1st National Bank Annual report 2010

DELIVERING EXCELLENCE | 1st National Bank Annual Report 2010 | 1

Excellence...a word many use frequently, they aspire to it, promise it and even claim to achieve it when there is no measurement of it. For your Bank, excellence is a tangible target to be delivered. This annual report shares with all, how excellence is measured and delivered. Delivered through superior service, unique innovation and visionary guidance...a vision not only of the destination but of the path. We celebrate the delivery of excellence, not to self-inflate but to remind all that the indigenous nature of this institution, far from being an encumbrance to excellence, is part and parcel of the path that leads us beyond profit targets. Indeed, we deliver excellence, for you.


DELIVERING EXCELLENCE

4 | 1st National Bank Annual Report 2010 | DELIVERING EXCELLENCE

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.

CORE VALUESIntegrIty ProfessIonalIsm ConfIdentIalIty

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.


TABLE OF CONTENTS


Notice is hereby given that the 73rd 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 Tuesday, 24th May 2011 at 5:00 p.m.

AGENDA

1. Tabling of Proxies2. ToconfirmtheMinutesofthe72ndAnnualMeetingofShareholdersof29thApril,20103. Matters arising out of the Minutes4. To consider and adopt the 2010 Report of the Board of Directors5. To consider and adopt the Auditor’s Report to the Shareholders6. To consider and adopt the Audited Financial Statements for the year ended 31st December, 20107. To sanction a dividend of $0.40 cents per share as recommended by the Board of Directors8. To elect four Directors.

(i) the directors retiring by rotation and who are eligible for re-election are:-

• Mrs.BrendaFloissac-Fleming • Mr.JohnsonCenac • Mr.TedburtTheobalds

(ii) TofillthevacancyoccasionedbythedeathofMr.LionelJames.

Note• NominationsmaybemadeeitherinwritingorontheprescribedformsandmustreachtheBank’sregistered officeatleastfive(5)daysbeforethedayofholdingthemeeting.

NOTE

AShareholderentitledtoattendthemeetingandvotemayappointaproxytovoteinhis/herplace.Apersonappointedbyproxyneednotbeashareholder.Theinstrumentappointingaproxyshallbeinwritingunderthehandoftheappointerorofhis/herattorneydulyauthorizedinwriting,orifsuchappointerisacorporation,eitherunderitscommonsealorunderthehandofanofficerorauthoritysoauthorized.TheinstrumentappointingaproxyandthepowerofattorneyorotherauthorityifanyunderwhichitissignedoranotariallycertifiedcopyofthatpowerofauthorityshallbedepositedattheregisteredofficeofTHECOMPANYnotlessthanfortyeighthoursbeforethetimeforholdingthemeetingatwhichthepersonnamedintheinstrumentproposestovoteandindefaulttheinstrumentofproxyshallnotbetreatedasvalid.

NOTICEisalsoherebygiventhattheShareTransferBookoftheBankwillbeclosedfrom14th May, 2011 to 24th May, 2011bothdatesinclusive.

BY ORDER OF THE BOARDBerylCarasco-AlleyneCorporateSecretary

NOTICE OF MEETING

DELIVERING EXCELLENCE | 1st National Bank Annual Report 2010 | 7DELIVERING EXCELLENCE | 1st National Bank Annual Report 2010 | 7

NOMINATION OF CANDIDATE FOR ELECTION AS A DIRECTOR OF 1ST NATIONAL BANK ST. LUCIA LIMITED

Note

Every director shall be the holder in his or her own right of at least one hundred unencumbered shares in the capital of THE COMPANY.

Noone(otherthanaretiringdirector)shallbeeligibletobeadirectorunlessnoticeinwritingthatheorsheisacandidateforsuchofficeshallhavebeengiventoTHECOMPANYbytwoothershareholdersofTHECOMPANYatleastfivedaysbeforethedayofholdingthemeetingatwhichtheelectionistotakeplace.

We, the undersigned Shareholders of the above Bank nominate ……………………................………………………………of ………………..........

……………………………………………………… as a candidate for election as a Director of the Bank at the Annual Meeting of Shareholders scheduled for ………………………………………………

Signed:………………………………….. Signed…………………………………..

………………………………………….. …………………………………………. Print Name Print Name

Date:…………………………………….. Date:…………………………………….

Please refer overleaf to the Guidelines on minimum requirements fordeterminingfitnessforDirectorship.


GUIDELINES ON MINIMUM REQUIREMENTS FOR DETERMINING FITNESS FOR DIRECTORSHIP (AsstatedinSection26oftheBankingAct.)

EverypersonwhoislikelytobeadirectoroftheBank(theperson)mustbeafitandproperperson.Ingeneraldetermination of this status, regard shall be had to the following:-

(a) theperson’sprobity,competenceandsoundnessofjudgementforfulfillingtheresponsibilityofaDirector;

(b) thediligencewithwhichthatpersonislikelytofulfilltheresponsibilitiesoftheposition;and

(c) whethertheinterestsofdepositorsorpotentialdepositorsoftheBankarelikelytobe,inanyway,threatened by the person.

In addition to the general provisions above, regard must be had to the previous conduct and activities in business or financialmattersoftheperson,andinparticular,toanyevidencethatthepersonnominatedasacandidate:-

(a) hascommittedanoffenceinvolvingfraudandotherdishonestyorviolence;

(b) hascontravenedanyprovisionmadebyorunderanenactmentdesignedforprotectingmembersofthepublicagainstfinanciallossduetodishonesty,incompetenceormalpracticebypersonsconcernedintheprovisionofbanking,insurance,investmentorotherfinancialservicesorthemanagementofcompaniesoragainstfinanciallossduetotheconductofadischargedorun-dischargedbankrupt;

(c) isnotcurrentinhis/herfinancialcommitmentsandotherobligationstotheBankandotherfinancialinstitutions;

(d) isnotamemberofeithertheBoard,ManagementorStaffofinstitutionsinvolvedinbusinessofafinancialnatureincludingbankingbusiness;


APPOINTMENT OF PROXY

The instrument appointing a proxy shall be in writing under the hand of the appointer, or of his or her attorney duly authorised in writing, or if such appointer be a corporation either under its common seal or under the hand of an officerorattorneysoauthorised.AproxyshallhavethesamerightsastheshareholderappointinghimorherasdefinedinSections138and145ofTHECOMPANIESACT(1996).Aproxyisvalidonlyatthemeetinginrespectofwhichitisgivenoranyadjournmentthereof.

The instrument appointing a proxy and the power of attorney or other authority if any under which it is signed or anotariallycertifiedcopyofthatpowerofauthorityshallbedepositedattheregisteredofficeofTHECOMPANYnot 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.

A person appointed by proxy need not be a shareholder.

I ………………………………………………. of …………………………………………….

being a shareholder of the above company, hereby appoint…………………………………………..

of……………..……………………………….orfailinghim/her……………………………………of

……………………………… my proxy to vote for me and on my behalf at the meeting of shareholders of the

above company to be held on …………………............... the …………. day of ………………………, 20…… and at

anyadjournmentoradjournmentsthereof.

Signed this …………………. day of ………………………………, 20……

Signed: …………………………

…………………………………. Print Name



CORPORATE DATAHEAD OFFICE P.O.Box168 Reduit gros Islet St.Lucia,WestIndies Tel: (758)4557000Fax: (758)4531630

CastriesBranch21BridgeStreet P.O.Box168 Castries,St.Lucia WestIndies Tel: (758)4557000 Fax:(758)4531630

RodneyBaySubBranch J.Q’sMall RodneyBay,GrosIslet Tel: (758)4528882/3 Fax: (758)4528884

VieuxFortSubBranch P.O.Box342 CommercialStreet VieuxFort Tel: (758)4546213 Fax: (758)4546137 MarigotBaySubBranchmarina VillageMarigotBay,CastriesTel:7584583744Fax:7584583638 BureaudeChange GeorgeF.L.CharlesAirportVigie,CastriesTel: (758)4531683Fax: (758)4518482

BureaudeChange SLASPAFerryTerminalFauxaChaux,CastriesTel: (758)4530041Fax: (758)4590730

SWIFT: LUOBLCLCEmail:[email protected]:www.1stnationalbankonline.com

SOLICITORS Floissac,Fleming&Associates

AUDITORPricewaterhouseCoopers REGULATOREasternCaribbeanCentralBank

AFFILIATIONSCaribbeanAssociationofIndigenousBanks(CAIB)ECICHoldingsLtd.St.LuciaChamberofCommerce,Industryand AgricultureEasternCaribbeanInstituteofBanking(ECIB)CaribbeanAssociationofAuditCommittee MembersInc. (CAACM) EasternCaribbeanSecuritiesExchange(ECSE)EasternCaribbeanHomeMortgageBank(ECHMB) BOARD OF DIRECTORS

CharmaineGardner President

Cyril matthew 1st Vice President

Ferrel V. Charles 2nd Vice President

BrendaFloissac-FlemingNigelFulgenceJosephMaxwellChristianHusbands LionelJamesJohnsonCenacTedburtTheobalds

G.CarltonGlasgow Managing Director

Corporate Secretary BerylCarasco-Alleyne


We distinguish ourselves in the financial services industry with the simple core value of service. We are all part of your service team and every member of the Bank family

understands that we need you as much as you need to be able to count on us. Our technologically advanced convenience services mean that we can be here for you with a

warm smile and the confidence that a trained professional can offer.


