1st National Bank Annual Report 2008

1ST NATIONAL BANK ANNUAL REPORT 2008

1st National Bank St. Lucia Limited P.0.Box 168 #21 Bridge Street Castries St. Lucia Tel: +758 455 7000 Fax: +758 453 1630 Email: manager@1stnationalbankslu.com Website: www.1stnationalbankonline.com

1ST NATIONAL BANK ANNUAL REPORT 2008

1ST NATIONAL BANK ANNUAL REPORT 2008

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INVOLVED, INTERESTED, INVESTED IN YOU! A GREAT COMPANY IS DEFINED BY MORE THAN A HEALTHY BOTTOM LINE. It is about people looking after people and making a difference in the simplest ways. 1st National Bank epitomizes the “right” kind of bank. We developed the perfect formula for winning the hearts and minds of our customers. We are a bank that is big enough to meet the banking needs of St. Lucians yet small enough to have personalized relationships that last a lifetime. Our focus on building stronger relationships within the company is also an extension of that philosophy. We understand that OUR PEOPLE - staff and customers - hold the key to our success. This year’s annual report reminds us of what is really important and this is why we have aptly themed it: Involved, Invested, Interested in You

Involved, Interested, Invested, In You!

04

Notice of Meeting

05

Corporate Profile

07

Financial Highlights

11

Report of Board of Directors

15

Board of Directors

17

Managing Director’s Report

28

Management Team

29

Management Organization Chart

30

Corporate Data

32

Auditor’s Report

34

Balance Sheet

35

Statement of Income

36

Statement of Changes in Equity

37

Statement of Cash Flows

38

Notes to the Financial Statements

04

NOTICE OF MEETING

NOTICE OF MEETING

Notice is hereby given that the 71st 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, 30th April, 2009 at 5:00 p.m.

AGENDA 1.

2.

3.

4.

5.

6.

7.

8.

9.

Tabling of Proxies To confirm the Minutes of the Annual Meeting of Shareholders of 29th May, 2008 Matters arising out of the Minutes To confirm the Minutes of the special meeting of shareholders held on 3rd July, 2008.

To consider and adopt the 2008 Report of the Board of Directors To consider and adopt the Auditor’s Report to the Shareholders To consider and adopt the Audited Financial Statements for the period ended 31st December, 2008 To sanction a dividend of $0.40 cents per share as recommended by the Board of Directors To elect three Directors.

The Directors retiring by rotation and who are eligible for re-election are:Mr. Ferrel Charles Mr. Nigel Fulgence Mr. Christian Husbands

Note: Nominations may be made either in writing or on the prescribed forms and must reach the Bank’s registered office at least five (5) days before the day of holding the meeting.

10. Proposal to amend the remuneration of the Directors.

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 20th April, 2009 to 30th April, 2009 both dates inclusive.

BY ORDER OF THE BOARD Beryl Carasco-Alleyne Corporate Secretary

1st National Bank Annual Report 2008

Involved, Interested, Invested, In You!

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CORPORATE PROFILE

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.

MISSION STATEMENT

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

CORE VALUES

Integrity • Professionalism • Confidentiality

1st National Bank Annual Report 2008

FINANCIAL HIGHLIGHTS

07

FINANCIAL HIGHLIGHTS 2008 $ ‘ 000

2007 $ ‘ 000

2006 $ ‘ 000

2005 $ ‘ 000

2004 $ ‘ 000

29,681 10,763 18,918 4,056 10,515 9,096

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

329,405 7,971 56,239 390,152 5,000

297,510 7,971 49,339 351,468 5,000

269,514 6,877 39,077 314,392 4,635

223,758 5,599 29,591 260,272 4,209

195,084 4,821 23,854 222,298 3,950

Dividends Declared Earnings per share Book Value

$ 0.40 1.82 11.25

$ 0.40 2.17 9.87

$ 0.35 2.10 8.43

$ 0.30 1.47 7.03

$ 0.25 1.21 6.04

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

2.33% 16.17% 4.85% 45.8% 94

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

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) Performance

Involved, Interested, Invested, In You!

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FINANCIAL HIGHLIGHTS

CUSTOMER DEPOSITS

2008 = $329 million 2007 = $298 million

INCREASE = $32 million, 11%

TOTAL ASSETS

2008 = $390 million 2007 = $351 million

INCREASE = $39 million, 11%

1st National Bank Annual Report 2008

FINANCIAL HIGHLIGHTS

09

TOTAL LOANS

2008 = $263 million 2007 = $237 million

INCREASE = $26 million, 11% COST EFFICIENCY

BANK 45.8%

AVERAGE INDUSTRY 60% CAPITAL ADEQUACY RATIO

BANK 19%

AVERAGE INDUSTRY 10% Involved, Interested, Invested, In You!

1st National Bank Annual Report 2008

REPORT OF BOARD OF DIRECTORS

11

REPORT OF BOARD OF DIRECTORS “THE RECENT DEVELOPMENTS IN THE WORLD ECONOMY WILL INEVITABLY IMPACT OUR LOCAL ECONOMY WHICH IS PREDICTED TO EXPERIENCE LOW GROWTH OVER THE NEXT YEAR. THE BOARD AND MANAGEMENT WILL REMAIN DILIGENT, ENSURING THAT THE BANK’S ASSETS, IN PARTICULAR ITS CREDIT ASSETS, ARE PRESERVED. THE BOARD GIVES THE ASSURANCE THAT IT WILL CONTINUALLY REVIEW THE BANK’S STRATEGIC DIRECTION TO MAINTAIN THE BANK’S GROWTH PATH AND TO GENERATE A HEALTHY RETURN ON SHAREHOLDER INVESTMENT.” Dr. Charmaine Gardner President

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REPORT OF BOARD OF DIRECTORS

The financial results of 1st National Bank St Lucia Limited for the year ended December 31, 2008 are creditable, having regard to peculiar circumstances relevant to the global economy. The Bank’s balance sheet position has grown by 11%, from $351 million at December 31, 2007 to $390 million inclusive of a profit before tax of $11.2 million.

This growth manifests in equity, with retained earnings growing steadily year on year. With a more than adequate Tier 1 Capital ratio of 19% and an expanding and diversified customer base, the Bank continues to achieve planned strategic growth and to meet its challenges directly. Consequently, the Bank now provides higher value credit to corporate customers and institutional investors.

Initiatives to increase awareness and enhance customer service delivery continue apace. Clients now have greater convenient access to their funds via online banking at our six ATM machines island wide. The newest business unit at Marigot has broadened its services to the yachting component of the tourism sector and indeed the unit has performed better than projected.

Investment in human resources and appropriate modern information technology remain a priority for the Bank. Staff development was undertaken as planned, particularly in leadership training and training in new information systems procured. Approximately $1.3 million was spent on information technology, to enhance service delivery.

The Bank is managed on the basis of solid banking principles that have resulted in steady growth of its assets. Our core values guide all decision making, thus enabling us to maintain the requisite level of service to customers in any environment, albeit calm or turbulent.

As a responsible corporate entity, our Bank partners with various organizations to further the development of youth and country, through participation in public policy discussions and reforms, the support of human resource capacity building by way of donations and the financing of student loans, staff training and development.

1st National Bank Annual Report 2008

REPORT OF BOARD OF DIRECTORS

13

Governance

Meetings

The Board comprises ten non-executive directors and one executive director. Directors have a wide range of experience and training in accounting and finance, educational administration, insurance, engineering, business and agriculture. You will recall that Mr. Aidan Floissac and Mrs. Carole Jn. Marie did not seek re-election to the Board at our last Annual Meeting of shareholders. We thank them both for their sterling contributions, particularly Mr. Floissac for his twenty years of dedicated service; we wish them well.

In executing its responsibility of institutional oversight, the Board and its five committees held several meetings during the year. The composition of the committees and attendance are compiled in the table below. The Loans Committee is excluded from the table, as agreed in principle at the last Annual Meeting. During the year under review, three meetings of the Loans Committee were held with above average attendance of 60%, 80% and 100% respectively.

At the last Annual Meeting, Director Mr. Joseph Maxwell was re-elected to the Board and two others in the persons of Mr. Johnson Cenac and Mr. Tedburt Theobalds were also elected. We welcome them and look forward to their contributions in this dynamic environment within which the Bank operates.

During the year, the President attended the annual meeting of ECIC Holdings Ltd in Antigua. We are pleased to report that although the Bank has not received a dividend from ECIC Holdings Ltd, the relationship remains strategic and the objective of broadening our customer and revenue base was realised.

During the year, the Chairperson of the Board of Directors successfully completed the Directors’ Education and Accreditation Program (DEAP) and obtained a diploma accredited with the Institute of Chartered Secretaries and Administrators of Canada. This is expected to provide greater insight into the technical elements of governance. In due course, other Directors will be similarly exposed.

The Bank takes advantage of every opportunity to expose Directors to relevant issues that will ultimately redound to better governance. The Chairperson and members of the Audit Committee attended the second meeting of the Caribbean Association of Audit Committee Members (CAACM) Inc, under the theme “Audit Committees: Improving performance through compliance”. Directors Gardner and Maxwell attended the annual meeting of the Caribbean Association of Indigenous Banks (CAIB) hosted in Barbados. The CAIB conference was facilitated by a team of experts on a variety of topics which included relevant issues in risk management for banks. Additionally, the Board participated in a briefing session on Corporate Governance by consultant Dr. Valda Henry.

The Corporate Governance Committee was assigned the task to review the Bank’s draft Corporate Governance Policy to ensure compliance with Central Bank guidelines. Progress on this review is satisfactory and the final draft will be completed by mid 2009.

Dividend Notwithstanding the current profit performance, the Board is pleased to recommend maintaining a dividend payout of $0.40 per share, yielding 13% and representing a total payout of $2 million. This dividend complies with regulatory guidelines and takes into account our future plans, which include the refurbishment and modernization of our existing premises.

It should be noted that when circumstances dictate, special sub-committees are convened to administer appropriate matters as required.

Outlook The recent developments in the world economy will inevitably impact our local economy which is predicted to experience low growth over the next year. The Board and Management will remain diligent, ensuring that the Bank’s assets, in particular its credit assets, are preserved. The Board gives the assurance that it will continually review the Bank’s strategic direction to maintain the Bank’s growth path and to generate a healthy return on shareholder investment.

Acknowledgements This financial year’s asset growth would not have been possible without the unwavering and unqualified commitment of management and staff. The Board expresses its thanks and heartfelt appreciation to them.

We thank our customers and shareholders for their continued support and interest in the Bank, which has allowed us to remain the premiere indigenous financial institution.

As colleagues on the Board, we have worked hard, cordially and fruitfully together. With our guidance and constructive discourses, we have assisted in propelling the Bank along its journey to its present standing.

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

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Report of Board of Directors

DIRECTORS’ ATTENDANCE 2008 BOARD & COMMITTEE MEETINGS DIRECTORS

BOARD

No. of Meetings

Actual Attendance

FINANCE, PLANNING & INVESTMENT No. of Meetings

Actual Attendance

HUMAN RESOURCE

No. of Meetings

Actual Attendance

AUDIT

No. of Meetings

Actual Attendance

CORPORATE GOVERNANCE

No. of Meetings

Actual Attendance

Charmaine Gardner

12

12

Cyril Matthew

12

9

5

5

Ferrel Charles (Audit Committee member until September 2008)

12

12

4

5

2

Aidan Floissac (retired May 2008)

12

3

Brenda FloissacFleming

12

5

2

1

2

2

Nigel Fulgence (Finance Committee member to September 2008)

12

12

4

2

2

2

5

5

2

2

Joseph Maxwell

12

12

4

4

2

2

5

5

Christian Husbands

12

12

4

4

2

2

2

Carole Eleuthere-Jn. Marie (retired May 2008)

12

1

Lionel James (member of Finance Committee from November 2008)

12

10

4

2

Johnson Cenac (elected May 2008)

12

9

Tedburt Theobalds (elected May 2008)

12

7

G. Carlton Glasgow

12

11

4

4

2

2

2

2

2

2

1st National Bank Annual Report 2008

board of directors

15

Board of Directors

Mrs. Brenda Floissac-Fleming Member

Mr. Joseph Maxwell Member

Mr. Nigel Fulgence Member Dr. Charmaine Gardner Chairperson/President

Mr. Ferrel Charles 2nd Vice President

Mr. Cyril Matthew 1st Vice President

16

Mr. Lionel James Member

Mr. Christian Husbands Member

board of directors

Mr. Tedburt Theobalds Member

Mr. Johnson Cenac Member

Mr. G. Carlton Glasgow Member

1st National Bank Annual Report 2008

MANAGING DIRECTOR’S REPORT

17

MANAGING DIRECTOR’S REPORT DESPITE THE FINANCIAL CRISIS THAT CRIPPLED SOME INSTITUTIONS AND THREATENS ECONOMIC GROWTH WORLDWIDE, THE BANK HAS RECORDED ANOTHER YEAR OF PROFITABLE OPERATIONS. PROFIT BEFORE TAX FOR THE FINANCIAL YEAR ENDING 2008 WAS $11.2 MILLION, A 13% DECREASE COMPARED TO THE PROFIT RECORDED FOR THE PRIOR YEAR. THE BALANCE SHEET GREW BY 11%, FOLLOWING A SIMILAR GROWTH TREND TO THE PRIOR YEAR, FROM $351 MILLION IN 2007 TO $390 MILLION. Our challenges were both systemic and internal and all indications are that the year ahead is likely to be more challenging, given our small economy. The interest rate on funding remained competitive and fairly high, while opportunities for employment of funds remained relatively flat. Space constraints impinged on our already stretched human resource capability and customer service delivery, resulting in only partial attainment of our strategic initiatives. Plans to renovate #21 Bridge Street and transform #18 Bridge Street were postponed temporarily as we pursued an initiative that would give the Bank significant leverage over the long term. However, we expect to move forward with construction plans during this financial year.

