles $

Total $

December 31, 2005 Cost or valuation Accumulated depreciation Net book amount

208,320 16,457,593 (152,993) (7,989,099)

6,208,267

306,356

1,898,544

55,327

8,468,494

Opening net book amount Additions in the year Disposals in the year Depreciation charge (Note 22)

6,208,267 15,025 – (109,988)

306,356 134,886 – (37,892)

1,898,544 567,167 (3,189) (419,810)

55,327 186,920 (51,962) (38,205)

8,468,494 903,998 (55,151) (605,895)

Closing net book amount

6,113,304

403,350

2,042,712

152,080

8,711,446

Year ended December 31, 2006

At December 31, 2006 Cost or valuation Accumulated depreciation Net book amount

7,844,355 (1,731,051)

1,203,602 7,910,375 (800,252) (5,867,663)

186,920 17,145,252 (34,840) (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

1,248,533 8,624,359 (842,842) (6,357,562)

186,920 20,831,023 (65,257) (9,147,840)

Year ended December 31, 2007

At December 31, 2007 Cost or valuation Accumulated depreciation Net book amount

10,771,211 (1,882,179) 8,889,032

405,691

2,266,797

121,663 11,683,183

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.

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Notes to Financial Statements

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Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

12 Property, plant and equipment …continued The historical cost of land and buildings are: 2007 $

2006 $

8,019,878 (1,507,610)

5,080,521 (1,410,024)

6,512,268

3,670,497

2007 $

2006 $

Accounts receivable Inventories of stationery and supplies Prepayments

2,387,386 113,266 276,719

893,131 118,549 259,084

2,777,371

1,270,764

14 Due to customers

2007 $

2006 $

Time deposits Savings accounts Demand amounts

107,016,083 158,846,641 31,647,050

74,600,069 147,852,330 47,061,685

297,509,774

269,514,084

Cost Accumulated depreciation based on historical cost Depreciated historical cost 13 Other assets

All deposits carry fixed interest rates.

The weighted average effective interest rate of customers’ deposits at December 31, 2007 was 3.58% (2006 – 3.10%).

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December 31, 2007

(expressed in Eastern Caribbean dollars) 15 Other liabilities

Manager’s cheques outstanding Accounts payable and accrued expenses Dividends payable on ordinary shares

2007 $

2006 $

1,820,570 1,782,170 289,965

2,634,948 780,952 243,736

3,892,705

3,659,636

2007 $

2006 $

16 Retirement benefit obligations Pension benefits The amount recognised in the balance sheet at December 31, 2007 is determined as follows:

Present value of funded obligations Fair value of plan assets

2,536,000 2,219,000 (2,253,000) (1,993,000)

Unrecognised actuarial gain

283,000 444,000

226,000 503,000

Liability in the balance sheet

727,000

729,000

2007 $

2006 $

At beginning of year Current service cost Interest cost Members’ contributions Actuarial (gain)/loss Benefits paid

2,219,000 141,000 133,000 31,000 29,000 (17,000)

2,063,000 131,000 123,000 28,000 (87,000) (39,000)

At end of year

2,536,000

2,219,000

The movement in defined benefit obligations is as follows:

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Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

16 Retirement benefit obligations …continued The movement in fair value of plan assets for the year is as follows: 2007 $

2006 $

At beginning of year Expected return on plan assets Actuarial (gain)/loss Bank’s contributions Members’ contributions Benefits paid

1,993,000 124,000 (11,000) 133,000 31,000 (17,000)

1,788,000 111,000 (21,000) 126,000 28,000 (39,000)

At end of year

2,253,000

1,993,000

2007 $

2006 $

141,000 133,000 (19,000) (124,000)

131,000 123,000 (17,000) (111,000)

131,000

126,000

2007 $

2006 $

729,000 131,000 (133,000) 727,000

729,000 126,000 (126,000) 729,000

2007 %

2006 %

6 6 5.5 –

6 6 5.5 –

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) The actual return on plan assets was $113,000 (2006 - $90,000).