14 | 1st National Bank Annual Report 2010 | DELIVERING EXCELLENCE14 | 1st National Bank Annual Report 2010 | DELIVERING EXCELLENCE

FINANCIAL HIGHLIGHTS

2010$ ‘ 000

2009$ ‘ 000

2008$ ‘ 000

2007$ ‘ 000

2006$ ‘ 000

Operating resultsInterest income 32,993 30,587 29,681 25,403 24,015 Interest expense 12,995 11,883 10,763 9,046 7,303 Net interest income 19,998 18,704 18,918 16,357 16,712Other income 4,619 4,866 4,056 5,646 4,468 Other operating expenses 13,774 11,622 10,515 9,028 8,157 After tax income 6,552 9,114 9,096 10,539 9,291

Balance sheet dataCustomer deposits 388,402 365,377 329,405 297,510 269,514 Common shareholder equity

7,971 7,971 7,971 7,971 6,877

Total shareholder equity 70,722 66,204 56,239 49,339 39,077Total Assets 466,470 436,072 390,152 351,468 314,392 Common shares issued & paid (‘000)

5,000 5,000 5,000 5,000 4,635

Performance$ $ $ $ $

Dividends Declared 0.40 0.40 0.40 0.40 0.35Earnings per share 1.31 1.82 1.82 2.17 2.10Book Value 14.14 13.24 11.25 9.87 8.43

Return on average assets 1.45% 2.21% 2.45% 3.17% 3.23%Return on average equity 9.57% 14.89% 17.23% 23.84% 27.06%Net Interest Margin 4.43% 4.53% 5.10% 4.91% 5.82%Productivity 55.96% 49.3% 45.8% 41.0% 38.5%Average Employees 101 95 94 90 82


+7%Increase over 2009 Increase over 2009 Increase over 2009

+6% +9%Total Assets, Millions Customer Deposits Net Loans, Millions

2010 2009$466 $436

2010 2009$388 $365

2010 2009$305 $281

COST EFFICIENCY

CAPITAL ADEqUACY RATIO

Bank

Bank

Target 56.41% > Industry Average 60%

Target 21%

55.96%

23%



BOARD OF DIRECTORS’ REPORT

In this the 74th year since the founding of the Bank, we are pleased to report on the activities for the financial year ended 2010, which culminated in another year of growth. The Balance

Sheet grew by 7%, from $436 million in 2009, to $466 million in 2010. Our strategy and commitment to manage the Bank conservatively was pivotal in avoiding some of the pitfalls associated with the global financial situation, resulting in increased value to shareholders.

Consequently, book value of shares increased from $13.24 to $14.14 per share.

We anticipated that the global crisis would continue to impact our performance and this manifested itself in the statement of income, in the form of increased provisions and a

reduction in some income streams. Nonetheless, the Bank’s capital adequacy ratio remained strong at 23%, reflective of our goal to maintain growth of the Bank.

STRATEGYWithSt.Lucia’seconomyvulnerabletoglobalpressuresandnaturaldisasters,wecontinuetorefineourstrategyinlightoftheseeventsaswellaspursueourobjectivestodevelopourhumanresourcebasetodriveourservicedeliverytoattainourvision.

Wewillcontinuetobuildontheconfidenceexpressedin this Bank by maintaining our focus on customersatisfaction.Wearepleasedwiththelaunchofoursmartbankingsuiteofproducts (mobileand internetbanking,Bankbrandedcreditandinternationaldebitcards)forthediscerningandbusycustomer.Indeed,thepositiveresultsofacustomersatisfactionsurveyconductedduring2010attesttoourstrategytoprovideanexpandedrangeofservicestoourcustomers.

TheBankremainscommittedtousingappropriateleadinginformation technology to deliver excellent service.During the year, we embarked on a major IT projectthatwillenhanceourinternalefficienciestobenefitourcustomersandthepublic.

1st National Bank embraces its role as an exemplarycorporatecitizen.Thiswasmadeevidentinthesizeabledonationsandcontributionstotaling$0.6milliongivento over thirty (30) non profit groups, schools, clubsand associations. Additionally, members of the Board,management and staff serve on Boards of variousorganizations and/or volunteer their services towardstheimprovementofthesocialfabricofourcountry.We anticipate that our efforts to address our space

constraints will finally bear fruit in 2011. Our plansto transform the building on #18 Bridge Street into amodernfacilitywillsignificantlyprogress.

AWARDSOurBankwastherecipientofthreecovetedawardsattheAnnual BusinessAwards Ceremony for 2010. Forthesecondconsecutiveyear,wereceivedtheawardforCorporate Social Responsibility, the two other awards being Business of theYear and Corporate Leadership.TheseAwardscallforrecognitionandhighcommendationoftheManagingDirectorandhisentirestaff.

GOVERNANCECorporate governance is critical for any modern-day institution, even more so in the financial servicesindustry,whereconfidenceandtrustisparamount.Goodgovernance extends to all aspects of our business andinforms all that we do. The Corporate GovernanceCommittee assists in themonitoring andmitigation ofrisk, particularly reputational and operational risk andsetstheframeworkforpolicymakingfortheBank.

You, our shareholders, have elected diverse individualsto serve on the Board of Directors of the Bank, withcollective expertise in the fields of law, commerce,engineering, accounting, agriculture, insurance, valuationsurveyingandmanagement.BoardCommitteesprovideoversightoftheBankinthecriticalareasofaudit,financeand planning, credit risk and human resources, each ofwhichcompriseanaverageoffourBoardmembers.Thenumberofdirectorswasreducedtotenduetothedeath


ofDirectorLionelJames.DirectorJames’contributionontheBoardaswellasCorporateGovernance,FinanceandPlanningCommitteeswillbegreatlymissed.

During this year several activities were undertaken toenhancegovernanceefficiencies. TheBoardundertookto conduct evaluation sessions facilitated by Dr.ValdaHenry; allDirectors participated in the sessionswhichwere informative and successful. Additionally, anAuditCommitteememberattendedtheannualconferenceoftheCaribbeanAssociationofAuditCommitteeMembers(CAACM)heldinSt.KittsandwaselectedtotheBoardof theCAACM. TwoDirectorssuccessfullycompletedthe Director Education and Accreditation Program(DEAP), accredited with the Institute of CharteredSecretaries andAdministrators ofCanada, bringing thetotalofAccreditedDirectorsontheBank’sBoardtofive.

As you may recall, two shareholder education forawereheldduring2010andwerepresentedbyDr.ValdaHenry, aManagement and Financial consultant andDr.ChristopherMalcolm,anAttorneyatLawwithanLLMinBankingandFinance.Theseminarwaswellattendedandthetopicsentitled“CharacteristicsofaneffectiveBoardand Director”, “Understanding Financial Statements”,“Role,RightsandResponsibilitiesofShareholders”werewellreceived.

TheBankwasnotrepresentedattheannualconferenceoftheCaribbeanAssociationofIndigenousBanks(CAIB)originallyscheduledforSt.Lucia.ThehostcountrywaschangedtoTrinidadandTobagoatveryshortnotice,duetothedevastatingeffectsofHurricaneTomasoneweekpriortotheoriginalscheduleddate.

DIVIDENDS Profit after tax attributable to shareholders is $6.6million, out of which a dividend of $0.40 per share isrecommended for payment, giving a yield on historicalcostpershareof13%.Thedividendpayoutisconsistentwith our capital preservation plan and equates to apayoutof31%ofaftertaxprofits.

MEETINGSAs Board and Committee Meetings are necessary forpropergovernanceoftheBank,wehave illustratedtherelevant data onmeetings held this year in the tableswhichfollow.

BOARD

NamesNo.Of

meetingsActualAttend.