The Bank’s general philosophy is to manage our resources with prudence, our overriding priority being safety of our customers’ funds which drives our staff engagement initiatives. We remain committed to maintaining a cutting edge information technology system that will enhance customer accessibility to the Bank via various media while simultaneously exceeding their service needs.

High asset quality remains a priority and we have implemented initiatives that will result in a reduction in loan losses while simultaneously booking quality loans. We are optimistic about the future and we anticipate that our initiatives will continue to grow and add value to the Bank.

Involved, Interested, Invested, In You!

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Financial Review

MANAGING DIRECTOR’S REPORT

TOTAL INCOME

PROFITABILITY Having regard to the prevailing economic environment, management is fairly pleased with the reported after tax performance of $9.1million. This result is lower than that attained last year and is the direct result of the slower economy. It is significant that each of the Bank’s business units contributed to the profitability of the Bank with the exception of Marigot Bay but whose performance exceeded our expectations. The outlook for this unit for the next year is favourable based on current trends.

40,000

35,000

$'000

30,000

AFTER TAX INCOME

25,000

20,000

15,000

$12,000 10,000

$10,000 5,000

$'000

$8,000 -

$6,000

2008

2007

2006

2005

2004

$4,000

$2,000

$2008 2007

2006 2005

2004

INCOME The Bank recorded total income of $34 million, an increase of 9% over 2007. This growth followed a similar trend for the 2006/2007 period. Interest income on loans increased by 14% and was due in part to adjustments relevant to adherence to International Accounting Standards (IAS). However, foreign exchange earnings were significantly less than that for 2007 by 30%, as a result of the impact of exchange rate fluctuations, reduction in tourism arrivals at the two ports that we service by 8% and a slow down in economic activity. Commission income reported is less than last year, resulting from adjustments made to comply with IAS 18.

NET INTEREST INCOME Interest expense increased by 19% over the prior year and had a significant impact on profit performance this year. This was mainly due to a steady increase in fixed deposits and relatively high interest rates on deposits. The anticipated reduction in deposit rates did not materialize and the market did not react as expected. Overall, net interest income increased over 2007 by 16%.

NON INTEREST EXPENSES The cost of operations increased by 16%, during a period which experienced a general increase in the cost of goods and services for the greater part of the year.

Additionally, the Bank implemented several initiatives to facilitate greater operational efficiency geared at enhancing customer service delivery and cost containment in the long term. Funds were allocated to advertising/promotions and donations to maintain a presence in the market and to contribute to the development of the community through education, sports, the arts and the environment.

1st National Bank Annual Report 2008

MANAGING DIRECTOR’S REPORT

19

RETURN ON EQUITY AND ASSETS 25.00%

20.00%

OPERATING EXPENSES

Depreciation 8%

15.00%

Operating lease 2% Staff costs 50%

10.00%

5.00% Return on assets Return on Equity

0.00% 2008

Admininstrative expenses 40%

Staff costs Admininstrative expenses Depreciation Operating lease

2007

2006

2005

2004

Earnings per share fell from $2.17 in 2007 to $1.82 in 2008. However, the book value of shares held increased to $11.25 from $9.87 in 2007.

SHAREHOLDERS EARNINGS PER COMMON SHARE DATA $12.00

The Bank recorded an increase in provision on loans from $0.13 million in 2007 to $1.25 million in 2008. This resulted from adjustments made to adhere to International Accounting Standards and to a lesser extent, the perceived impact of the financial crisis.

KEY PERFORMANCE INDICATORS The Bank’s revenue growth was slower than its asset growth.

For a fair portion of the year, liquidity and safety of funds took precedence over profit maximization and periodically, there were no suitable investment instruments to absorb the excess liquidity. Consequently, key performance indicators like return on assets (ROA) and return on equity (ROE), though creditable and comparable to industry standards, were lower than previous years at 2.33% and 16.17% respectively.

$10.00

$8.00

$6.00

$4.00

$2.00

Earnings per share

Book value per share

$2008

2007

2006

2005

2004

The cost efficiency ratio (before provision) moved negatively, from 41.0% in 2007 to 45.8% this year, the result of several initiatives undertaken to enhance customer service delivery. Though the cost efficiency ratio is higher than recent years, it is well within the industry standard of 60%.

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Financial Condition Total assets of the Bank at December 31, 2008 grew from $351 million in 2007 to $390 million, maintaining its growth trend over the last five years. This is driven principally by growth in customer deposits and profits. Given the concerns surrounding financial institutions worldwide, the loyalty of our customers is testimony to the soundness of the Bank.

MANAGING DIRECTOR’S REPORT

Loans to customers Loans and advances to customers increased by 11% over 2007, bringing the net loan portfolio to $249 million. This asset category comprised 64% of the Bank’s total assets. The Bank registered increases in all industry segments with the largest increase registered in manufacturing (96%), followed by tourism (28%), professional services (16%) and personal loans (11%).

TOTAL LOANS AND ADVANCES

TOTAL ASSETS

2004

$400,000

$350,000

2005

YEARS

$300,000

$250,000

$200,000

$150,000

2006

2007

$100,000

$50,000

2008

$2008

2007

2006

2005

2004

0

50,000

100,000

150,000

200,000

250,000

300,000

$'000

CASH During the financial year, the Bank held adequate levels of cash to satisfy customer needs as well as to meet regulatory and liquidity requirements. Liquidity needs fluctuated during the year but were fairly stable overall. The position was monitored daily with the focus remaining mainly on safety of funds.

INVESTMENTS The Bank invests in both debt and equity instruments. We hold treasury bills of the Governments of St. Lucia, St. Vincent and Antigua and bonds of the Government of St. Lucia. The majority of the Bank’s total investment portfolio (including treasury bills), matures within one year, with 14% maturing in more than one year. The investment portfolio is structured to assist with the management of the liquidity position.

Credit quality is critical to loan growth and a plan to reduce the non performing loan ratio is under review to comply with the limit of 5% set by the Central Bank. The ratio (non performing loans to net loans) is currently at 13.0% up from 12.5% in 2007.

PROPERTY, PLANT AND EQUIPMENT Plans to transform #18 Bridge Street to befit the image of the Bank are ongoing as management continues to maximize long term profit opportunities. Capital expenditure allocated to Information Technology was $1.3 million, of which $0.5 million was spent on the implementation of a redundancy site that will enable the Bank to maintain service to customers in the event of a disaster.

Loans to financial institutions are all short term investment instruments, the main purpose of which is to earn a return while providing a buffer should a liquidity need arise. The total amount of funds in this portfolio is $39 million, comprising 10% of total assets.

1st National Bank Annual Report 2008

MANAGING DIRECTOR’S REPORT

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FUNDING Total deposits increased by 11% over 2007 audited figures, from $298 million to $329 million. The deposits of private individuals dominate the deposit portfolio and comprise 53% of total deposits. Each of the three deposit categories recorded modest increases over 2007. Despite the stiff competition for deposits, particularly from non bank financial institutions, the Bank was able to attract sufficient levels of funding to satisfy its growth goals.

The number of shares held remained stable at 4,999,966 as a result of a Board decision to temporarily withhold a new share issue. The Bank’s equity increased from $49 million in 2007 to $56 million in 2008, an increase of 14%. This increase strengthens the Bank’s capital base and lays the foundation for our growth and development plans.

CAPITAL MANAGEMENT The Bank’s capital adequacy ratio at December 31, 2008 was strong at 19% and above the 8% requirement of the Central Bank. This strength is the result of prudent earnings retention of over 75% annually and contributes to safety and soundness of the Bank. A high ratio has engendered continued confidence in the Bank. The Bank’s capital structure is typical of commercial banks and there are no plans to alter its structure in the near future.

RISK MANAGEMENT The Board of Directors approves the risk management policies and key limits of the Bank and management reviews the day to day risk exposures and associated issues. In that regard, training initiatives were ongoing to enhance risk management in all business units that will redound to increased earnings.

Customer Service and Delivery Channels Customer satisfaction remains central to our activities. A customer satisfaction survey was commissioned during the last quarter of 2008, to guide strategic decisions. During the year, customers’ accessibility to their accounts was enhanced. The number of applications for internet banking increased by more than 100% and ATM use increased island wide. Work commenced on revamping the website during that year, to make it more user-friendly and informative.

In order to give a fillip to its market presence, the Bank has temporarily outsourced a significant portion of its marketing. The decision to outsource was mainly due to space constraints as the planned remodelling of #18 Bridge Street would not materialize in the short term.

The Bank’s strategic objective of creating a safe, comfortable and welcome environment for customers was partially realised when the Bank undertook the following:

A new air-conditioning plant was commissioned for the premises on Bridge Street. Staff and customers now experience a constantly cool and comfortable environment.

Work commenced on setting up a redundancy (back-up computer room) site at Vieux-Fort sub-Branch. E1 fibre connectivity network to and from all branches was installed and implementation of the site was completed during the latter half of the year. The Vieux Fort site has the capability to seamlessly cut-in with the latest back-up information, without Branches being aware of the switch. This installation is a significant achievement in our objective to ensure business continuity.

Additional security equipment including cameras and monitors were installed at all branches except Marigot Bay sub-Branch, which already had the latest digital equipment. With computer and ATM fraud increasing at an alarming rate, ATM micro-digital cameras were installed to enable the Bank to identify individuals intent on card fraud. This initiative gives Management better coverage of any illegal activity that can take place around the Bank’s premises, resulting in an enhancement of overall security.

A credit card fraud seminar was held for merchants and their staff jointly with our credit card provider. The Bank used this opportunity to sensitize its customers and staff on the growing instances of fraud through the illegal use of credit and magnetic cards.

An anti-money laundering product was installed towards the end of the year, aimed at monitoring and reporting money laundering activities in compliance with requirements of correspondent banks.

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MANAGING DIRECTOR’S REPORT

In the quest to perfect customer service delivery, we are committed to investing in cutting edge technology to meet the ever changing needs of customers. The core computer system was upgraded to make the core database ready to interface with a mobile phone banking product and for the launch of new technology products. A new Payments Processing Suite was implemented which made the processing of drafts, manager’s cheques, and wire transfers multiple times more efficient, thereby reducing processing time and human error. Automated cheque printing was implemented in the last quarter, reducing the time taken to manually prepare these instruments.

Human Resources During the year under review, the Bank kept its focus on the strategic elements of:• Institutional strengthening • Leadership Building, and • Development of employee capacity INSTITUTIONAL STRENGTHENING In its drive to sustain high revenue growth, increased operational efficiency, excellent and timely service delivery and full regulatory compliance, routine position reviews were conducted in the context of the Bank’s strategic goals.