Movement in the liability recognised in the balance sheet:

At beginning of year Pension expense Contributions paid At end of year The principal actuarial assumptions used were as follows:

Discount rate Expected return on plan assets Future salary increases Future pension increases

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December 31, 2007

(expressed in Eastern Caribbean dollars)

16 Retirement benefit obligations …continued Plan assets allocation is as follows:

Debt securities Others

2007 %

2006 %

75 25

52 48

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 2008 is estimated at $145,000.

The amount of pension plan for the year is as follows: 2007 $

2006 $

2,536,000 (2,253,000)

2,219,000 (1,993,000)

Deficit

283,000

226,000

Experience adjustment on plan liabilities Experience adjustment on plan assets

29,000 (11,000)

(87,000) (21,000)

2007 $

2006 $

At beginning of year Charge for the year (Note 25)

272,553 (438,244)

246,608 25,945

Deferred tax (asset)/liability at end of year

(165,691)

272,553

2007 $

2006 $

(552,304)

908,508

Defined benefit obligation Fair value of plan assets

17 Deferred income tax

The deferred tax (asset)/liability comprises of the following temporary differences:

Accelerated capital allowances

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Notes to Financial Statements

61

Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007

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62

Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

18 Share capital No. of Shares

2007 $

No. of Shares

2006 $

Issued and fully paid: At beginning of year Issued during the year

4,635,177 364,789

6,877,088 1,094,366

4,209,229 425,948

5,599,244 1,277,844

At end of year

4,999,966

7,971,454

4,635,177

6,877,088

Authorized: 5,000,000 ordinary shares

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

2007 $

2006 $

Interest and similar income Loans and advances

Deposits with banks Investment securities

21,415,093 276,483 3,711,825

20,627,028 178,040 3,210,018

25,403,401

24,015,086

Interest expense and similar charges Time deposits Savings deposits Demand deposits

3,933,619 5,064,629 47,730

2,753,999 4,495,662 53,460

9,045,978

7,303,121

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December 31, 2007

(expressed in Eastern Caribbean dollars)

21 Other operating income 2007 $

2006 $

Foreign exchange Commission income Fees income Rental income Dividend income

2,495,828 2,039,334 698,934 315,000 96,840

2,249,387 1,922,547 156,799 – 139,132

5,645,936

4,467,865

2007 $

2006 $

Staff costs (Note 24) Administrative expenses (Note 23) Depreciation (Note 12) Operating lease rental Gain on disposal of property, plant and equipment

4,637,472 3,507,517 714,068 171,050 (1,984)

4,256,879 3,200,498 605,895 98,100 (4,848)

9,028,123

8,156,524

2007 $

2006 $

915,305 454,582 347,102 334,256 303,908 231,163 197,409 196,998 187,290 147,879 120,000 56,000 15,625

1,072,733 397,301 376,352 194,528 220,074 237,322 148,572 182,404 97,800 144,614 104,333 6,770 17,695

3,507,517

3,200,498

22 Other operating expenses

23 Administrative expenses

Other operating expenses Postage, telephone and telexes Utilities Audit and professional fees Equipment expenses Security expenses Repairs and maintenance Insurance Directors’ fees and expenses Stationery Bank licence Legal fees Rates and taxes Total administrative expenses

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Notes to Financial Statements

63

Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007

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64

Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

24 Staff costs 2007 $

2006 $

3,456,935 501,560 400,037 147,940 131,000

3,249,715 300,000 447,869 133,295 126,000

4,637,472 The average number of employees during the year was 90 (2006 - 82).