CharmaineGardner 13 13

Cyril matthew 13 9

ferrel Charles 13 11

BrendaFloissac-Fleming 13 10

NigelFulgence 13 13

JosephMaxwell 13 13

ChristianHusbands 13 13

LionelJames 13 10

JohnsonCenac 13 13

TedburtTheobalds 13 13

G.CarltonGlasgow 13 13

fInanCe InVestment and PlannIng

NamesNo.Of


ferrel Charles 4 3

JosephMaxwell 4 3


LionelJames 4 3


HUMANRESOURCE

NamesNo.Of



NigelFulgence 2 2

JosephMaxwell 2 1



AUDIT

NamesNo.Of


Cyril matthew 7 4

NigelFulgence 7 6

JosephMaxwell 7 7

JohnsonCenac 7 4

TedburtTheobalds 7 6

CorPorate goVernanCe

NamesNo.Of



NigelFulgence 2 2


LionelJames 2 2



OUTLOOKIntheaftermathoftheglobalcrisis,theEasternCaribbeanCentralBank(ECCB)has increased itsoversightonallfinancialinstitutionswithinitspurviewandweanticipateincreasedregulationinthefuture.TheprogramofreformoftheglobalregulatoryframeworkspearheadedbytheG20countrieswill impactuponouroperations aswilltheresponseoftheOECSCurrencyUnionwhichisstillunfolding.Anynewregulationswillrequirearevisioninourapproachtothemanagementofriskandwillcertainlyhavecostimplications.

WecontinuetomanageourstrategicrelationshipwithECIC Holdings Ltd and the CaribbeanAssociation ofIndigenousBanks,sothattogetherwecanplayacriticalroleinadvocacyandleveragingourcombinedstrengthforthebenefitofall.Discussionsontheplantoamalgamateindigenousbankscontinueandweurgeallshareholderstokeepabreastofthesedevelopmentsastheyevolve.

Our plans for ongoing growth of the Bank continueapace.We will focus our efforts to capitalize on anyopportunitiestobenefitthecountryandultimately,theBank.

ACKNOWLEDGEMENTSThe Board was saddened by the passing of DirectorLionel James who provided a sterling and insightfulcontribution during the years he served as aDirector.Additionally, we note with regret the passing of SirVincentFloissac,DirectorontheBoardduringtheyears1959to1991.Hisadviceandguidanceduringthattimewas immeasurable.We extend sincere condolences toboththeirfamilies.Wealsotakethisopportunitytoofferoursympathiestothefamiliesofshareholderswhodiedduring2010includingStanleyFrench,FrancisTobiasandSimonBarthelmy. CONCLUSIONInclosing,wewishtoconveyourprofoundappreciationto theManagement and staff of the Bank for anotheryear of balance sheet growth.To our customers and

shareholders, we extend our gratitude as your role ispivotaltotheBank’ssuccess.

The journey ahead is not without its challenges andthreats but we plan to confront them with the usualattributescharacteristicof1stNationalBank.

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

CREDITRISK

NamesNo.Of


CharmaineGardner 4 4

Cyril matthew 4 2


NigelFulgence 4 3

JohnsonCenac 4 4



Service, security and the confidence that your Bank will be there for you throughout your life, all hinge on a sustainable and profitable business model and process. Your Bank knows that you count on our strength and stability behind you on every purchase, investment or

business venture...we are strong for you. Our shareholders are assured of sound performance through visionary direction and professional and ethical operations at all levels.




Charmaine GardnerPresident

Cyril Matthew1stVicePresident

Nigel Fulgencedirector

Ferrel V. Charles2nd Vice President

Brenda Floissac-Fleming

director

Lionel Jamesdirector


G. Carlton Glasgowmanaging director

Christian Husbamdsdirector

Tedburt Theobalds

director

Joseph Maxwelldirector

Johnson Cenacdirector


Delivering excellence is the work of many hands.Winning three top national awards in each of the last two years is huge.

It underscores the Bank’s commitment to professionalism, integrity, confidentiality and active corporate citizenship.

The entire 1st National Bank Team shares this awardwith our customers and shareholders.





MANAGING DIRECTOR’S REPORT

2010wasaveryactiveyearfortheBankaswealignedour resources in a contracting market to increaseefficiencies and treat with the many challenges, themostsignificantbeingthecontinuedeffectsoftheglobaleconomicdownturnwhichnegativelyaffectedtheBank’sprofitability. Despite the foregoing, our resilience wasdemonstratedthroughreasonablebalancesheetgrowthof7%.

Although the world economy has shown modestrecoverythishasnotyethadsufficientimpacttorestoreour economy to its pre-2007 levels. Uncertainty inthe price of petrol, a fall in foreign direct investments,the passage of HurricaneTomas, the weak real estatemarket, increasedunemployment,haveall impactedourportfolio,withnegativeeffectonourprofitperformance.Additionally, our decision to transform the building on#18 Bridge Street further reduced the final result butthebenefitswillbederivedfromtheincreasedbusinessthatthemodern,aestheticpremiseswillattractoverthemediumtolongterm.

Our vision to be the Bank of choice is ubiquitous inthe local market and guides all that we do.We werethereforepleasedtohavebeenawardedBusinessoftheyearattheSt.LuciaBusinessAwardsforthefinancialyearended 2010. Ourmanagement of the Bank’s assets isatparwithbankinginstitutionslocallyandintheOECSregionand,asweexecutedourstrategy,wefocusedongoodgovernance,capitaladequacy,corporatecitizenship,increasedproductbreadthandfinancialdiscipline.

Efforts to enhance our market visibility were evidentin our media messages including our successful fifteenminutetelevisionprogram,1stNationalBanknotes,ournewsletter,TheTellerandourinteractiveanduserfriendly

website.There-brandingeffortsoftheBankcontinuetobearfruitintermsofincreasedawarenessanddiversityofourcustomerbase.Weplantoupgradeourwebsiteduringthesecondquarterof2011toincludemoreusefulinformationandresources.

TheBankcontinuestorefineandredefinebanking,thistimethroughitsdevelopmentoftheSmartBankingbrand.Thiscombinestheexistingservices,MoBanking,1stOnlineBanking,1stCashpointATMs,SmartOpeningHoursandtherecentlyintroduced1stDebitCard.Separately,theseservicesaregreatofferingsandprovidecustomerswithbankingattheirfingertips;combined,theyareapowerfultool for financial freedom, hassle-free transactions anda time-saver.Ourelectronicbankingproductoffering issecondtonone.

Thesuccessofanyinstitutionliesinthecommitmentofitsstaff.AfterthepassageofHurricaneTomas,thegeneralstaffbodyacceptedthedecisiontocanceltheusualgalaStaffChristmasdinnerandinitsstead,donatethefundsallocated (EC$50,000) to victims of HurricaneTomas.Additionally, staff donated and delivered relief items tohurricane victims in Soufriere. We applaud them forthislevelofsupportwhichisreflectiveofthecommunitybankingweespouse.

In the broader sense we understand the critical roletheBankplaysinbringingchoiceandeconomicleverageto the general public. We contribute to growth ofthe economy by providing a safe haven for customers’funds, financing personal and business endeavours andgenerally supportingnationaleconomicactivity.Despitetherecession,thedecisionwastakentomaintainourstafflevelstherebydispellinginsecurityandpreparingforthefuture.

“The Bank continues to refine and redefine banking, this time through its development of the Smart Banking brand. This combines the existing services, MoBanking, 1st Online Banking,

1st Cashpoint ATMs, Smart Opening Hours and the recently introduced 1st Debit Card. Separately, these services are great offerings and provide customers with banking at their

fingertips; combined, they are a powerful tool for financial freedom, hassle-free transactions and a time-saver. Our electronic banking product offering is second to none.”


FINANCIAL REVIEW

Income StatementAprofitbeforetaxof$8.3millionwasrecordedforthefinancialyearendedDecember31,2010.Thisperformanceisfair,havingregardtocurrentmarketconditions.Profitafter taxwas $6.5m, reducing by 28%over 2009. Thereduction isdue toanumberof reasons to includeanincrease in provisions of approximately $0.8million or52%,ataxassessmentbytheInlandRevenueDepartmentfor prior years, an increase in operational expenses(includingaccelerateddepreciationofthebuildingon#18BridgeStreet)of18%andtheincreaseininterestexpenseof9%.Theincreaseinexpensesoutweighedtheincreaseinrevenue,resultinginareductioninprofitperformance.

IncomeNotwithstanding the slow economic recovery, totalincomeincreasedby6%overthe2009auditedposition.

Total interest income grew by a modest 8% and loaninterestincomeincreasedby11%,theresultofourstrategytoexpandtheloanportfolioaswellastheimpactofIAS39onourinterestincomestream.Theincreaseinloaninterestincomewasoffsetbya4%declineininvestmentincome for two main reasons viz: (1), the decision tomaintain higher liquidity levels for operations and (2),lowerinterestratesonavailableinvestmentinstruments.

Netinterestincomeincreasedreasonablyby7%overthefigure for2009butdidnot increase in linewithassets.Thishasresultedinaslightfallinthenetinterestmarginforaverageearningassetsof10basispoints.

Althoughcommissionandfeeincomeincreasedby13%and6%respectively,foreignexchangeearningsfellby14%duetotheimpactofunfavourableforeignexchangeratesonbalancesheld,causingadecline intotalnon interestincomeof5%overthatfor2009.