Consequently, in 2009 some of the challenges identified within the Bank’s business units were addressed through a process of both internal advancement and external recruitment of personnel to fill key positions. In effect, Assistant Managers for Lending, Recoveries, Finance and Accounts were appointed, as were a Manager and Senior Supervisor at the Sub-Branch level.

This is also very much in line with the Bank’s overall approach to succession planning, with its emphasis on enhancing the professional development and advancement of employees and the retention of key talented personnel.

LEADERSHIP BUILDING In tandem with its strategic objective of creating inspirational leadership at all levels, in 2008 the Bank continued the implementation of its leadership development and training programme throughout the Organization.

In this regard, the following initiatives were effected:• Conducting of Transformational Coaching Workshops for management and supervisory personnel.

• Training for select supervisors in areas of Communication, Human Relations and Supervisory Skills.

• Promotion of some eight (8) employees within the supervisory grades.

Additionally, at the Bank’s Annual Dinner & Staff Awards function, persons were recognized for having excelled during the course of the year in the coveted categories of:• • • • • •

Perfect Attendance Special Commendation Junior Officer of the Year Supervisor of theYear Managing Director’s Award Branch of the Year

DEVELOPING EMPLOYEE CAPACITY The Bank is committed to achieving its goal of retaining highly competent, empowered and dedicated staff.

As planned therefore, a staff satisfaction survey was conducted to assist in determining 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 survey outcomes are currently under review for implementation where necessary during the 2009 financial year.

Additionally, planned skills training of staff was done throughout 2008 in technical areas pertaining to:• • • • • • • • •

Financial reporting Accounting Credit Appraisal Techniques Residential Mortgage Underwriting Retail and Commercial Credit Appraisal Credit Risk Anti-Money Laundering Audit Tools and Techniques Ongoing orientation to support I.T. initiatives implemented.

1st National Bank Annual Report 2008

MANAGING DIRECTOR’S REPORT

23

Corporate Social Responsibility It was fitting for the first indigenous bank to assist Ms. Barbara Cadet, a regionally and internationally known St. Lucian saxophonist with the launch of her CD “Indigenously Yours” this year. In addition to our financial support to Ms. Cadet, the 1st National Bank Chorale put on a spectacular performance of traditional songs with a spicy Creole flavour adding to the success of the well attended event.

St. Lucia is home to a number of seasoned and budding poets. The Bank supported the St. Lucia Arts Festival Company’s hosting of yet another successful creative arts event, “Word Alive 4”. Performance poetry with music is a breeding ground for artists to develop their creativity and their artistic talent. We are proud to be a part of that development.

The Bank also provided support to the Caribbean Youth Festival to stage the annual event which utilizes local and regional performers to spread positive messages to the youth through song. The proceeds of the show were presented to the Centre for Adolescent Rehabilitation and Education (CARE), an institution which the Bank supports under covenant.

In 2008, the venue for the opening of Jazz was at Fond d’Or Historical Park, Dennery. The Bank has been a Gold sponsor of jazz at that venue since 2006. The level of sponsorship ensures that the activity is very well marketed thus creating an awareness of the festival and providing funds for the preservation of historical artefacts and the environment.

Giving back to community and providing support to community development is fundamental to our identity as a corporate citizen. We carefully select programs that benefit the youth and country. Our emphasis remains on sport, arts and education.

We acknowledge and applaud the contribution of women to our country. Accordingly, our Calendar celebrated the journey and achievements of twelve women of excellence under the theme “Outstanding women of St. Lucia”. The women chosen were drawn from varied backgrounds and professions, whose accomplishments and triumphs were truly inspirational and worthy of being chronicled for future generations. The 2009 calendar represents the final in the planned trilogy dedicated to women of St. Lucia.

The Bank has once again thrown its support behind another major arts activity. Nobel Laureate Week opened with “Masquerade Master”, a contemporary play that uses St. Lucia’s masquerade traditions as its background. The Bank is now known as the foremost supporter of the arts in St. Lucia.

As testimony to its level of commitment to the creative arts, the Bank sponsored training for three young St. Lucians in the Performing Arts. Melissa Giddings and Deana Phillip attended a summer programme at the Edna Manley School of Performing Arts while Chani St. Clair attended a dance workshop in Barbados.

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24

MANAGING DIRECTOR’S REPORT

Financial support was provided to the Royal St. Lucia Police Force Calypso Competition dubbed “Kaiso Headquarters”. The Bank has been a major sponsor of the event from its inception, three years ago. We see this as a good opportunity for police and the community to mingle in the quest to build a stronger community.

Development of young people is a priority for our community involvement and the opportunity was seized to provide support to Kiddie Crew. Kiddie Crew assists with the development of children, bringing out their self confidence and latent talents while teaching them new skills for the future.

The Bank invests time and money in our people through sport as this instils discipline, cooperation and a spirit of friendly competitiveness, all vital for functional communities. To this end, a number of sporting activities were beneficiaries of funds from the Bank including, Sir Arthur Lewis Community College Youth Sports Summer Camp for the underprivileged, the National Swimming Association which revived the National Secondary Schools Swim tournament, St. Lucia Volley Ball Association, St. Lucia Veterans Cricket team, St. Lucia Netball Association, St. Lucia Domino Association and Inland Revenue Sports Club.

The Bank has been the main sponsor of the 13 and Under Track and Field Championship for the past fifteen years and pledges its support for the continuance of the event. The Championship has produced athletes such as Levern Spencer (sportswoman of the year for 2008), Lenyn Leonce (Gold Medalist at the CARIFTA Games and 2008 Junior Sportsman of the Year) and Sandisha Antoine (Junior Female Athlete of 2008).

The Ministry of Social Transformation Youth and Sports, at its 2008 National Sports awards, presented 1st National Bank with a plaque in recognition of the Bank’s outstanding contribution to sports in St. Lucia.

1st National Bank Annual Report 2008

MANAGING DIRECTOR’S REPORT

25

The Bank continues its philanthropic thrust by way of donations to various charitable and Non Governmental Organizations. Some of these include the National Community Foundation, Cluny Foundation, Centre for Adolescent Rehabilitation and Education (CARE), St. Lucia Sickle Cell Association, St. Lucia Blind Welfare Association and the Ex-service Men’s League. The Bank donates to various homes for the aged on the island such as Marian Home, St. Lucy’s Home, Adelaide and Frances Memorial Home and Salvation Army.

Teachers play a critical role in the development of our future citizens. The Bank honoured their contribution by sponsoring a major conference of Teachers and Principals organized by the St. Lucia Teachers Union under the theme “Teachers Matter: The role and importance of teachers in society”. Assistance was also given to many schools across the length and breadth of the island for various projects such as sports, drama, agriculture and graduation exercises.

Many sporting and cultural clubs/organizations, mothers and fathers groups were also beneficiaries of the Bank’s goodwill.

The 1st National Bank Staff Chorale considered their time well spent when they performed from their repertoire of Christmas carols outside the Bank’s premises on Bridge Street to the delight of the general public. At Christmas, the choir visited the Queen of Folk, Dame Sesenne Descartes and presented her with a food Hamper and gifts. They made us proud to listen to their recorded Christmas message renditions on Radio and Television.

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26

MANAGING DIRECTOR’S REPORT

Outlook

Acknowledgements

The year ahead is expected to be challenging as the effects of the world financial crisis reach our shores. Gross domestic product is projected to be approximately 2% but we are confident that we have laid a solid foundation to continue our planned moderate growth.

Our banking practices remain conservative yet developmental in focus. Continued attention will be paid to our credit assets to maintain and improve the quality of the portfolio.

The continued growth of the Bank would not be possible without the commitment of the staff and management who have worked hard despite our present space constraints. I thank them for their patience and perseverance while we pursue appropriate solutions. To members of the Staff Chorale, I express gratitude for your selflessness and thank you for displaying our core values and honour, through your work.

We expect to launch the Bank’s mobile banking and debit card products during the new financial year. More services will be added to our online banking product as we upgrade our premises to make them more modern, comfortable and accessible for customers, staff and the public.

Accordingly, we urge our customers and the public to remain proactive in their savings and investment as we look forward to an exciting yet challenging year ahead and as we set our sights on the next seventy years of service to our country.

Shareholder Information

I thank too, our many customers who have been the bastions of the Bank. We are truly grateful for their continued confidence and pleased that they are happy to be a part of the 1st National Bank family. We pledge to maintain that level of trust and encourage them to provide constructive criticism that will enhance their experiences with us.

This onward journey would not be complete without the support of the Board of Directors and shareholders and I thank them on behalf of the management and staff.

Finally, I thank the general public who have taken time to comment favourably about the Bank, on its many initiatives and its progress. I thank those who have given us the opportunity to participate in the various community activities in support of culture, sports, education and entertainment to name a few and we look forward to continuing this partnership when possible.

Following the last annual meeting, a petition was raised by two shareholders of the Bank to amend Section 12.4 of the Bank’s Bye Law No.1. A special meeting of shareholders was held on Thursday, July 3rd 2008 to consider a Resolution for the amendment of the voting rights of shareholders which was proposed and seconded in writing by Mr. Vincent Palmer and Mr. William Edgecombe respectively.

Bye-Law 12.4 of the Bank’s By-law no.1 states that “every shareholder shall on a poll have one vote for every share in THE COMPANY held by that person, but no shareholder shall be entitled to more than twenty-five votes”.

G. Carlton Glasgow Managing Director

The resolution for the amendment read as follows: “Every shareholder shall on a poll have one vote for every share in the Company held by that person, but no shareholder shall be entitled to votes in excess of one-twentieth of one per cent of the Bank’s authorized share capital”.

After due consideration and considerable discussion, the resolution was put to the vote by show of hands. On a vote of six (6) in favour and ninety two (92) against, the resolution was defeated.

The Bank’s shareholding structure has not changed and no shareholder owns more than 20% of the Bank’s shares. A total of 141,877 shares were transferred during the year but the total number of shareholders remained the same at 1,332.

Efforts to automate the efficient distribution of dividend cheques are in progress. However, we urge shareholders who do not have an account with the Bank to do so in an effort to reduce delays in dividend payments. Kindly contact our Corporate Secretary for the necessary forms.

1st National Bank Annual Report 2008

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01

02

03

04

05

06

07

08

09

11

13

28

01

G. CARLTON GLASGOW MANAGING DIRECTOR

02

AUREA LAFEUILLEE FINANCE MANAGER

03

JOSEPH FEDEE OPERATIONS MANAGER

04

DENISE HOLDEN-PIERRE MANAGER, INTERNAL AUDIT

05

BERYL CARASCO-ALLEYNE HUMAN RESOURCE MANAGER/ CORPORATE SECRETARY

06

ROBERT FEVRIER MANAGER, PROJECTS & SERVICES

07

CLARETTE AUGUSTE-TAYLOR MANAGER, LENDINGS

08

VALERY MARSHALL-ST. OMER ASSISTANT MANAGER, OPERATIONS

09

SYLVIA ALCEE MANAGER, RODNEY BAY SUB BRANCH

10

PATRICIA HOWELL ASSISTANT MANAGER, LENDINGS

11

PETER FLOISSAC ASSISTANT MANAGER, RECOVERIES

12

NAOMI PROMESSE-EDWARD MANAGER, VIEUX FORT SUB BRANCH

13

BEVERLEY ANN GREENE ASSISTANT MANAGER, FINANCE

14

MANSLEY JULIUS ASSISTANT MANAGER, ACCOUNTING

10

12

MANAGEMENT TEAM

14 1st National Bank Annual Report 2008

29

MANAGEMENT ORGANIZATION CHART

Management Organization Chart BOARD OF DIRECTORS

MANAGING DIRECTOR

Manager Lendings

Assistant Manager, Lendings

Assistant Manager, Recoveries

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Operations Manager

Assistant Manager, Operations

Manager, Projects and Services

Sub Branch Managers, Rodney Bay, Vieux Fort and Officer in Charge, Marigot Bay Sub Branch

Human Resource Manager/ Corporate Secretary

Finance Manager

Assistant Manager, Finance

Assistant Manager, Accounting

Manager Internal Audit

30

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. Charles 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 SUB-BRANCH Marina Village Marigot Bay, Marigot Castries Tel: 758 458 3744 Fax: 758 458 3638 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: 758 451 8482 SWIFT : LUOBLCLC Email: manager@1stnationalbankslu.com Website: www.1stnationalbankonline.com

1st National Bank Annual Report 2008

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1st National Bank Annual Report 2008

For the year ended 31 march 2008

PriceWaterhouseCoopers Pointe Seraphine P.O.Box 195 Castries St. Lucia, West Indies Telephone (758) 456-2600 Facsimile (758) 452-1061

March 24, 2009

Independent Auditors’ Report To the Shareholders of 1st National Bank St. Lucia Limited

Report on the Financial Statements We have audited the accompanying financial statements of 1st National Bank St. Lucia Limited (the Bank) which comprise the balance sheet as of December 31, 2008 and the statements of income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

32

Auditor’s report

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For the year ended 31 march 2008

1st National Bank Annual Report 2008

PriceWaterhouseCoopers Pointe Seraphine P.O.Box 195 Castries St. Lucia, West Indies Telephone (758) 456-2600 Facsimile (758) 452-1061

Auditor’s Responsibility ...continued An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as of December 31, 2008 and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Chartered Accountants

PricewaterhouseCoopers refers to the East Caribbean firm of PricewaterhouseCoopers and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. A full listing of the partners of the East Caribbean firm is available on request at the above address.