4,256,879

Salaries and wages Profit sharing Other employee benefits Social security costs Pension costs (Note 16)

25 Income tax expense 2007 $

2006 $

Current Deferred (Note 17)

2,744,711 (438,244)

3,133,179 25,945

2,306,467

3,159,124

Tax on the Bank’s income before income tax differs from the theoretical amount that would arise using the statutory tax rate of 30% (2006 – 30%) as follows: 2007 $

2006 $

Profit before income tax

12,845,897

12,450,261

Tax calculated at the statutory tax rate of 30% (2006 – 30%) Tax effect of exempt income Tax effect of expenses not deductible for tax purposes Tax effect of timing differences in existing buildings

3,853,769 (1,097,619) 27,701 (477,384)

3,735,078 (597,176) 21,222 –

2,306,467

3,159,124

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 $10,539,430 (2006 - $9,291,137) divided by the weighted average number of shares in issue ranking for dividend during the year of 4,852,385 (2006 - 4,415,796).

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December 31, 2007

(expressed in Eastern Caribbean dollars)

27 Dividends In the financial statements for the year ended December 31, 2007, $1,622,312 was appropriated from retained earnings relating to the 2006 dividend. At a meeting on April 2, 2008, the Board of Directors declared a dividend of $0.40 per share in respect of 2007 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, 2008.

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: 2007 $

2006 $

Cash and balances with Central Bank (Note 5) Due from other banks (Note 6)

8,450,390 12,583,177

6,437,689 4,830,031

21,033,567

11,267,720

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 2007 $

2006 $

Loans outstanding at January 1 Net loans issued for the year

3,242,979 (130,137)

2,729,078 513,901

Loans outstanding at December 31

3,112,842

3,242,979

241,484

230,644

Interest income earned

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Notes to Financial Statements

65

Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007

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66

Notes to Financial Statements December 31, 2007

(expressed in Eastern Caribbean dollars)

29 Related party transactions …continued Deposits from Directors and other key management personnel 2007 $

2006 $

1,085,938 (165,892)

1,040,615 45,323

920,046

1,085,938

31,882

31,460

2007 $

2006 $

Salaries and other short-term benefits Post and other employment benefits

791,664 140,800

740,842 54,879

932,464

795,721

Deposits at January 1 Net deposits received during the year Deposits outstanding at December 31 Interest expense on deposits Key management compensation and Directors’ fees

30 Contingent liabilities and commitments (a) Loans commitment, guarantee and other financial facilities At December 31, 2007, 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: 2007 $

2006 $

Loan commitments Acceptances Guarantees and standby letters of credit Documentary and commercial letters of credit

26,241,705 30,230 3,358,086 304,018

22,343,256 134,707 3,745,619 99,982

29,934,039

26,323,564

(b) Legal The Bank is the defendant in various legal actions. In the opinion of the directors, after taking appropriate legal advice, the results of such actions will not have a material effect on the Bank’s financial position.

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Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007

• 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 200

Notes

67

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68

Corporate Data Head Office and Main Branch 21 Bridge Street P. O. Box 168 Castries, St. Lucia, West Indies Tel : 758 455 7000 Fax: 758 453 1630 Sub- Branch J.Q’s Mall Rodney Bay, Gros Islet Tel : 758 452 8882/3 Fax:758 452 8884 Sub-Branch P. O. Box 342 Commercial Street Vieux Fort Tel : 758 454 6213 Fax: 758 454 6137

Bureau de Change George F.L. Charles Airport Vigie, Castries Tel : 758 453 1683 Fax: 758 451 8482 Bureau de Change SLASPA Ferry Terminal Faux a Chaux, Castries Tel : 758 453 0041 Fax: 758 459 0730 SWIFT : LUOBLCLC Email : manager@1stnationalbankslu.com Website : www.1stnationalbankonline.com SOLICITORS -

Floissac, Fleming & Associates

AUDITOR

PricewaterhouseCoopers

-

Sub-Branch Marina Village Marigot Bay, Marigot Tel: 758 458 3744 Fax: 758 458 3638

2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual Report • 2007 Annual R