KEY PERFORMANCE INDICATORS (KPI’s) DESCRIPTION

Capitaladequacy Thisperformanceindicatorwasbroughtintosharperfocusafterthefinancialmeltdown.Itisameasureoffinancialstrength.TheBankwasadequatelycapitalizedbeforethecrisisandwehavemaintainedourphilosophyofconservatism.TheBank’scapitaladequacyratio(BasleI)ishealthyat23%.

Returnonaverageequity ThisisakeyindicatoroftheBank’sperformanceandcomparestheprofitaftertaxtoshareholders’equity.Itfellfrom14.89%in2009to9.57%in2010;profitsaftertaxfellby28%duelargelytoincreasedprovisions,operatingexpensesanddepreciation.

Costefficiencyratio Thisratioshowshowwellwemanagecostscomparedtonetincome.Anexcellentratiobyinternationalstandardsfallswithintherangeof50%to65%.Oursregressedto55.9%asexpectedbutweplantomonitorthisfigurecarefullyin2011.

Dividends ItistheBank’spolicytomaintainshareholderwealth;adividendof40centspershareisproposed.TheBankhaspaidasteadydividendof40centspersharefrom2007.

Returnonaverageassets(ROA) ThisKPIwas1.45%,fallingfrom2.21%lastyear. Inadditiontotheabovementionedreasons for thedecline inROE,prioritywasgiventosafetyandliquidityneedsaboveprofitability.

Netinterestincome Thismetric increasedby7%over that for2009, an indicationthatourassetportfolioperformedfairlywell.

Customersatisfactionsurvey Over80%ofcustomerssurveyedwereeitherverysatisfiedorsatisfiedwithourservice.

CorporateCitizenship This is an important metric for us as we contribute to thedevelopmentofyouth,theartsandcountry.In2010,theBankdonatedatotalof$0.6milliontoamultitudeoforganisations.Thiscomprises2%ofourtotalrevenue.

Thetablebelowillustratessomekeyindicatorsofourperformanceforthisfinancialyear.2010PERFORMANCEREVIEW


Operating expensesOperatingexpensesincreasedby19%overthatfor2009,driven mainly by increases in operating lease rentals,administration costs anddepreciation. Operating leaserentalincreasesarepertinenttothenecessaryexpansionofouroperationsinRodneyBayandChocBayasweplanto enhance the aesthetics for both customer and staffalike.ThecommissioningoftheChocBaysubbranchisexpectedearlyinthesecondquarterof2011.

Further analysis of administration costs reveals thatadvertising and equipment costs increased by 40% and51%respectively.Theincreaseinadvertisingcostsarosefollowing our decision to maintain our visibility in themarketandenhanceourmarketpositionasweincreasedour product offering (branded credit and debit cards,mobile banking). Most of the increase in equipmentexpenses (mainly computer related) is relevant to theacquisitionoftheaforementionedproductofferings.

Theincreaseinstaffcostsof3%takesintoconsiderationreasonable annual increments by industry standards,trainingincoreareassuchaslending,debtrecoveryandcustomerservice.Trainingwasalsoundertakentoutilizeavailableandnewsoftwaretoenhanceproductivity.The

increaseinstaffexpenseswasoffsetbythereductionintheBank’spensionobligation,asadvisedbyaprofessionalactuary.

BALANCE SHEET

Total assetsAtthisyearend,theBank’stotalassetsregisteredgrowthof7%overthepositionatDecember31,2009,from$436million to$466million, resulting inacompoundannualgrowthrateof12%overthelast5years.

Cashonhand,balances atCentralBankand itemsduefromotherBanksincreasedby19%overthepositionatDecember31,2009.Thiswasprimarilyduetoincreasesin deposits held at our correspondent banks. Liquidityneedsfluctuatedthroughouttheyearbutwewereabletomeettheseneedssatisfactorilyasweaccessedfundsfromourliquiditypool,whichincreasedby58%overlastyear.

Loansandadvancestofinancialinstitutionsincreasedby18% over 2009 primarily because of funds transferredfromtheliquidationoftwoinvestmentsintheheld-to-maturitycategoryaswellasliquidationofTreasuryBillsthatdidnotmeetourminimumbidrequest.

Anetincreaseof9%wasrecordedinloansandadvances

0

5000

10000

15000

20000

2006 2007 2008 2009 2010

Net Interest Income

Loans and Advances73%

Commission6%

Forex6%

Investment15%

Composition of Income

Loans and Advances CommissionForex Investment

Administrative expenses44%

Depreciation11%

Operating Lease Rental6%

Staff costs39%

Operating Expenses

Administrative expenses DepreciationOperating Lease Rental Staff costs

0

125000

250000

375000

500000

20062007

20082009

2010

Asset Growth


tocustomers[$305min2010,$281min2009],reflectinganincreaseddemandforcredit.Thelargest increaseinvaluewasseeninpersonalcredit,followedbyprofessionalandotherservices.Thisperformanceisinlinewithourobjectivetoreduceriskandgrowtheportfolio.

Available- for- sale investmentsgrewby11%aspartofouroverallmanagementoftheinvestmentportfolio.

Other assets increased significantly due to work inprogressonournewestbusinessunitatChocBayandwork done in readiness for the implementation of the4sight imaging project. This system is being suppliedby our software provider and will handle documentimaging,recordingandinputofMICRencodedcheques.ImplementationofanimagingsystemisarequirementbyECCBwhichweexpectwillimproveefficiencies.

Total LiabilitiesDepositsincreasedby6%or$23million,from$365millionto$388million.Thisgrowthismoderatehavingregardtothecompetitionandtheprevailingeconomicconditionsin themarket. A significant proportion of this derivesfrom households (62%)with 30% being due to privateandpublicinstitutions.TheBankhadnodebtsecuritiesinissueduringthefinancialyear.Thechartbelowillustratesdepositperformanceforthelastfiveyears.

Shareholders’equityincreasedfrom$66millionin2009

to $71 million in 2010, deriving mainly from profits.Retainedearnings increasedby10%over thefigure for2009.We plan to maintain this level of growth in thefuture. The ratio of total assets to total shareholders’equitywashealthyat7:1.ThebookvalueoftheBank’sshares increased year on year to $14.14 per share in2010.

Capital managementBasedonBasleIguidance,theTier1capitaladequacyratiowas stable at 23%.On this basis, capital riskfortheBankislow.Weplantomaintainthecapitaladequacy ratio above 15% to support our growthgoalsaswellastoensuresafetyoffundsentrustedwithus.Shouldtherebeachangeintheregulatoryrequirement to maintain an increased capitaladequacyratio,webelievethattheBankissufficientlycapitalizedtomeetthatchallenge.

LiquidityAtyearend,theBankhad$21.5millionincashandcashequivalents to manage its liquidity needs.The liquiditypositionwas considered adequate throughout the year.A continuing challenge for the industry is the lack ofbreadthanddepthofthemoneyandcapitalmarkets insourcing alternative streams to efficiently manage ourliquidityneedsshouldacrucialsituationarise.

Risk Management Duetotheverynatureofitsactivities,theBankisexposedtoavarietyofrisks.Keyareasofriskincludecredit,interestrate,market,operationalandliquidityrisk.TheHeadsofDepartmentandBusinessUnitsareresponsible forthemanagementofriskinaccordancewithinternalpolicies,reportingtotheManagingDirectoratperiodicintervals.Additionally, theBoardprovidesnecessaryoversight toreducerisk.FurtherdetailsonhowriskismanagedareincludedintheAuditedFinancialStatements.

Outlook/ProspectsTheforecastforoureconomyisforslowgrowthin2011and 2012, based on the assumption that the current

0 100000 200000 300000 4000002006

2007

2008

2009

2010

Loans and Advances

0

100000

200000

300000

400000

20062007

20082009

2010

Customer Deposits

$0

$3.00

$6.00

$9.00

$12.00

$15.00

2006 2007 2008 2009 2010

Book value per share


conditionswillprevail.Asaresultoftherecentfinancialcrisisanditscontinuingeffects,itisanticipatedthatmorerobustregulationwillbe implementedwhichwillhaveimplicationsforincreasedcostsfortheBank.AlthoughBasleIIIguidelineshavebeenissuedforimplementationin2017,weplantoemploysomeoftheguidelinesinthemanagementofourliquiditywhereappropriate.

EffortsbytheBankers’Associationtoreformforeclosurelegislationareongoingwithcompletionexpectedintheshort to medium term. We anticipate the legislationwillbesupportedbybothGovernmentandtheCentralBank,intheoverallframeworkforriskmanagementoftheCurrencyUnion,particularlyasithasimplicationsforthemanagementofournonperformingloanportfolio.

In 2011, we plan to continue to utilize the results ofthecustomerandstaffsurveystoenhanceourinternalprocesses. We believe we have the right corporatestrategy to build on the Bank’s successes. However,ourbusinessstrategywillberevisedtoattainstrongerfinancial and operational performance whilst meetingourcustomers’andstaffneeds.