Auditor’s report

33

8

1st National Bank Annual Report 2008

Balance Sheet

As of December 31, 2008

(expressed in Eastern Caribbean dollars) 2008 $

2007 $

29,208,566 5,088,351 17,910,470 38,642,361 248,470,227

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

12,789,462 22,171,742 1,018,873 12,474,455 2,347,028 30,846

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

390,152,381

351,468,371

Due to customers (Note 14) Other liabilities (Note 15) Retirement benefit obligations (Note 16)

329,404,588 3,769,600 739,000

297,509,774 3,892,705 727,000

Total liabilities

333,913,188

302,129,479

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

7,971,454 37,539,794 10,727,945

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

Total equity

56,239,193

49,338,892

390,152,381

351,468,371

Assets Cash and balances with Central Bank (Note 5) Due from other banks (Note 6) Treasury bills (Note 7) Loans and advances to financial institutions (Note 8) Loans and advances to customers (Note 9) Investment securities: (Note 11) - available-for-sale - held-to-maturity Income tax recoverable Property, plant and equipment (Note 12) Other assets (Note 13) Deferred income tax asset (Note 17) Total assets Liabilities

Equity

Total equity and liabilities

Approved by the Board of Directors on March 24, 2009

Director

Director

34

balance sheet

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Statement of Income

For Ended December 31,2008 2008 Forthe theYear year ended 31 march (expressed in Eastern Caribbean dollars)

2008

2007

$

$

29,680,766

25,403,401

(10,762,836)

(9,045,978)

18,917,930

16,357,423

4,056,350

5,645,936

22,974,280

22,003,359

(10,514,717)

(9,028,123)

Impairment losses on loans and advances (Note 10)

(1,248,031)

(129,339)

Profit before income tax

11,211,532

12,845,897

Income tax expense (Note 25)

(2,115,966)

(2,306,467)

9,095,566

10,539,430

1.82

2.17

Interest and similar income (Note 20) Interest expense and similar charges (Note 20) Net interest income Other operating income (Note 21) Operating income Other operating expenses (Note 22)

Net profit for the year Earnings per share for profit attributable to the equity holders of the bank during the year (Note 26) (expressed in EC$ per share) - basic and diluted

statement of income

35

1st National Bank Annual Report 2008

Statement of Changes in Equity

For the Year Ended December 31, 2008 (expressed in Eastern Caribbean dollars)

2008 $

2007 $

Share capital (Note 18) At beginning of year Issued during the year

7,971,454 –

6,877,088 1,094,366

At end of year

7,971,454

7,971,454

Retained earnings At beginning of year Net profit for the year Dividends on ordinary shares (Note 27) Transfer to statutory reserve (Note 19) Transfer from revaluation reserve

30,421,308 9,095,566 (1,999,986) – 22,906

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

At end of year

37,539,794

30,421,308

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

7,971,454 –

6,877,088 1,094,366

At end of year

7,971,454

7,971,454

Revaluation reserve At beginning of year Transfer to retained earnings

2,285,636 (22,906)

2,308,541 (22,905)

At end of year

2,262,730

2,285,636

Revaluation reserve - Investment securities: available-for-sale At beginning of year (Decrease)/ increase in fair value

689,040 (195,279)

438,783 250,257

493,761

689,040

Total reserves

10,727,945

10,946,130

Equity, end of year

56,239,193

49,338,892

Reserves

At end of year

36

statement of changes in equity

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Statement of Cash Flows

For Ended December 31,2008 2008 Forthe theYear year ended 31 march (expressed in Eastern Caribbean dollars)

2008 $

2007 $

11,211,532

12,845,897

834,094 – 1,248,031 12,000 (50,810) (29,680,766) 10,762,836

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

(5,663,083)

(2,768,943)

(4,770,570) (6,625,331) (24,653,415) 310,337 32,010,267 (160,608)

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

Cash (used in)/generated from operations

(9,552,403)

2,004,459

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

28,268,360 (10,878,289) (2,874,199)

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

4,963,469

15,261,627

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

(2,380,738) (5,225,912) 50,810 (1,625,366) –

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

Net cash used in investing activities

(9,181,206)

(5,014,063)

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

– (1,962,483)

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

Net cash used in financing activities

(1,962,483)

(481,717)

Net (decrease)/increase in cash and cash equivalents

(6,180,220)

9,765,847

Cash and cash equivalents, beginning of year

21,033,567

11,267,720

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

14,853,347

21,033,567

Cash flows from operating activities Profit before income tax Adjustments for: Depreciation (Note 12) Gain on disposal of property, plant and equipment Impairment losses on loans and advances Retirement benefit obligations Dividend income Interest and similar income Interest expense and similar charges Cash flow before changes in operating assets and liabilities (Increase)/decrease in mandatory reserve deposits with Central Bank Increase in loans and advances to financial institutions Increase in loans and advances to customers Decrease/(increase) in other assets Increase in due to customers (Decrease)/increase in other liabilities

Net cash from operating activities

statement of cash flows

37

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 1 General information 1st National Bank St. Lucia Limited, (the Bank) was incorporated in Saint Lucia on December 1937 and continued under the Companies Act of 1996. In addition to compliance with the Companies Act 1996, the Bank is also subject to the provisions of the Banking Act of Saint Lucia No. 34 of 2006. The Bank commenced trading in January 1938 and provides retail banking services including the acceptance of deposits, granting of loans, the provision of foreign exchange services and commercial banking services.

The Bank has four branches and two bureaux de change. The registered office and principal place of business of the Bank is 21 Bridge Street, Castries, Saint Lucia.

2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation The financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards (IFRS). The financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings and available-for-sale financial assets.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Bank’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. (a) Interpretation to existing standard effective in 2008 • IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’, provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. This interpretation does not have any impact on the Bank’s financial statements, as the Bank has a pension deficit and is not subject to any minimum funding requirements. (b) Interpretations to existing standards effective in 2008 but not relevant The following interpretations to existing standards are mandatory for accounting periods beginning on or after 1 January, 2008 but they are not relevant to the Bank’s operations: • IFRIC 11, ‘IFRS 2 – Company and treasury share transactions’; and • IFRIC 12, ‘Service concession arrangements’.

38

notes to financial statements

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Notes to Financial Statements

December 31, 2008 For the year ended 31 march 2008 (expressed in Eastern Caribbean dollars)

2 Summary of significant accounting policies …continued (c) Standards and amendment to existing standard not yet effective and relevant to the Bank The following standards and amendment to existing standard have been published and are mandatory for accounting periods beginning on or after 1 January 2009 or later periods, but the Bank has not early adopted: • IAS 1 (Revised), ‘Presentation of financial statements’ (effective from 1 January 2009). The revised standard will prohibit the presentation of items of income and expenses (that is, ‘nonowner changes in equity’) in the statement of changes in equity, requiring ‘non-owner changes in equity’ to be presented separately from owner changes in equity. All non-owner changes in equity will be required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). Where entities restate or reclassify comparative information, they will be required to present a restated balance sheet as at the beginning comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period. The Bank will apply IAS 1 (Revised) from 1 January 2009.

• IAS 19 (Amendment), ‘Employee benefits’ (effective from 1 January 2009). The amendment clarifies that a plan amendment that results in a change in the extent to which benefit promises are affected by future salary increases is a curtailment, while an amendment that changes benefits attributable to past service gives rise to a negative past service cost if it results in a reduction in the present value of the defined benefit obligation.

- The definition of return on plan assets has been amended to state that plan administration costs are deducted in the calculation of return on plan assets only to the extent that such costs have been excluded from measurement of the defined benefit obligation.

- The distinction between short term and long term employee benefits will be based on whether benefits are due to be settled within or after 12 months of employee service being rendered.

- IAS 37, ‘Provisions, contingent liabilities and contingent assets’, requires contingent liabilities to be disclosed, not recognised. IAS 19 has been amended to be consistent.

The Bank will apply the IAS 19 (Amendment) from 1 January 2009.

• IAS 36 (Amendment), ‘Impairment of assets’ (effective from 1 January 2009). Where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculation should be made. The Bank will apply the IAS 36 (Amendment) and provide the required disclosure where applicable for impairment tests from 1 January 2009. (d) Standards, amendments and interpretations to existing standards that are not yet effective and not relevant to the Bank The following standards, amendments and interpretations to existing standards have been published and are mandatory for accounting periods beginning on or after 1 January 2009 or later periods but are not relevant for the Bank’s operations: • IAS 16 (Amendment), ‘Property, plant and equipment’ (and consequential amendment to IAS 7, ‘Statement of cash flows’) (effective from 1 January 2009); • IAS 20 (Amendment), ‘Accounting for government grants and disclosure of government assistance’ (effective from 1 January 2009);

notes to financial statements

39

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 2 Summary of significant accounting policies …continued (d) Standards, amendments and interpretations to existing standards that are not yet effective and not relevant to the Bank …continued •

IAS 23 (Amendment), ‘Borrowing costs’ (effective from 1 January 2009);

•

IAS 27 (Revised), ‘Consolidated and separate financial statements’ (effective from 1 July 2009);

•

IAS 27 (Amendment), ‘Consolidated and separate financial statements’ (effective from 1 January 2009);

•

IAS 28 (Amendment), ‘Investments in associates’ (and consequential amendments to IAS 32, ‘Financial Instruments: Presentation’ and IFRS 7, ‘Financial instruments: Disclosures’) (effective from 1 January 2009);

•

IAS 29 (Amendment), ‘Financial reporting in hyperinflationary economies’ (effective from 1 January 2009);

•

IAS 31 (Amendment), ‘Interests in joint ventures’ (and consequential amendments to IAS 32 and IFRS 7) (effective from 1 January 2009);

•

IAS 32 (Amendment), ‘Financial instruments: Presentation’, and IAS 1 (Amendment), ‘Presentation of financial statements’ – ‘Puttable financial instruments and obligations arising on liquidation’ (effective from 1 January 2009);

•

IAS 38 (Amendment), ‘Intangible assets’, (effective from 1 January 2009);

•

IAS 39(Amendment), ‘Financial instruments: Recognition and measurement’(effective from 1 January 2009);

•

IAS 40 (Amendment), ‘Investment property’ (and consequential amendments to IAS 16) (effective from 1 January 2009);

•

IAS 41 (Amendment), ‘Agriculture’ (effective from 1 January 2009);

•

IFRS 1 (Amendment) ‘First time adoption of IFRS’ and IAS 27 ‘Consolidated and separate financial statements’(effective from 1 January 2009);

•

IFRS 2 (Amendment), ‘Share-based payment’ (effective from 1 January 2009). The amended standard deals with vesting conditions and cancellations;

•

IFRS 3 (Revised), ‘Business combinations’ (effective from 1 July 2009);

•

IFRS 5 (Amendment), ‘Non-current assets held for sale and discontinued operations’ (and consequential amendment to IFRS 1, ‘First-time adoption’) (effective from 1 July 2009);

•

IFRIC 13, ‘Customer loyalty programmes’ (effective from 1 July 2008);

•

IFRIC 15, ‘Agreements for construction of real estates’ (effective from 1 January 2009); and

•

IFRIC 16, ‘Hedges of a net investment in a foreign operation’ (effective from 1 October 2008).

40

notes to financial statements

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Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

2 Summary of significant accounting policies …continued 2.2 Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition including: cash and nonrestricted balances with the Central Bank and deposits with other banks.

2.3 Financial assets The Bank classifies its financial assets in the following categories: loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluates this designation at every reporting date. (a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: (a) those that the bank intends to sell immediately or in the short term, which are classified as held for trading, and those that the bank upon initial recognition designates as at fair value through profit or loss; (b) those that the bank upon initial recognition designates as available for sale; or (c) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration. (b) Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank’s management has the positive intention and ability to hold to maturity. If the Bank were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available-for-sale. (c) Available-for-sale financial assets Available-for-sale financial assets are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.

Purchases and sales of held-to-maturity and available-for-sale are recognised on trade-date – the date on which the Bank commits to purchase or sell the asset. Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership.

Available-for-sale financial assets are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised in equity, until the financial asset is derecognised or impaired at which time the cumulative gain or loss previously recognised in equity should be recognised in profit or loss. However, interest calculated using the effective interest method is recognised in the statement of income. Dividends on available-for-sale equity instruments are recognised in the statement of income when the entity’s right to receive payment is established.

The fair values of quoted investments in active markets are based on current bid prices. If there is no active market for a financial asset (and for unlisted securities), the Bank establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, and other valuation techniques commonly used by market participants.

notes to financial statements

41

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 2 Summary of significant accounting policies …continued 2.4 Property, plant and equipment Land and buildings comprise mainly branches and offices. Land and buildings are shown at fair value, based on valuations by external independent valuers, less subsequent depreciation for buildings. Any accumulated depreciation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. All other assets are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of income during the financial period in which they are incurred.

Land is not depreciated. Depreciation is calculated using the straight-line method for buildings and the reducing balance method for all other property, plant and equipment to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows:

Buildings Furniture and fixtures Equipment Motor vehicles

2% 10% 15- 25% 20%

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use.

Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the statement of income.

2.5 Sale and repurchase agreements Securities purchased under agreements to resell (‘reverse repos’) are recorded as loans and advances to financial institutions or customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method.

2.6 Impairment of financial assets (a) Assets carried at amortised cost The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

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notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

2 Summary of significant accounting policies …continued 2.6 Impairment of financial assets …continued The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: • Delinquency in contractual payments of principal or interest; • Cash flow difficulties experienced by the borrower (for example, equity ratio, net income percentage of sales); • Breach of loan covenants or conditions; • Initiation of bankruptcy proceedings; • Deterioration of the borrower’s competitive position; and • Deterioration in the value of collateral.

The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss on financial asset has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statement of income. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the statement of income.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the statement of income. (b) Assets classified as available for sale The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in equity – is removed from equity and recognised in the statement of income. Impairment losses recognised in the statement of income on equity instruments are not reversed through the statement of income. If in subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the statement of income.

notes to financial statements

43

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 2 Summary of significant accounting policies …continued 2.6 Impairment of financial assets …continued (c) Renegotiated loans Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. In subsequent years, the asset is considered to be past due and disclosed only if renegotiated.

2.7 Impairment of other non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units).

2.8 Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

2.9 Guarantees and letters of credit Guarantees and letters of credit comprise undertakings by the Bank to pay bills of exchange drawn on customers. The Bank expects most guarantees and letters of credit to be settled simultaneously with the reimbursement from the customers. Guarantees and letters of credit are accounted for as off-balance sheet transactions and are disclosed in the contingent liabilities and commitments note.

2.10 Provisions Provisions are recognised when: the Bank has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.

44

notes to financial statements

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Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

2 Summary of significant accounting policies ‌continued 2.11 Employee benefits (a) Pension obligation The Bank operates a defined benefit plan for all employees. The assets of the plan are held separately. The pension plan is funded through payments from employees and the Bank, taking account of the recommendations of independent qualified actuaries. A defined benefit plan is a pension plan that defines an amount of pension that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government securities that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to income over the employees’ expected average remaining working lives. Past-service costs are recognised immediately in the statement of income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period. (b) Profit-sharing and bonus plans The Bank recognises a liability and an expense for bonuses and profit-sharing, based on a formula that takes into consideration the profit attributable to the Bank’s shareholders after certain adjustments. The Bank recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

2.12 Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. The principal temporary differences arise from depreciation of property, plant and equipment. If the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting or taxable profit or loss, it is not accounted for.

Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Income tax payable on profits, based on the applicable tax law is recognised as an expense in the period in which profits arise. The tax effects of income tax losses available for carry forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised.

notes to financial statements

45

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 2 Summary of significant accounting policies …continued 2.13 Share capital (a) Share issue costs Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds. (b) Dividends on ordinary shares Dividends on ordinary shares are recognised in equity in the period in which they are approved.

Dividends for the year declared after the balance sheet date are disclosed in the notes to the financial statements.

2.14 Interest income and expense Interest income and expense for all interest bearing financial instruments are recognised within “interest income” and “interest expense” in the statement of income using the effective interest method.

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

2.15 Fee and commission income Fees and commissions are generally recognised on an accrual basis when the service has been provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan. Performance linked fees or fee components are recognised when the performance criteria are fulfilled.

2.16 Dividend income Dividends are recognised in the statement of income when the Bank’s right to receive payment is established.

2.17 Leases (a) The Bank is the lessee Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of income on a straight-line basis over the period of the lease. (b) The Bank is the lessor When assets are leased out under an operating lease, the assets are included in the balance sheet based on the nature of the assets. Lease income is recognised over the term of the lease on a straight line basis.

46

notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

2 Summary of significant accounting policies …continued 2.18 Foreign currency translation (a) Functional and presentation currency Items in the financial statements are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The financial statements are presented in Eastern Caribbean dollars, which is the Bank’s functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of income.

2.19 Financial instruments Financial instruments carried on the balance sheet include cash resources, investment securities, loans and advances to customers, loans and advance to financial institutions, deposits with other banks, deposits from banks and due to customers. The particular recognition methods adopted are disclosed in the individual policy statement associated with each item.

2.20 Comparatives Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current year.

3 Financial risk management The Bank’s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks.

Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. The Bank’s aim is therefore to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Bank’s financial performance.

The Bank’s risk management policies are designed to identify and analyse these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice.

Risk management is carried out by the Finance Department under policies approved by the Board of Directors. Management identifies, evaluates and hedges financial risks in close cooperation with the Bank’s operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk and credit risk. In addition, internal audit is responsible for the independent review of risk management and the control environment.

The most important types of risk are credit risk, liquidity risk, market risk and other operational risk. Market risk includes currency risk, interest rate and other price risk.

notes to financial statements

47

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.1 Credit risk The Bank takes on exposure to credit risk, which is the risk that a counterparty will cause a financial loss for the Bank by failing to discharge an obligation. Significant changes in the economy, or in the health of a particular industry segment that represents a concentration in the Bank’s portfolio, could result in losses that are different from those provided for at the balance sheet date. Management therefore carefully manages its exposure to credit risk. Credit exposures arise principally in lending activities that lead to loans and advances, and investment activities that bring debt securities and other bills into the Bank’s asset portfolio. There is also credit risk in off-balance sheet financial instruments such as loan commitments. The credit risk management and control are centralised and reports to the Board of Directors.

3.1.1 Credit risk measurement (a) Loans and advances Eastern Caribbean Central Bank prudential guidelines are embedded in the Bank’s daily operational management. The operational measurements can be contrasted with impairment allowances required under IAS 39, which are based on losses that have been incurred at the balance sheet date (the ‘incurred loss model’).

The Bank assesses the probability of default of individual counterparties using the Eastern Caribbean Central Bank prudential guidelines. Clients of the Bank are segmented into five rating classes. The Bank’s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class. This means that, in principle, exposures migrate between classes as the assessment of their probability of default changes. The Bank regularly validates the performance of the rating and their predictive power with regard to default events.

Bank’s internal ratings scale Bank’s rating Description of the grade

1 Pass 2 Special Mention 3 Substandard 4 Doubtful 5 Loss (b) Debt securities and other bills For debt securities and other bills, external rating such as Fitch’s rating, Caricris or their equivalents are used by management for managing of the credit risk exposures.

3.1.2 Risk limit control and mitigation policies The Bank manages, limits and controls concentrations of credit risk wherever they are identified − in particular, to individual counterparties and groups, and to industries.

The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to the industry segments.

Such risks are monitored on a revolving basis and subject to an annual or more frequent review by the Board of Directors.

The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on- and off-balance sheet exposures, and daily delivery risk limits in relation to trading items. Actual exposures against limits are monitored daily.

Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate.

48

notes to financial statements

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Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

3 Financial risk management …continued 3.1.2 Risk limit control and mitigation policies …continued Some other specific control and mitigation measures are outlined below. (a) Collateral The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advances, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are: • • •

Mortgages over residential properties; Charges over business assets such as premises, inventory and accounts receivable; and Charges over financial instruments such as debt securities and equities.

Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured. In addition, in order to minimise the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances.

Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured. (b) Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans.

Documentary and commercial letters of credit – which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions – are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan.

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.

3.1.3 Impairment and provisioning policies The impairment provision shown in the balance sheet at year-end is derived from each of the five internal rating grades. The table below shows the percentage of the Bank’s on- and offbalance sheet items relating to loans and advances and the associated impairment provision for each of the Bank’s internal rating categories: 2008

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

49

2007

Loans and advances (%)

Impairment provision (%)

Loans and advances (%)

Impairment provision (%)

86.5% 2.3% 5.0% 3.8% 2.4%

26.1% 2.4% 20.4% 23.0% 28.1%

84.4% 2.9% 6.9% 3.5% 2.3%

0.8% 7.4% 14.5% 33.2% 44.1%

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.1.3 Impairment and provisioning policies…continued The internal rating tool assists management to determine whether objective evidence of impairment exists under IAS 39, based on the following criteria set out by the Bank: • • • • • •

Delinquency in contractual payments of principal or interest; Cash flow difficulties experienced by the borrower (eg equity ratio, net income percentage of sales); Breach of loan covenants or conditions; Initiation of bankruptcy proceedings; Deterioration of the borrower’s competitive position; and Deterioration in the value of collateral.

The Bank’s policy requires the review of individual financial assets that are above materiality thresholds at least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of the incurred loss at balance-sheet date on a case-by-case basis, and are applied to all individually significant accounts. The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account.

3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements Credit risk exposures relating to on-balance sheet assets are as follows:

Due from other banks Treasury bills Loans and advances to financial institutions Loans and advances to customers: − Overdraft − Demand loans − Promissory notes − Mortgages − Non-productive loans and overdrafts Investments securities: − available for sale − held to maturity Other assets Credit risk exposures relating to off-balance sheet items are as follows: Financial Guarantees Loan commitments and other credit related liabilities At December 31

Maximum exposure 2008 $

2007 $

5,088,351 17,910,470 38,642,361

12,583,177 15,477,411 32,171,428

11,454,873 101,076,271 7,868,260 107,003,795 21,067,028

9,412,925 97,625,826 9,937,527 91,436,388 15,167,087

9,431,682 22,171,742 1,839,745

5,999,227 19,276,037 2,387,386

3,707,216 25,371,125

3,692,334 26,241,705

372,632,919

341,408,458

The above table represents a worse case scenario of credit risk exposure to the Bank at December 31, 2008 and 2007, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the balance sheet.

As shown above, 67% of the total maximum exposure is derived from loans and advances to financial institutions and customers (2007 - 65%); 8% represents investments in debt securities (2007 - 7%).

50

notes to financial statements

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Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

3 Financial risk management …continued 3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements…continued Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loan and advances portfolio based on the following: • • • • •

89% of the loans and advances portfolio is categorised in the top two grades of the internal rating system (2007 - 87%); Mortgage loans which represent the largest percentage of the portfolio, followed by demand loans, are backed by collateral; 57% of the loans and advances portfolio are considered to be neither past due nor impaired (2007 - 55%); The Bank continues to grant loans and advances in accordance with its lending policies and guidelines; and 9% of the investments in debt securities and other bills have at least at A- credit rating. Many issuers in the region are not graded, consequently 59% of investments are not rated, compared to 91% last year.