CUSTOMER SERVICE AND DELIVERY CHANNELSAs noted elsewhere in this report, early in 2010, theBankwonthree awardsattheAnnualBusinessAwards,two of which were in the areas of customer service,namelyServiceExcellenceandInnovation.InApril2010,spurred on by these accolades, the Bank confidentlylaunched theVisa co-branded Credit Card to includetheBank’slogo.Customersexpressedtheirsatisfactionwiththeoveralldesignofthecardswhichareavailableinthreecategoriesnamely,Classic,Gold,andCorporate.

We proceeded to increase our market presenceduring this recessionyearand tookonbold initiativesand implementations. True to the mission statement,we continued to create value and satisfaction for our

customers throughexcellent serviceusingappropriatetechnology. The Credit Card launch was closelyfollowedbytheInternationalDebitCard(IDC)Projectimplementation. Our core card services systemwas upgraded to prepare for the scheduled launch ofour International Debit Card (IDC) Project, and thiswas successfully achieved in July 2010with full mediacoverage.

The customer satisfaction survey conducted to gaugewhethercustomers’needswereindeedbeingaddressedtotheirsatisfaction,revealedthatcustomershadstrongconfidenceintheBankandarehappywithitsservicesand products. Further, the results indicated that theBank’s reputation was the leading reason for overallcustomer satisfaction.TheBank’s indigenous characteralsoresonatedstronglywithrespondents.

Plans to enhance our customers’ banking experienceprogressedsatisfactorily.Lateinthethirdquarter,workcommencedon the retrofittingof leasedpremises forthecommissioningofChocBaysub-Branch.Thisnewestbusinessunitwillfeatureadrive-upATMandnight-safefacilitiesandisexpectedtobeopenforbusinessinthesecondquarterof2011.

Duringthelatterhalfof2010,theformerHeadOfficeatNo.21BridgeStreetwasrenovatedtoprovidegreatercomfortfortheCreditRiskDepartmentandultimatelyour borrowing customers. Expansion proposals forRodney Bay sub branch have been approved and weanticipate that works will be completed by the lastquarter of 2011.We thank the staff affected by theseprojectsfortheirforbearanceasourplanstomaketheworkplacemorecomfortableprogress.

Customerserviceexcellencedrivesourbusiness,always.ImmediatelyafterthewindsofHurricaneTomàsabated,the Bank ensured that customers had prompt accesstotheirfundsandwasabletoprovidebankingfacilitiesthroughitsATMservices.The GFL Charles Airport


Bureau-de-Change was open for business at 6:00 a.m. the next day, declared a holiday by Government for clean-up purposes. We commend our staffwhoservedthepublic intheirtimeofneedonthatday,fortheircommitmentto live the core values of the Bank.

CORPORATE CITIzENSHIP AND OUTREACHOurBanktrulybelievesingivingbacktocommunityandtakes its roleasacorporatecitizen seriously. In2010,the Bank contributed approximately $0.6 million insupport to the community, in areasof sports, the arts,culture and various philanthropic projects. Our totalcontributionwasanimpressive2%ofourrevenue.Webelieveinthedevelopmentofouryouthandcommunityand thiswas recognized at the2011 St. LuciaBusinessAwardswheretheBankcapturedtheCorporateSocialResponsibilityAward forasecondconsecutiveyear,the award forCorporateLeadershipandthecovetedAwardof BusinessoftheYearforthefinancialyearended2010.

For 1st National Bank, corporate social responsibilityis a way of life and in so doing, we partner withapproved organizations to provide financial supportin educational development, community outreachprogrammes,competitiveandhealthysportingactivities,cultural development and preservation, positive socialtransformation.

Educational development

EducationaldevelopmentcontinuestobeapriorityareafortheBankandthehighlightsforthiscategorywereasfollows:1. Ourmemorialscholarshipholder,DawnavanFoster,

successfully completed his second year studies inLawandEconomicsandenteredhisfinalyearattheUniversityoftheWestIndies.

2. Our comprehensive Student Loan Programmecontinues to attract a number of students wishing

topursuecoursesrangingfrombankingandfinance,law, engineering, economics, accounting and otherpriorityareasidentifiedbytheGovernment.

3. Weweretheonlyfinancialinstitutiontoparticipatein the Sir Arthur Lewis Community College’sCareerGuidanceFair.Studentsofthetertiary levelinstitutionwereexposedtobankingandethicsintheworkplaceaswellaspracticalone-on-onemockjobinterviewsessions.

4. The Bank was recognized by the Mon ReposCombined School at their graduation ceremonyfor itssterlingsupportandassistance in itsvariouseducationalandsportingexercises.

5. The Junior Achievement Programme, in thedevelopmentofyouth.TheBankservesasamemberonitsBoard.

6. TheCentre forAdolescentRenewal andEducation(Care)

7. NobelLaureateWeek:TheBanksteadfastlysupportsthe Nobel laureate activities in cash and kind,particularly, lectures,exhibitions,concerts,theatricalperformances,allofwhichhelpinspireourpeopletoachieve.

8. Poetsandauthors toencourage interest inreadinganddiscussion.


Community Outreach This category is at the core of the Bank’s corporatesocialactivities.AnumberofcommunityprogramsweresupportedbytheBankthisyear,toincludethefollowing:1. AdonationofEC$100,000.00totheSt.JudeHospital

whichwasdestroyedbyfire.Thefundswillbeusedtooutfitanewdentalclinic.

2. After the terrible earthquake in Haiti, our StaffChorale participated in a fund raising concertorganized by the Catholic Church. The Bankcontributed EC$4,500.00 in recognition of thiseffort. An additional EC$25,000.00 was donatedtotheHolySeedInternationalOrphanageinHaiti,an organization whose work positively impactsdisadvantagedchildren.

3. Organizationsthatseektoengagethemarginalizedwithin our society, (the elderly, the orphans, thesick andphysically challenged) continue to receivefunding through established covenants with 1stNationalBank. Thebeneficiariesofthiscorporategestureofgoodwillareasfollows:

• Centre for Adolescent Renewal and Education(Care)

• ClunyFoundation• HolyFamilyChildren’sHome• TheEarlyChildhoodDevelopmentCentre• TheMarianHome• St.Lucy’sHome• NationalCommunityFoundation(NCF)• St.LuciaBlindWelfareAssociation• St.LuciaSickleCellassociation

• NationalCouncilof/forpersonswithdisabilities• Adelaide&FrancesMemorialHome• PoppyAppealFund

SportsWebelieveitisparamounttocontinueoursponsorshipof sports for its overall benefits to health andsocial development. It is for these reasons that wehave sponsored the 13 and Under Track and Field

Championship,incollaborationwiththeSt.LuciaAthleticsAssociation,whereyoungathletesarenurtured.WeareproudtoseetheresultsinathleteslikeLaverneSpencerwhoiscurrentlyrankedat#3intheworldamongfemalehigh jumpers. Other contributions and sponsorshipsinclude:1. SupporttotheSt.LuciaUnder23NationalNetball

TeamtoparticipateandgainexposureintheregionaltournamentswithintheO.E.C.Stostrengthentheirgame.

2. The1stNationalBankSecondarySchoolsSwimmingChampionship which sets the pace for youngswimmers to harness and perfect their skills inpreparationforregionalandinternationalswimmingevents. Someoftheswimmersparticipated intheCommonwealthGamesheldinIndia.

3. The St. Lucia Special Olympic NationalTeam - tocovertravelexpensestoPuertoRicotoparticipateintheWorldSpecialOlympicTournament.Wearehappytoreportthatthetournamentwasasuccessand the team returned homewith severalmedalsincludinggold.

4. Kouwie Sent Lisi, a fun/run/walk activity, thatpromotes healthy habits/lifestyles and exercisethroughsports. 1stNationalBankpartneredwith


theNationalCommunityFoundation in thisuniquefund raising event, proceeds of which went to theN.C.F.toassistwithongoingoutreachprogrammes.

5. A variety of schools around the island to assist inhostingtheirannualsportsmeets.

6. Annualsportscampsforyouthandtheunderprivileged.

Cultural Development and Preservation This is a significant area for which 1st National Bankcontinuesitssupportoftalentandinnovation.Here,thedonationsandcontributionswereasfollows:

1. The premier sponsor ofWordAlive InternationalLiterary Festival which featured the launch andreadings by Honourable DerekWalcott from hisbookentitledWhiteEgrets.ThefestivalalsosawthestagingofWordAlive5“dramaticpoetrywithmusic”whereyoung,buddingSt.Lucianpoetsshowcasetheirtalentinhealthycompetition.

2. 100% support was given to St. Lucian jazz artisteRonald“Boo“Hinksonwhenhelaunchedhiscompactdisctitled“Shades”,aneclecticblendofsmoothjazzrhythms, Caribbean pop ballads, Latin andAfricanmusic.