3.1.5 Loans and advances Loans and advances are summarised as follows: 2008 $

2007 $

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

150,515,962 79,527,603 32,657,984

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

Gross

262,701,549

236,642,655

Less: allowance for impairment (Notes 9 and 10)

(14,231,322)

(13,062,902)

Net

248,470,227

223,579,753

38,642,361

32,171,428

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

The total impairment provision for loans and advances is $14,231,322 (2007 - $13,062,902). Further information of the impairment allowance for loans and advances to banks and to customers is provided in Notes 9 and 10.

notes to financial statements

51

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.1.5 Loans and advances…continued (a) Loans and advances neither past due or impaired The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the Bank.

December 31, 2008 Overdrafts $

Demand loans $

Promissory notes $

Mortgages $

Total Loans and advances to customers $

9,547,239 1,737,367 – – –

61,480,754 1,238,413 – – –

5,325,447 – – – –

70,038,928 1,147,814 – – –

146,392,368 4,123,594 – – –

11,284,606

62,719,167

5,325,447

71,186,742

150,515,962

Overdrafts $

Demand loans $

Promissory notes $

Mortgages $

Total Loans and advances to customers $

Grades 1. Pass 2. Special mention 3. Sub-standard 4. Doubtful 5. Loss

9,428,772 – – – –

55,195,936 445,979 9,231 – –

5,883,541 – 9,674 – –

56,897,479 2,168,803 – – –

127,405,728 2,614,782 18,905 – –

Total

9,428,772

55,651,146

5,893,215

59,066,282

130,039,415

Loans and advances to customers Grades 1. Pass 2. Special mention 3. Sub-standard 4. Doubtful 5. Loss Total December 31, 2007

Loans and advances to customers

Loans and advances to financial institutions Loans and advances to financial institutions were graded 1 (Pass) as at December 31, 2008 and December 31, 2007.

52

notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, ended 2008 31 march 2008 (expressed in Eastern Caribbean dollars)

3 Financial risk management ‌continued 3.1.5 Loans and advances ‌continued (b) Loans and advances past due but not impaired Loans and advances less than 90 days past due are not considered impaired, unless other information is available to indicate the contrary. Gross amount of loans and advances by class to customers net of unearned interest that were past due but not impaired were as follows: Demand loans $

Promissory notes $

Mortgages $

Total Loans and advances to customers $

20,424,112 8,850,958 2,675,937 8,097,336

1,107,753 458,878 317,023 731,009

18,557,205 3,197,194 3,834,521 11,275,677

40,089,070 12,507,030 6,827,481 20,104,022

Total

40,048,343

2,614,663

36,864,597

79,527,603

Fair value of collateral

64,595,029

6,948,529

79,223,069

150,766,627

December 31, 2007 Past due up to 30 days Past due 30-60 days Past due 60-90 days Past due over 90 days

21,809,908 8,721,723 2,159,243 6,540,057

2,326,224 466,351 391,788 836,937

16,117,653 7,886,470 1,667,381 6,512,136

40,253,785 17,074,544 4,218,412 13,889,130

Total

39,230,931

4,021,300

32,183,640

75,435,871

Fair value of collateral

71,557,750

10,400,735

64,099,375

146,057,860

December 31, 2008 Past due up to 30 days Past due 30-60 days Past due 60-90 days Past due over 90 days

Upon initial recognition of loans and advances, the fair value of collateral is based on valuation techniques commonly used for the corresponding assets. In subsequent periods, the fair value is updated by reference to market price or indexes of similar assets. There were no overdrafts past due but not impaired.

notes to financial statements

53

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.1.5 Loans and advances…continued (c) Loans and advances individually impaired The table below shows the gross amount of individually impaired loans and advances to customers by grades before taking into consideration the cash flows from collateral held.

2008 $

2007 $

Grades: 1. Pass 2. Special mention 3. Sub-standard 4. Doubtful 5. Loss

2,146,463 439,447 12,568,058 9,943,439 7,560,577

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

Total

32,657,984

31,167,369

Fair value of collateral

58,550,849

49,238,788

Individually impaired loans

(d) Loans and advances renegotiated Restructuring activities include extended payment arrangements, approved external management plans, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgment of local management, indicate that payment will most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans, in particular customer finance loans. There were no renegotiated loans that would otherwise be past due or impaired at December 31, 2008 and 2007.

3.1.6 Debt securities, treasury bills and other eligible bills The table below presents an analysis of debt securities, treasury bills and other eligible bills by rating agency designation at December 31, 2008, based on Fitch, Caricris or their equivalent: Investment securities

AA- to AA+ A- to A+ Lower than AUnrated Total

Treasury bills $

Available-for-sale $

Held-to-maturity $

Total $

– – 6,255,217 11,655,253

262,800 496,425 625,000 11,405,237

4,066,257 – 10,067,975 8,037,510

4,329,057 496,425 16,948,192 31,098,000

17,910,470

12,789,462

22,171,742

52,871,674

54

notes to financial statements

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Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

3 Financial risk management ‌continued 3.1.7 Repossessed collateral During 2008, the Bank obtained assets by taking possession of collateral held as security, as follows:

Nature of assets

Carrying amount $ 994,850

Vehicles

Repossessed vehicles are sold as soon as practicable with the proceeds used to reduce the outstanding indebtedness. Repossessed vehicles are classified in the balance sheet within other assets.

3.1.8 Concentration of risks of financial assets with credit risk exposure (a) Geographical sectors The Bank operates primarily in St. Lucia and the exposure to credit risk is concentrated in this area.

notes to financial statements

55

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 3 Financial risk management…continued 3.1.8 Concentration of risks of financial assets with credit risk exposure…continued (b) Industry sectors The following table breaks down the Bank’s main credit exposure at their carrying amounts, as categorised by the industry sectors of our counterparties.

Financial institutions $

Manufacturing $

Tourism $

Government $

Professional and other services $

Personal $

Other industries $

Total $

– 38,642,361

– –

– –

17,910,470 –

– –

– –

– –

17,910,470 38,642,361

– – – – –

684,607 2,866,251 5,146 538,530 157,445

47,095 1,702,885 2,145,327 251,033

– – – – –

3,407,227 16,174,781 87,074 7,764,041 2,858,178

2,884,097 44,351,020 6,732,523 83,642,381 16,117,067

4,543,587 37,672,417 1,084,181 13,966,986 13,017,670

11,566,613 102,767,354 7,908,924 108,057,265 32,401,393

7,656,695 8,609,583 799,538

– – –

– – –

– 13,458,992 –

– – –

– – –

5,132,767 103,167 1,040,207

12,789,462 22,171,742 1,839,745

As at December 31, 2008

55,708,177

4,251,979

4,146,340

31,369,462

30,291,301

153,727,088

76,560,982

356,055,329

As at December 31, 2007

47,999,113

2,168,094

3,258,082

25,655,305

26,259,907

139,086,556

72,153,001

316,580,058

Treasury bills Loans and advances to financial institutions Loans and advances to customers: - Overdraft - Demand loans - Promissory notes - Mortgages - Non-productive loans and overdrafts Investment securities: - available-for-sale - held-to-maturity Other assets

56

notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

3 Financial risk management …continued 3.2 Market risk The Bank takes on exposure to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks arise from open positions in interest rate and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates, credit spreads, foreign exchange rates and equity prices. The Bank exposures to market risks arise from its non-trading portfolios.

Non-trading portfolios primarily arise from the interest rate management of the Bank’s retail and commercial banking assets and liabilities. Non-trading portfolios also consist of equity risks arising from the Bank’s held-to-maturity and available-for-sale investments.

3.2.1 Price risk The Bank is exposed to equity securities price risk because of investments held by the Bank and classified on the balance sheet as available for sale. To manage its price risk arising from investments in equity securities, the Bank diversifies its portfolio.

At December 31, 2008 if equity securities prices had been 5% higher/lower with all variable held constant equity for the year would have been $46,875 higher/lower as a result of the increase/decrease in fair value of available for sale equity securities.

3.2.2 Foreign exchange risk The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total which are monitored daily. The Bank’s exposure to currency risk is minimal since most of its assets and liabilities in foreign currencies are held in United States dollars. The exchange rate of the Eastern Caribbean dollar (EC$) to the United States dollar (US$) has been formally pegged at EC$2.70 = US$1.00 since 1976. The following table summarises the Bank’s exposure to foreign currency exchange rate risk at December 31, 2008. Included in the table are the Bank’s financial instruments at carrying amount, categorised by currency.

notes to financial statements

57

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.2.2 Foreign exchange risk…continued Concentration of currency risk – on and off balance sheet financial instruments ECD

CAD

EURO

USD

GBP

TTD

BD

TOTAL

26,271,308 1,609,084 17,910,470 38,642,361 248,470,227

63,488 102,005 – – –

695,083 560,269 – – –

1,644,470 1,951,670 – – –

158,367 806,315 – – –

187,925 10,692 – – –

187,925 48,316 – – –

29,208,566 5,088,351 17,910,470 38,642,361 248,470,227

8,238,753 22,171,742 1,839,745

– – –

– – –

4,550,709

– – –

– – –

– – –

12,789,462 22,171,742 1,839,745

Total financial assets

365,153,690

165,493

1,255,352

8,146,849

964,682

198,617

236,241

376,120,924

Liabilities Due to customers Other liabilities

328,087,379 3,769,600

– –

2,516 –

1,314,693 –

– –

– –

– –

329,404,588 3,769,600

Total financial liabilities

331,856,979

–

2,516

1,314,693

–

–

–

333,174,188

Net on-balance sheet positions

33,296,711

165,493

1,252,836

6,832,156

964,682

198,617

236,241

42,946,736

Credit commitments

29,078,341

–

–

–

–

–

–

29,078,341

325,230,777 300,405,911

239,716 –

1,073,251 2,633

9,748,750 993,935

2,718,397 –

13,387 –

199,445 –

339,223,723 301,402,479

Net on-balance sheet positions

24,824,866

239,716

1,070,618

8,754,815

2,718,397

13,387

199,445

37,821,244

Credit commitments

29,934,039

–

–

–

–

–

–

29,934,039

As at December 31, 2008 Assets Cash and balances with Central Bank Due from other banks Treasury bills Loans and advances to financial institutions Loans and advances to customers Investment securities - available-for-sale - held-to-maturity Other assets

As at December 31, 2007 Total financial assets Total financial liabilities

58

notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

3 Financial risk management ‌continued 3.2.3 Interest rate risk Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but may reduce losses in the event that unexpected movements arise. The Board sets limits on the level of mismatch of interest rate repricing that may be undertaken.

notes to financial statements

59

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.2.3 Interest rate risk The table below summarises the Bank’s exposure to interest rate risks. It includes the Bank’s financial instruments at carrying amounts, categorized by the earlier of contractual repricing or maturity dates.

Up to 1 month $

1-3 months $

3-12 months $

1-5 years $

Over 5 years $

Non-interest bearing $

Total $

– 4,113,432 1,307,232 4,575,878 14,710,552

– – 13,706,971 25,931,650 1,142,268

– – – 8,134,833 7,666,349

– – – – 54,568,904

– – 2,896,267 – 170,382,154

29,208,566 974,919 – – –

29,208,566 5,088,351 17,910,470 38,642,361 248,470,227

9,431,682 579,274 –

– 2,003,068 –

– 11,468,474 –

– 5,072,844 –

– 3,048,082 –

3,357,780 – 1,839,745

12,789,462 22,171,742 1,839,745

34,718,050

42,783,957

27,269,656

59,641,748

176,326,503

35,381,010

376,120,924

Liabilities Due to customers Other liabilities

197,959,963 –

35,962,807 –

68,750,388 –

2,077,130 –

– –

24,654,300 3,769,600

329,404,588 3,769,600

Total financial liabilities

197,959,963

35,962,807

68,750,388

2,077,130

–

28,423,900

333,174,188

(163,241,913)

6,821,150

(41,480,732)

57,564,618

176,326,503

47,165,269 170,358,792

23,940,770 36,722,204

16,084,513 58,106,410

68,399,408 1,731,181

151,701,507 –

31,932,256 34,483,892

339,223,723 301,402,479

(123,193,523)

(12,781,434)

(42,021,897)

66,668,227

151,701,507

As at December 31, 2008 Assets Cash and balances with Central Bank Due from other banks Treasury bills Loans and advances to financial institutions Loans and advances to customers Investment securities: - available-for-sale - held-to-maturity Other assets Total financial assets

Total interest repricing gap As at December 31, 2007 Total financial assets Total financial liabilities Total interest repricing gap

60

notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

3 Financial risk management …continued 3.2.3 Interest rate risk…continued The Bank’s fair value interest rate risk arises from debt securities classified as available for sale. At December 31, 2008 if market interest rates had been 100 basis points higher/lower with all variables held constant, equity for the year would have been $64,479 lower/$126,552 higher as a result of the decrease/increase in fair value of available for sale debt securities.