3. The presenting sponsor of Fond d’Or Jazz, acommunity based event which provides for muchcommunityinvolvementwithproceedsgoingtowardsthepreservationofthesite.

4. TheRoyalSt.LuciaPoliceForceand theR.C.BoysPrimary School also benefited from the Bank’scorporategenerosity inthestagingoftheircalypsocompetitions dubbed “Kaiso Headquarters” and“R.C.Jam”respectively.

5. A financial contribution was made to the DamePearletteLouisyPrimarySchoolandtheRitualsKidsCarnivalBandwiththeirrespectiveportrayalsofthe


“Castries Market” and“Redemption Song” duringthe2010carnivalseason.

6. TheBankwasthepremiersponsoroftworivetinganddramatic theatre plays entitled“ForColouredGirls” and “The Coloured Museum” directed bySt. LuciansAlvin Hippolyte and Drenia Frederickrespectively, with a full slate of bright, young andtalentedSt.Lucians.

7. The St. Lucia NationalYouth Choir was affordedthe opportunity to engage in two high profileperformances in Barbados. The Chorale put ontwomajor performances oneofwhichwas in aidof raising fundsonbehalfof theOptimistClubofBarbados.

Positive social transformationWe believe in affording persons an opportunity topositively transform their lives and as such, we haveprovidedfinancialsupporttothefollowing:1. ActNowGeneration-foundedbyagroupofjudicial

officers working within the family court system,thegroupaimstotransformlivesof juvenileswhocommit petty crimes and show signs of deviantbehaviour. This year, we funded a summer campattended by juvenile delinquents from St. Lucia,BarbadosandDominica.Theclosing activitywasaconcert featuring drama, song, poetry and dance,stagedattheNationalCulturalCentre.

2. The St. Lucia Crisis Centre, which responds tofamiliesincrisiswithafocusonabusedwomenandchildren, also received financial aid from the Bankto further expand its objectives and awarenessprogrammes.

3. MinistryofGenderRelations-toassistwiththeirworkinpromotingtheachievementofwomenandendinggenderbasedviolence.

4. RiseSt.Lucia Increceivedmuchneededassistanceincelebrationof InternationalYearof theYouth.AnationalyouthrallywasheldinthebeautifultownofSoufrierewhereEngineerandmotivationalspeaker

Dr. CarlMarc from theUnited States ofAmericaaddressedtheyouth.

5. CaribbeanYouthFestivalwasgivenfinancialsupportastheysoughttobringaboutpositivechangeinthelivesofmanyyoungpersons.Thisinitiativecombineslocalandregionaltalenttospreadpositivemessagesthroughmusicandsong.Theproceedsgotowardsthe sustainability of a youth development clinic inVieux Fort as well as assistance to the NationalCommunityFoundation.

Environment

Going green was a project pioneered by theTapionSchoolandsupportedby1stNationalBank.Inadditionto a monetary contribution, the Bank purchased theuniformsfortheirenvironmentalclubaswellasgarbagebins to undertake the composting project.The schoolalsolauncheditsenvironmentalClub“TAPS”.

The Bank promotes internal best practices as anevolvingdrivetocontinuallyaddresstheimpactontheenvironment, by reducing the amount of paper usedinternally and through Online Banking and ElectronicBanking.

HUMAN RESOURCES


During 2010, human resources enhancement andmanagement continued to be critical to the Bank’sachievementofitsstrategicgoals.

A number of initiatives were therefore planned andexecutedaspartoftheLearningandGrowthObjectiveoftheBank’sCorporateStrategywhichemphasized:-• Thecultivationofinspirationalleadershipatalllevels

oftheinstitution.

• ThedevelopmentandempowermentofstaffaskeyplayerswithintheBank.

• The provision of pertinent skills, resources andinformationtofacilitateemployeeefficiency.

• Thecreationofaworkingenvironmentconducivetogrowthandprofessionalism.

• Thealignmentof staffaroundtheBank’svisionandstrategy.

Duringthereviewperiod,thefollowingaccomplishmentswere noteworthy:-

I. Staff Training and Development

Employees at all levels were exposed to a range oftraining activities pertinent to all aspects of the Bank’s

operations.Inanticipationoftheimpactoftherecessiononourfinancialportfolio,theBankstrengthenedtheskillsandleadershipcapacityofitsstaffincriticalareas,aimedatmitigatinganyadverseeffectsoverthemediumtolongterm.Theseincluded:-• Credit Risk; Credit Management; Debt Recovery;

ProvisionofCardServices;MortgageUnderwriting.

• Anti-money laundering; fraud detection andprevention;auditingtechniques.

• Effectivecommunication;HumanRelations;EmployeePerformance Management; employee coaching;overcomingleadershipchallenges.

• Investment Opportunities; Understanding FinancialStatements.

• Information Systems Security; Orientation toMoBanking upgrades, Microsoft Excel, and ChequeImagingprocesses.

• Disaster Preparedness; Business Recovery Planning;FirstAid;FireSafetydrills.

• ProfessionalBankingCourses.

• Loanassistancefordegreelevelcourses.

II. Employee Recognition and Motivation

TheindustrialclimatewithintheBankremainedstablein2010.Thisstabilitywasreinforcedthroughthefollowingactionswhichwereundertakenduringthereviewperiod:-

• The promotion of a number of junior employeesto supervisory level grades, in keeping with theBank’spolicyofbuildingleadersatalllevelsthroughidentificationofsuitablestafffromwithintofillvacantandnewpositions.


• TheconductingofareviewandrevisionoftheBank’sexistingsalaryscalesandgradestructuretoensurealignment with comparable position ranges in thefinancialsector,andtoremainrelativelycompetitivein order to attract and retainqualitypersonnel.

• The granting of annual performance-based salaryincrements as an incentive to all staff for theirrespectivecontributionsthroughouttheyear.

• Thepaymentof a shareof theBank’sprofit toalleligiblestaffhavingregardtotheircollectiveeffortsatgeneratingaprofitwithintheyear.

• Special acknowledgement of deserving personnelandappreciationofallstaffatthe2010annualawardsfunction.AwardswerepresentedinthecategoriesofPerfectAttendance,JuniorOfficeroftheYear,SeniorOfficer of theYear, Special Recognition, ManagingDirector’sAwardandBranchoftheYear.

• Convening of regular general staff meetingsand departmental coaching aimed at improvingcommunicationandinformationsharingthroughouttheinstitution.

• The issuing of new uniforms to staff to enhancetheir professional appearance and underscore theimportanceofimageandteam.

III. Enhancing Employee Efficiency and Productivity

The enhancement of technological and informationbasedresourcesin2010isexpectedtofurtherfacilitateemployeeefficiencyandproductivity.

Among thehighlightsof thiswas theestablishmentofamorecomprehensive,user friendlyHumanResourceDatabase which, when fully populated, will serve toimprove the processing and reliability of essentialManagementInformationwithintheBank.

During the year, the Bank’s corporate strategy wascascaded down to the staff to guide service delivery.The process was further cascaded in the redesignedPerformance Management System (PMS) which wasinitiatedattheBranchlevelin2010.ThePMSfocuseson jobaccountability, assessesemployeecompetenciesandisexpectedtoresultinamoreobjectiveappraisalofstaffperformance.

IV Organizational Structure – Review and Planning

As an essential component of its forward planning,the Bank keeps its organizational structure underregular review. In 2010, the following expansions intheBank’soperations and serviceswere approved forimplementation:-• The establishment of a separate Card Services

departmentbasedontheoutcomeofapreviouslycommissioned business feasibility study. Thedepartment, expected to be operational as ofJanuary2011,willbeinitiallystaffedbyanAssistantManagerandtwosupportstaff.

• Additionally,theoutfittingofChocBaySubbranchcommenced in 2010 and is anticipated to be fullyfunctionalearlyinthesecondquarterof2011.TheSubbranchwillcarryanOfficer-in-Charge,assistedbyfivesupportstaff.

V. Upgrading of the Working Environment

In2010, theplannedrefurbishmentof theupperfloorof theBank’sBridge Street premises came to fruition,with the creation of more spacious, comfortable andbetterappointedofficesforthestaffoftheCreditRiskDepartment.

Theongoingeffortsatimprovingtheworkingambiance


and creating requisite space continued apace, with thecommencement of renovation of another wing of theBridgeStreetofficesandpreparationsfortheextensionof the Rodney Bay Sub Branch – both earmarked forcompletionin2011.

In effect, during the year under review and with theassistanceofmanagement,supervisorsandotherstaff,thehumanresourcemanagementportfolioremainedfocusedonthe learning&growthperspectiveoftheBank’skeystrategicobjectives.