Cash flow interest rate risk arises from loans and advances to customers at variable rates. At December 31, 2008 if variable interest rates had been 100 basis points higher/lower with all other variables held constant, post-tax profit for the year would have been $1,552,262 higher/lower, mainly as a result of higher/lower interest income on variable rate loans.

3.3 Liquidity risk Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay depositors and fulfill commitments to lend.

3.3.1 Liquidity risk management process The Bank’s liquidity is managed and monitored by the Finance Department. This includes: •

Daily to weekly monitoring to ensure that requirements can be met. This includes the replenishment of funds as they mature or are borrowed by customers. The Bank ensures that sufficient funds are held in the one to thirty day maturity bucket to satisfy liquidity requirements.

•

Maintaining a portfolio of marketable assets that can easily be liquidated as protection against any unforeseen liquidity problems. Additionally, the investment portfolio is diversified by currency, geography, provider, product and term.

•

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

•

Managing the concentration and profile of debt maturities.

The Bank is looking to formalize arrangements with indigenous Banks in the Eastern Caribbean, to fund any liquidity needs that may arise 3.3.2 Funding approach Sources of liquidity are regularly reviewed to maintain a wide diversification by currency, geography, provider, product and term.

notes to financial statements

61

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.3.3 Non-derivative cash flows The table below presents the cash flows payable by the Bank under non-derivative financial assets and liabilities by remaining contractual maturities at the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows, whereas the Bank manages the inherent liquidity risk based on expected undiscounted cash inflows.

Up to1 month $

1-3 months $

3-12 months $

1-5 years $

Total $

Liabilities Due to customers Other liabilities

222,635,987 3,769,600

36,206,105 –

70,534,136 –

2,293,200 –

331,669,428 3,769,600

Total liabilities (Contractual maturity dates)

226,405,587

36,206,105

70,534,136

2,293,200

335,439,028

Liabilities Due to customers Other liabilities

200,949,979 3,892,705

36,722,204 –

58,106,410 –

1,843,587 –

297,622,180 3,892,705

Total liabilities (Contractual maturity dates)

204,842,684

36,722,204

58,106,410

1,843,587

301,514,885

As at December 31, 2008

As at December 31, 2007

Assets available to meet all of the liabilities and to cover outstanding loan commitments include cash, central bank balances, items in the course of collection and treasury and other eligible bills; loans and advances to financial institutions; and loans and advances to customers. In the normal course of business, a proportion of customer loans contractually repayable within one year will be extended. The Bank would also be able to meet unexpected net cash outflows by selling securities and accessing additional funding sources.

62

notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

3 Financial risk management …continued 3.3.4 Off-balance sheet items (a) Loan commitments The dates of the contractual amounts of the Bank’s off-balance sheet financial instruments that commit it to extend credit to customers and other facilities (Note 30), are summarised in the table below. (b) Financial guarantees and other financial facilities Financial guarantees (Note 30), are also included below based on the earliest contractual maturity date.

As at December 31, 2008 Loan commitments Guarantees, acceptances and other financial facilities Total As at December 31, 2007 Loan commitments Guarantees, acceptances and other financial facilities Total

1 year $

1-5 years $

Over 5 years $

Total $

15,965,251

9,400,678

5,196

25,371,125

3,707,216

–

–

3,707,216

19,672,467

9,400,678

5,196

29,078,341

24,551,521

1,690,184

–

26,241,705

3,692,334

–

–

3,692,334

28,243,855

1,690,184

–

29,934,039

3.4 Fair values of financial assets and liabilities Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable willing parties who are under no compulsion to act and is best evidenced by a quoted market value, if one exists. The following methods and assumptions were used to estimate the fair value of financial instruments.

The fair values of cash resources, other assets and liabilities, cheques and other items in transit and due to other banks are assumed to approximate their carrying values due to their short term nature. The fair value of off balance sheet commitments are also assumed to approximate the amounts disclosed in Note 30 due to their short term nature. (a) Loans and advances to customers Loans and advances are net of provisions for impairment. The estimated fair values of loans and advances represent the discounted amount of estimated future cash flow expected to be received. Expected cash flows are discounted at current market rate to determine fair value. (b) Investment securities Investment securities include only interest bearing assets held to maturity; assets classified as available for sale are measured at fair value. The fair value for held-to-maturity assets is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit maturity and yield characteristics. notes to financial statements

63

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 3 Financial risk management …continued 3.4 Fair values of financial assets and liabilities…continued (c) Due to customers The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand.

Deposits payable on a fixed date are at rates, which reflect market conditions and are assumed to have fair values which approximate carrying values.

The table below summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s balance sheet at their fair value.

Carrying value

Fair value

2008 $

2007 $

2008 $

2007 $

38,642,361 248,470,227 11,454,873 101,076,271 7,868,260 107,003,795 21,067,028

32,171,428 223,579,753 9,412,925 97,625,826 9,937,527 91,436,388 15,167,087

38,642,361 250,853,268 11,454,873 104,741,555 8,445,030 107,215,744 18,996,066

32,171,428 232,843,067 9,412,925 102,878,852 10,595,064 95,168,647 14,787,579

22,171,742

19,276,037

21,863,698

18,170,791

329,404,588 120,722,596 173,451,589 35,230,403

297,509,774 107,016,083 158,846,641 31,647,050

329,404,588 120,722,596 173,451,589 35,230,403

297,509,774 107,016,083 158,846,641 31,647,050

Financial assets Loans and advances to financial institutions Loans and advances to customers: − Overdraft − Demand loans − Promissory notes − Mortgages − Non-productive loans and overdrafts Investment securities − Held to maturity Financial liabilities Due to customers: − Time deposits − Savings accounts − Demand accounts

3.5 Capital management The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of balance sheets, are: • To comply with the capital requirements set by the Eastern Caribbean Central Bank; • To safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and • To maintain a strong capital base to support the development of its business.

Capital adequacy and the use of regulatory capital are monitored daily by the Bank’s management, employing techniques based on the guidelines developed by the East Caribbean Central Bank (‘the Authority’) for supervisory purposes. The required information is filed with the Authority on a quarterly basis.

The Authority requires each bank or banking group to: (a) hold the minimum level of the regulatory capital of $5,000,000 and (b) maintain a ratio of total regulatory capital to the riskweighted asset (the ‘Basel ratio’) at or above the internationally agreed minimum of 8%.

64

notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

3 Financial risk management …continued 3.5 Capital management…continued The Bank’s regulatory capital as managed by management is divided into two tiers: • Tier 1 capital: share capital, retained earnings and reserves created by appropriations of retained earnings.

• Tier 2 capital: qualifying subordinated loan capital, collective impairment allowances and unrealised gains arising on the fair valuation of equity instruments held as available for sale.

The risk-weighted assets are measured by means of a hierarchy of five risk weights classified according to the nature of − and reflecting an estimate of credit, market and other risks associated with − each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for off-balance sheet exposure, with some adjustments to reflect the more contingent nature of the potential losses.

The table below summarises the composition of regulatory capital and the ratios of the Bank for the years ended December 31, 2008 and 2007. During those two years, the Bank complied with all of the externally imposed capital requirements to which they are subject.

Tier 1 capital Share capital Statutory reserve Retained earnings

2008 $

2007 $

7,971,454 7,971,454 37,539,794

7,971,454 7,971,454 30,255,220

Total qualifying Tier 1 capital

53,482,702

46,198,128

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

493,761 2,262,730

689,040 2,285,636

Total qualifying Tier 2 capital

2,756,491

2,974,676

56,239,193

49,172,804

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

279,562,292 5,815,668

213,921,000 5,987,000

Total risk-weighted assets

285,377,960

219,908,000

19%

21%

Total regulatory capital

Basel ratio

notes to financial statements

65

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 4 Critical accounting estimates, and judgements in applying accounting policies The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) Impairment losses on loans and advances The Bank reviews its loan portfolio to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the statement of income, the Bank makes judgement as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extent that the net present value of estimated cash flows differs by +/-5%, the provision would be estimated $618,745 lower or $642,842 higher. (b) Impairment of available-for-sale equity investments The Bank determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgement. In making this judgment, the Bank evaluates among other factors, when there is evidence of deterioration in the financial health of the investee industry and sector performance, changes in technology and operational and financing cash flows. There were no declines in fair value below cost considered significant or prolonged as at December 31, 2008. (c) Held-to-maturity investments The Bank follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgement. In making this judgement, the Bank evaluates its intention and ability to hold such investments to maturity. If the Bank fails to keep these investments to maturity other than for the specific circumstances – for example, selling an insignificant amount close to maturity – it will reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value not amortised cost. If the entire held-to-maturity investments are tainted, the fair value would decrease by $308,044 with a corresponding entry in the fair value reserve in equity.

66

notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

5 Cash and balances with Central Bank

2008 $

2007 $

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

7,991,839 1,773,157

8,081,378 369,012

Included in cash and cash equivalents (Note 28)

9,764,996

8,450,390

19,443,570

14,673,000

29,208,566

23,123,390

Mandatory reserve deposits with Central Bank

Pursuant to Section 17 of the Banking Act of St. Lucia No.34 of 2006, the Bank is required to maintain in cash and deposits with the Central Bank reserve balances in relation to the deposit liabilities of the institution.

Mandatory reserve deposits are not available for use in the Bank’s day-to-day operations. The balances with the Central Bank are non-interest bearing.

6 Due from other banks

2008 $

2007 $

Items in the course of collection from other banks Placements with other banks

566,838 4,521,513

1,632,832 10,950,345

Included in cash and cash equivalents (Note 28)

5,088,351

12,583,177

The weighted average effective interest rate in respect of interest bearing deposits at December 31, 2008 was 1.47% (2007 – 2.49%).

7 Treasury bills Treasury bills

2008 $

2007 $

17,910,470

15,477,411

Treasury bills are debt securities issued by the Government of Saint Lucia, Saint Vincent, Grenada and Antigua. The weighted average effective interest rate of bills in 2008 was 6.15% (2007 – 6.10%). All treasury bills have fixed interest rates.

notes to financial statements

67

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 8 Loans and advances to financial institutions

Reverse repos

2008 $

2007 $

38,642,361

32,171,428

Reverse repos are securities purchased under agreements to resell. The weighted average effective interest rate of the reverse repos in 2008 was 5.78% (2007 – 5.75%).

Allowance account for losses on loans and advances to financial institutions as at December 31, 2008 and 2007 was nil.

9 Loans and advances to customers

2008 $

2007 $

11,566,613 102,767,354 7,908,924 108,057,265 32,401,393

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

262,701,549

236,642,655

(14,231,322)

(13,062,902)

248,470,227

223,579,753

Current Non-current

23,519,169 224,951,058

18,672,256 204,907,497

Total

248,470,227

223,579,753

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

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

Loans and advances with fixed rates are $40,310,317 (2007 - $38,009,260) and those with variable rates are $222,391,232 (2007 - $198,633,395).

The weighted average effective interest rate on productive loans stated at amortised cost at December 31, 2008 was 9.8% (2007 - 10.14%) and productive overdraft stated at amortised cost was 12.25% (2007 - 12.37%).

68

notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars)

10 Provision for impairment of loans and advances Reconciliation of allowance account for losses on loans and advances by class is as follows: Overdraft $

Demand loans $

Promissory notes $

Mortgage $

Non-productive loans $

Total $

Balance at January 1, 2008 Provision for loan impairment Loans written off during the year

15,847 102,551 (6,658)

124,163 1,584,466 (17,546)

16,644 45,582 (21,562)

18,245 1,069,070 (33,845)

12,888,003 (1,553,638) –

13,062,902 1,248,031 (79,611)

At December 31, 2008

111,740

1,691,083

40,664

1,053,470

11,334,365

14,231,322

Balance at January 1, 2007 Provision for loan impairment Loans written off during the year Amounts recovered during the year

15,847 – – –

149,622 – (25,459) –

24,386 – (7,742) –

21,050 – (2,805) –

12,722,658 129,339 – 36,006

12,933,563 129,339 (36,006) 36,006

At December 31, 2007

15,847

124,163

16,644

18,245

12,888,003

13,062,902

11 Investment securities

2008 $

2007 $

912,500 2,445,280

2,180,634 2,445,280

5,004,192 4,427,490

5,013,537 985,690

Total securities: available-for-sale

12,789,462

10,625,141

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

10,078,086 12,093,656

10,093,348 9,182,689

Total securities: held-to-maturity

22,171,742

19,276,037

Current Non-current

23,482,498 8,120,926

10,081,846 15,193,418

Total

31,603,424

25,275,264

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

notes to financial statements

69

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 11 Investment securities‌continued All debt securities have fixed interest rates.

The weighted average effective interest rate on securities held-to-maturity stated at amortised cost at December 31, 2008 was 6.91% (2007 - 6.55%).

The movement in available-for-sale and held-to-maturity financial asset during the year is as follows: Available for sale $

Held to maturity $

At January 1, 2008 Additions Disposals (sale and redemption) Losses from changes in fair value

10,625,141 7,490,432 (5,130,832) (195,279)

19,276,037 37,546,945 (34,651,240) –

At December 31, 2008

12,789,462

22,171,742

At January 1, 2007 Additions Disposals (sale and redemption) Gains from changes in fair value

6,082,515 10,296,152 (6,003,783) 250,257

29,379,393 11,677,146 (21,780,502) –

At December 31, 2007

10,625,141

19,276,037

70

notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, ended 2008 31 march 2008 (expressed in Eastern Caribbean dollars) 12 Property, plant and equipment

Land and Building $

Furniture and Fixtures $

Equipment $

Motor Vehicles $

Total $

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

1,203,602 (800,252)

7,910,375 (5,867,663)

186,920 (34,840)

17,145,252 (8,433,806)

6,113,304

403,350

2,042,712

152,080

8,711,446

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

6,113,304 2,939,356 (12,500) (151,128)

403,350 44,931 – (42,590)

2,042,712 714,534 (516) (489,933)

152,080 – – (30,417)

8,711,446 3,698,821 (13,016) (714,068)

Closing net book amount

8,889,032

405,691

2,266,797

121,663

11,683,183

10,771,211 (1,882,179)

1,248,533 (842,842)

8,624,359 (6,357,562)

186,920 (65,257)

20,831,023 (9,147,840)

8,889,032

405,691

2,266,797

121,663

11,683,183

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

8,889,032 24,510 (156,244)

405,691 40,258 (43,363)

2,266,797 1,560,598 (610,155)

121,663 – (24,332)

11,683,183 1,625,366 (834,094)

Closing net book amount

8,757,298

402,586

3,217,240

97,331

12,474,455

10,795,721 (2,038,423)

1,288,791 (886,205)

10,184,957 (6,967,717)

186,920 (89,589)

22,456,389 (9,981,934)

8,757,298

402,586

3,217,240

97,331

12,474,455

December 31, 2006 Cost or valuation Accumulated depreciation Net book amount Year ended December 31, 2007

At December 31, 2007 Cost or valuation Accumulated depreciation Net book amount Year ended December 31, 2008

At December 31, 2008 Cost or valuation Accumulated depreciation Net book amount

In 2003, land and buildings were revalued by an independent valuer based on open market value. The valuation indicated that the market value was below the carrying amount of the respective assets in the books of the Bank. As a result, the carrying amounts were reduced by $309,290, with a corresponding reduction in the revaluation reserves in equity. notes to financial statements

71

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 12 Property, plant and equipment ‌continued The historical cost of land and buildings are:

Cost Accumulated depreciation based on historical cost Depreciated historical cost

2008 $

2007 $

8,044,398 (1,608,309)

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

6,436,089

6,512,268

2008 $

2007 $

1,839,745 156,800 350,483

2,387,386 113,266 276,719

2,347,028

2,777,371

2008 $

2007 $

120,722,596 173,451,589 35,230,403

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

329,404,588

297,509,774

13 Other assets

Accounts receivable Inventories of stationery and supplies Prepayments

14 Due to customers

Time deposits Savings accounts Demand amounts

All deposits carry fixed interest rates.

The weighted average effective interest rate of customers’ deposits at December 31, 2008 was 3.56% (2007 - 3.58%).

72

notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars) 15 Other liabilities

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

2008 $

2007 $

1,242,654 2,199,478 327,468

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

3,769,600

3,892,705

16 Retirement benefit obligations Pension benefits The amount recognised in the balance sheet at December 31, 2008 is determined as follows: 2008 $

2007 $

2,378,000 (2,613,000)

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

Unrecognised actuarial loss

(235,000) 974,000

283,000 444,000

Liability in the balance sheet

739,000

727,000

2008 $

2007 $

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

2,536,000 139,000 152,000 36,000 (468,000) (17,000)

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

At end of year

2,378,000

2,536,000

Present value of funded obligations Fair value of plan assets

The movement in defined benefit obligations is as follows:

notes to financial statements

73

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 16 Retirement benefit obligations…continued The movement in fair value of plan assets for the year is as follows:

Movement in the liability recognised in the balance sheet:

2008 $

2007 $

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

2,253,000 139,000 75,000 127,000 36,000 (17,000)

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

At end of year

2,613,000

2,253,000

At beginning of year Pension expense Contributions paid At end of year

2008 $

2007 $

727,000 139,000 (127,000)

729,000 131,000 (133,000)

739,000

727,000

The principal actuarial assumptions used were as follows: The amounts recognised in the statement of income are as follows:

Current service cost Interest cost Net actuarial gains recognised in the year Expected return on plan assets Total included in staff costs (Note 24)

2008 $

2007 $

139,000 152,000 (13,000) (139,000)

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

139,000

131,000

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

2008 %

2007 %

7 7 5.5 –

6 6 5.5 –

The actual return on plan assets was $214,000 (2007 - $113,000).

74

notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008

(expressed in Eastern Caribbean dollars) 16 Retirement benefit obligations…continued Plan assets allocation is as follows:

Debt securities Others

2008 %

2007 %

86 14

75 25

100

100

The expected rate of return on plan assets set by reference to estimated long-term returns on the plan’s strategic asset allocation. Allowance is made for some performance from the plan’s portfolio.

The Bank’s expected contributions for the year 2009 is estimated at $149,000.

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

Defined benefit obligation Fair value of plan assets (Surplus)/deficit Experience adjustment on plan liabilities Experience adjustment on plan assets

17 Deferred income tax

At beginning of year Statement of income charge/(recovery) for the year (Note 25) Deferred tax asset at end of year

The deferred tax asset comprises of the following temporary differences:

Accelerated capital allowances notes to financial statements

75

2008 $

2007 $

2,378,000 (2,613,000)

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

(235,000)

283,000

(43,000) 75,000

29,000 (11,000)

2008 $

2007 $

(165,691) 134,845

272,553 (438,244)

(30,846)

(165,691)

2008 $

2007 $

(102,820)

(552,304)

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 18 Share capital No. of Shares

2008 $

No. of Shares

2007 $

4,999,966 –

7,971,454 –

4,635,177 364,789

6,877,088 1,094,366

4,999,966

7,971,454

4,999,966

7,971,454

Authorized: 5,000,000 ordinary shares Issued and fully paid: At beginning of year Issued during the year At end of year

19 Statutory reserve Pursuant to Section 14(1) of the Banking Act of St. Lucia No. 34 of 2006, the Bank shall, out of its net profits of each year transfer to that reserve a sum equal to not less than twenty percent of such profits whenever the amount of the fund is less than one hundred percent of the paid-up capital of the Bank.

20 Net interest income

Interest and similar income Loans and advances Deposits with banks Investment securities

Interest expense and similar charges Time deposits Savings deposits Demand deposits

Net interest income

2008 $

2007 $

24,427,048 75,398 5,178,320

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

29,680,766

25,403,401

5,229,080 5,487,550 46,206

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

10,762,836

9,045,978

18,917,930

16,357,423

76

notes to financial statements

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars) 21 Other operating income

2008 $

2007 $

1,747,447 1,531,602 306,491 420,000 50,810

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

4,056,350

5,645,936

2008 $

2007 $

5,220,735 4,245,162 834,094 214,726 –

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

10,514,717

9,028,123

2008 $

2007 $

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

1,101,378 634,408 546,506 438,276 348,847 291,304 261,589 192,143 138,712 137,484 120,000 18,890 15,625

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

Total

4,245,162

3,507,517

Foreign exchange Commission income Fees income Rental income Dividend income

22 Other operating expenses

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

23 Administrative expenses

notes to financial statements

77

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 24 Staff costs

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

2008 $

2007 $

3,774,844 511,717 637,465 157,709 139,000

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

5,220,735

4,637,472

The average number of employees during the year was 94 (2007 - 90).

25 Income tax expense Current Tax under accrued in prior years Deferred (Note 17)

2008 $

2007 $

1,861,115 120,006 134,845

2,744,711 – (438,244)

2,115,966

2,306,467

Tax on the Bank’s income before income tax differs from the theoretical amount that would arise using the statutory tax rate of 30% (2007 - 30%) as follows: 2008 $

2007 $

Profit before income tax

11,211,532

12,845,897

Tax calculated at the statutory tax rate of 30% (2007 - 30%) Tax effect of exempt income Tax effect of expenses not deductible for tax purposes Tax under accrued in prior year Tax effect of timing differences in existing buildings

3,363,460 (1,411,583) 44,083 120,006 –

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

2,115,966

2,306,467

26 Earnings per share Basic and diluted The calculation of basic and diluted earnings per share is based on the net profit attributable to shareholders of $9,095,566 (2007 - $10,539,430) divided by the weighted average number of shares in issue ranking for dividend during the year of 4,999,966 (2007 - 4,852,385). notes to financial statements

78

Involved, Interested, Invested, In You!

Notes to Financial Statements

For December the year 31, 2008 ended 31 march 2008 (expressed in Eastern Caribbean dollars) 27 Dividends

In the financial statements for the year ended December 31, 2008, $1,999,986 was appropriated from retained earnings relating to the 2007 dividend. At a meeting on March 24, 2009, the Board of Directors declared a dividend of $0.40 per share in respect of 2008 amounting to a total of $1,999,986. This dividend will be accounted for in equity as an appropriation of retained earnings in the year ended December 31, 2009.

28 Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents comprise the following balances with less than 3 months maturity:

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

2008 $

2007 $

9,764,996 5,088,351

8,450,390 12,583,177

14,853,347

21,033,567

29 Related party transactions Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. A number of banking transactions are entered into with related parties in the normal course of business. These transactions were carried out on commercial terms and conditions, at market rates.

The volume of related-party transactions, outstanding balances at the year-end and related expenses and income for the year are as follows: Loan and advances to Directors and other key management personnel 2008 $

2007 $

Loans outstanding at beginning of year Net loans issued for the year

3,112,842 (120,513)

3,242,979 (130,137)

Loans outstanding at end of year

2,992,329

3,112,842

237,312

241,484

Interest income earned

notes to financial statements

79

1st National Bank Annual Report 2008

Notes to Financial Statements December 31, 2008

(expressed in Eastern Caribbean dollars) 29 Related party transactions…continued Deposits from Directors and other key management personnel

Deposits at beginning of year Net deposits received during the year Deposits outstanding at end of year Interest expense on deposits

2008 $

2007 $

920,046 (210,068)

1,085,938 (165,892)

709,978

920,046

23,201

31,882

2008 $

2007 $

832,036 64,885

791,664 140,800

896,921

932,464

Key management compensation and Directors’ fees

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

30 Contingent liabilities and commitments (a) Loans commitment, guarantee and other financial facilities At December 31, 2008, the bank had the contractual amounts of the Bank’s off-balance sheet financial instruments that commit it to extend credit to customers, guarantee and other facilities as follow:

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

2008 $

2007 $

25,371,125 3,707,216 – –

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

29,078,341

29,934,039

80

notes to financial statements

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1ST NATIONAL BANK ANNUAL REPORT 2008

1st National Bank St. Lucia Limited P.0.Box 168 #21 Bridge Street Castries St. Lucia Tel: +758 455 7000 Fax: +758 453 1630 Email: manager@1stnationalbankslu.com Website: www.1stnationalbankonline.com

1ST NATIONAL BANK ANNUAL REPORT 2008

1ST NATIONAL BANK ANNUAL REPORT 2008