SHAREHOLDER INFORMATIONThere were no increases in the Bank’s share capitalduringthisfinancialyear,remainingat4,999,966.Atotalof31,286sharesweretransferredduringtheyear,withthenumberofshareholderstotaling1,333.Asrequiredby the Banking Act of St. Lucia, No. 34 of 2006, noshareholder heldmore than 20% of the Bank’s shares.There are however, frequent inquires to purchase theBank’sshares,an indicationofcontinued interest in theBank. Wecontinuetoentreatshareholderstoutilizeadeposit account as their preferredmethodof paymentofdividendsasitisthemostefficientmeansavailableatthistime.

Thechartbelowillustratesthecurrentstatusofdatesofelection and re-electionofnonexecutiveDirectorsontheBoard.

ROTATIONOFDIRECTORSINACCORDANCEWITHSECTION4OFBY-LAWNO.1

ACKNOWLEDGEMENTSMuchwasaccomplishedfor2010andIwishtothankthemanagementandstaffwhocommitted toproviding theenablingenvironmentthatresulted intheBankwinninganotherthreeawards.Additionally,Iwanttocommendour staff for their patience and endurance aswe seekto improvethephysicalenvironmentwithinwhichtheyoperate.

I must express sincere appreciation to our customersfortheirunfailingconfidence,loyaltyandsupportforyetanotheryear.Wegivetheassurancethatwewillcontinuetoexecutestrategiesthatwilladdvaluealways.

TothoseinstitutionsthathavechosentocollaboratewithusasGoodCorporateCitizens,wethankyouforactivelysharingourforesightinenhancingthelivesofthoseweserve.Ialsowanttothankallstakeholderswhohavetakenan interest in our business through their constructivecriticism, reinforcement or comment as these assist inenhancingourservicedelivery.

Asalways,onbehalfofthemanagementandstaff,IthanktheBoardofDirectorsfortheirongoingsupport.

G.CarltonGlasgowmanaging director

NAME YEAR OF ELECTION

YEAR OFRE-ELEC-

TION

Charmaine Gardner 1990 2010Cyril Matthew 1998 2010Ferrel Charles 1980 2009Brenda Floissac-Fleming

1993 2007

Nigel Fulgence 2000 2009Joseph Maxwell 2001 2008Christian Husbands 2003 2009Lionel James 2007 2010Johnson Cenac 2008Thedburt Theobalds

2008


Managem

ent Organization C

hart

BO

AR

D O

F DIR

ECTO

RS

Manager, Lendings

Assistant

Manager,

Lendings

Assistant

Manager,

Recoveries

Assistant

Manager,

Operations

Assistant

Manager,

Finance

Assistant

Manager,

Accounting

Sub Branch M

anagers,R

odney Bay, Vieux Fort and

Officer in C

harge, Marigot

Bay Sub B

ranch

Operations M

anagerFinance M

anagerM

anager Internal A

uditH

uman R

esource M

anager/C

orporate Secretary

Manager, Projects and Services

MA

NAG

ING

DIR

ECTO

R


G. Carlton Glasgowmanaging director

Beryl Carasco-AlleyneHumanResourceManager/CorporateSecretary

Robert FevrierManager,Projects&Services

Denise Holden-PierreManager,InternalAudit

Aurea Lafeuilleefinance manager

Joseph FedeeOperationsManager

Clarette Auguste-Taylormanager lendings


Valery Marshall-St. OmerAssistantManager,Operations


Naomi Promesse-EdwardManager,VieuxFortSubBranch

Sylvia AlceeManager,RodneyBay

SubBranch

Beverley Ann GreeneAssistantManager,Finance

Peter FloissacAssistantManager,Recoveries

Mansley JuliusAssistantMana

ger,Accounting

Patricia HowellAssistantManager,Lendings


We don’t tell you what your dreams should be, we show you how to achieve them! Like a true friend, we are there with advice and guidance. We have helped so many reach further

than even they could have imagined, we can surely help you reach every goal on the way to a fulfilled and maximised life.




1st National Bank St. Lucia Lim

ited

•1st National Bank St. Lucia L

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PriceWaterhouseCoopersPointe SeraphineP.O.Box 195CastriesSt. Lucia, West IndiesTelephone (758) 456-2600Facsimile (758) 452-1061

May 6th, 2011

IndePendent AudItor’s rePort

to the shareholders of1st 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, 2010 and the statements of income, comprehensive income, changes in equity and 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 and for such internal control as management determines is necessary to enable the preparation of financial statements

that are free from material misstatement, whether due to fraud or error.

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 about whether the financial statements are free from material misstatement.

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.


ited


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“PricewaterhouseCoopers” refers to the East Caribbean firm of PricewaterhouseCoopers or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. A full listing of partners of the East Caribbean Firm is available on request at the above address.

Chartered Accountants

Independent Auditor’s report…continued

Auditor’s responsibility…continued

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,

2010, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.


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1st National Bank St. Lucia LimitedBalance SheetAs of December 31, 2010

(expressed in Eastern Caribbean dollars)

Approved by the Board of Directors on March 31, 2011

___________________________________ Director _______________________________ Director

Note 2010$

2009$

Assets

Cash and balances with Central Bank 5 26,786,364 29,307,645Due from other banks 6 15,171,047 5,976,620Treasury bills 7 9,235,477 16,832,105Loans and advances to financial institutions 8 56,395,260 47,965,561Loans and advances to customers 9 305,328,634 280,947,796Investment securities:

- available-for-sale 11 13,611,702 12,285,162- held-to-maturity 11 16,264,813 22,556,356

Income tax recoverable 1,844,257 1,731,068Property, plant and equipment 12 14,450,128 15,331,161Other assets 13 7,024,006 2,920,830Deferred income tax asset 17 358,544 218,194

Total assets 466,470,232 436,072,498

Liabilities

Due to customers 14 388,402,319 365,377,016Other liabilities 15 6,819,199 3,832,385Retirement benefit obligations 16 527,000 659,000

Total liabilities 395,748,518 369,868,401

Equity

Capital and reservesShare capital 18 7,971,454 7,971,454Retained earnings 49,299,114 44,700,869Reserves 13,451,146 13,531,774

Total equity 70,721,714 66,204,097

Total liabilities and equity 466,470,232 436,072,498

The accompanying notes form an integral part of these financial statements.


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1st National Bank St. Lucia LimitedStatement of IncomeFor the year ended December 31, 2010


Note 2010$

2009$

Interest and similar income 20 32,992,686 30,587,169

Interest expense and similar charges 20 (12,994,882) (11,883,032)

Net interest income 19,997,804 18,704,137

Other operating income 21 4,618,687 4,866,109

Operating income 24,616,491 23,570,246

Other operating expenses 22 (13,774,172) (11,621,901)

Impairment losses 25 (2,538,373) (1,577,771)

Profit before income tax 8,303,946 10,370,574

Income tax expense 26 (1,752,303) (1,256,102)

Profit for the year 6,551,643 9,114,472

Earnings per share(expressed in EC$ per share)

- basic and diluted 27 1.31 1.82



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1st National Bank St. Lucia LimitedStatement of Comprehensive IncomeFor the year ended December 31, 2010


2010$

2009$

Profit for the year 6,551,643 9,114,472

Other comprehensive income

Gains on revaluation of land and buildings – 2,723,259

Fair value (losses)/gains on available-for-sale financial assetsUnrealised net (losses)/gains arising during the year (34,040) 56,812Net reclassification adjustments for realised net gains – 70,347

Net fair value (losses)/gains on available-for-sale financial assets (34,040) 127,159

Total other comprehensive (loss)/income for the year (34,040) 2,850,418

Total comprehensive income for the year 6,517,603 11,964,890



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1st National Bank St. Lucia LimitedStatement of Changes in EquityFor the year ended December 31, 2010


ShareCapital

$

StatutoryReserve

$

RevaluationReserve

$

RevaluationReserve –available-

for-sale$

RetainedEarnings

$

TotalEquity

$

Balance at January 1, 2009 7,971,454 7,971,454 2,262,730 493,761 37,539,794 56,239,193

Comprehensive income

Profit for the year – – – – 9,114,472 9,114,472

Gains on revaluation of land andbuildings – – 2,723,259 – – 2,723,259

Fair value gains on available-for-sale financial assets – – – 127,159 – 127,159

Total comprehensive income – – 2,723,259 127,159 9,114,472 11,964,890

Dividends relating to 2008 – – – – (1,999,986) (1,999,986)

Transfer to retained earnings – – (46,589) – 46,589 –

Balance at December 31, 2009 7,971,454 7,971,454 4,939,400 620,920 44,700,869 66,204,097

Balance at January 1, 2010 7,971,454 7,971,454 4,939,400 620,920 44,700,869 66,204,097

Comprehensive income

Profit for the year – – – – 6,551,643 6,551,643

Fair value loss on available-for-sale financial assets – – – (34,040) – (34,040)

Total comprehensive income – – – (34,040) 6,551,643 6,517,603

Dividends relating to 2009 – – – – (1,999,986) (1,999,986)

Transfer to retained earnings – – (46,588) – 46,588 –

Balance at December 31, 2010 7,971,454 7,971,454 4,892,812 586,880 49,299,114 70,721,714



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1st National Bank St. Lucia LimitedStatement of Cash FlowsFor the year ended December 31, 2010


Note 2010$

2009$

Cash flows from operating activitiesProfit before income tax 8,303,946 10,370,574Adjustments for:

Depreciation 12 1,570,931 1,068,207Gain on disposal of property, plant and equipment 2,689 –Impairment losses 25 2,538,373 1,577,771Retirement benefit obligations 16 55,000 53,000Dividend income 21 (88,660) (81,630)Interest and similar income 20 (32,992,686) (30,587,169)Interest expense and similar charges 20 12,994,882 11,883,032

Cash flow before changes in operating assets and liabilities (7,615,525) (5,716,215)

Increase in mandatory reserve deposits withCentral Bank 1,206,214 (2,248,860)Increase in loans and advances to financial institutions (8,209,029) (9,181,709)Increase in loans and advances to customers (24,243,674) (33,161,734)(Increase)/decrease in other assets (4,103,176) (573,802)Increase in due to customers 23,082,480 35,577,951Increase/(decrease) in other liabilities 2,973,790 11,143

Cash used in operations (16,908,920) (15,293,226)

Interest and similar income received 29,959,881 29,578,936Interest expense and similar charges paid (13,052,059) (11,488,555)Income taxes paid (2,005,842) (2,155,645)

Net cash (used in)/generated from operating activities (2,006,940) 641,510

Cash flows from investing activitiesProceeds from sale of treasury bills, net 7,630,270 1,058,366Purchase of investment securities (8,649,675) (24,610,805)Proceeds from sale of investment securities 13,683,594 24,850,785Dividends received 88,660 81,630Purchase of property, plant and equipment 12 (692,587) (1,201,654)

Net cash generated from investing activities 12,060,262 178,322

Cash flows from financing activitiesDividends paid on ordinary shares (1,986,962) (1,948,344)Retirement benefit contributions paid (187,000) (133,000)

Net cash used in financing activities (2,173,962) (2,111,344)

Net increase/(decrease) in cash and cash equivalents 7,879,360 (1,291,512)

Cash and cash equivalents, beginning of year 13,591,835 14,853,347

Cash and cash equivalents, end of year 29 21,471,195 13,591,835



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1st National Bank St. Lucia LimitedNotes to Financial StatementsDecember 31, 2010


(1)

1 General information

1st National Bank St. Lucia Limited, (the Bank) was incorporated in Saint Lucia in December 1937 andcontinued under the Companies Act of 1996. In addition to compliance with the Companies Act of 1996, theBank is also subject to the provisions of the Banking Act of Saint Lucia No. 34 of 2006. The Bank commencedtrading in January 1938 and provides retail banking services including the acceptance of deposits, granting ofloans, the provision of foreign exchange services, commercial banking services and electronic banking services.

The Bank has four branches and two bureaux de change. The registered office and principal place of businessof 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 preparat ionThe financial statements of the Bank have been prepared in accordance with International Financial ReportingStandards (IFRS). The financial statements have been prepared under the historical cost convention, as modifiedby 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 accountingestimates. It also requires management to exercise its judgement in the process of applying the Bank’s accountingpolicies. The areas involving a higher degree of judgement or complexity, or areas where assumptions andestimates are significant to the financial statements are disclosed in Note 4.

New and amended standards and interpretations mandatory for the first time for the financial year beginningJanuary 1, 2010 but not currently relevant to the Bank (although they may affect the accounting for futuretransactions and events)

The following standards and amendments to existing standards have been published and are mandatory for theBank’s accounting periods beginning on or after January 1, 2010 or later periods.

IFRIC 9, ‘Reassessment of embedded derivatives and IAS 39, Financial instruments: Recognition andmeasurement’, effective July 1, 2009. This amendment to IFRIC 9 requires an entity to assess whether anembedded derivative should be separated from a host contract when the entity reclassifies a hybrid financialasset out of the ‘fair value through profit or loss’ category. This assessment is to be made based oncircumstances that existed on the later of the date the entity first became a party to the contract and the date ofany contract amendments that significantly change the cash flows of the contract. If the entity is unable to makethis assessment, the hybrid instrument must remain classified as at fair value through profit or loss in itsentirety.


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2 Summary of significant accounting policies…continued

New and amended standards and interpretations mandatory for the first time for the financial year beginningJanuary 1, 2010 but not currently relevant to the Bank (although they may affect the accounting for futuretransactions and events) …continued

IFRS 5 (amendment), ‘Non-current assets held for sale and discontinued operations’. The amendment clarifiesthat IFRS 5 specifies the disclosures required in respect of non-current assets (or disposal groups) classified asheld for sale or discontinued operations. It also clarifies that the general requirement of IAS 1 still apply, inparticular paragraph 15 (to achieve a fair presentation) and paragraph 125 (sources of estimation uncertainty) ofIAS 1.

New standard issued but not effective for the financial year beginning 1 January 2010 and not early adopted

IFRS 9, ‘Financial instruments’, issued in November 2009. This standard is the first step in the process toreplace IAS 39, ‘Financial instruments: recognition and measurement’. IFRS 9 introduces new requirements forclassifying and measuring financial assets and is likely to affect the Bank’s accounting for its financial assets.The standard is not applicable until 1 January 2013 but is available for early adoption.

The Bank is yet to assess IFRS 9’s full impact. However, initial indications are that it may affect the Bank’saccounting for its debt available-for-sale financial assets, as IFRS 9 only permits the recognition of fairvalue gains and losses in other comprehensive income if they relate to equity investments that are not heldfor trading. Fair value gains and losses on available-for-sale debt investments, for example, will thereforehave to be recognised directly in profit or loss.

2.2 Foreign currency translation(a) Functional and presentation currencyItems in the financial statements are measured using the currency of the primary economic environment in whichthe entity operates (“the functional currency”). The financial statements are presented in Eastern Caribbeandollars, which is the Bank’s functional and presentation currency.

(b) Transactions and balancesForeign currency transactions are translated into the functional currency using the exchange rates prevailing atthe dates of the transactions. Foreign exchange gains and losses resulting from the settlement of suchtransactions and from the translation at year-end exchange rates of monetary assets and liabilities denominatedin foreign currencies are recognised in the statement of income.

2.3 Cash and cash equivalentsFor the purposes of the statement of cash flows, cash and cash equivalents comprise balances with less thanthree months maturity from the date of acquisition, including cash and non-restricted balances with the CentralBank and deposits with other banks.

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


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2.5 Financial assets and liabilitiesThe Bank classifies its financial assets in the following categories: loans and receivables, held-to-maturityinvestments, and available-for-sale financial assets. The classification depends on the purpose for which theinvestments were acquired. Management determines the classification of its investments at initial recognitionand re-evaluates this designation at every reporting date.

2.5.1 Financial assets(a)Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are notquoted 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 fairvalue 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 ofcredit deterioration.

Loans and receivables are initially recognised at fair value – which is the cash consideration to originate orpurchase the loan including any transaction costs – and measured subsequently at amortised cost using theeffective interest rate method. Loans and receivables are reported in the balance sheet as loans and advances tofinancial institutions or customers. Interest on loans is included in the statement of income and is reported as‘Interest and similar income’. In the case of an impairment, the impairment loss is reported as a deductionfrom the carrying value of the loan and recognised in the statement of income as ‘Impairment losses on loansand advances’.

(b)Held-to-maturityHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixedmaturities that the Bank’s management has the positive intention and ability to hold to maturity, other than: (a)those that the Bank upon initial recognition designates as at fair value through profit or loss; (b) those that theBank designates as available for sale; and (c) those that meet the definition of loans and receivables.

These are initially recognised at fair value including direct and incremental transaction costs and measuredsubsequently at amortised cost, using the effective interest method.

Interest on held-to-maturity investments is included in the statement of income and reported as ‘Interest andsimilar income’. In the case of an impairment, the impairment loss is reported as a deduction from the carryingvalue of the investment and recognised in the statement of income.

(c)Available-for-sale financial assetsAvailable-for-sale investments are financial assets that are 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 pricesor that are not classified as loans and receivables, held to- maturity investments or financial assets at fair valuethrough profit or loss.


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2.5.1 Financial assets…continued(c)Available-for-sale financial assets…continued

Available-for-sale financial assets are initially recognised at fair value, which is the cash consideration includingany transaction costs, and measured subsequently at fair value with gains and losses being recognised in thestatement of comprehensive income, except for impairment losses and foreign exchange gains and losses, untilthe financial asset is derecognised. If an available-for-sale financial asset is determined to be impaired, thecumulative gain or loss previously recognised in the statement of comprehensive income is recognised in thestatement of income. However, interest is calculated using the effective interest method, and foreign currencygains and losses on monetary assets classified as available for sale are recognised in the statement of income.Dividends on available-for-sale equity instruments are recognised in the statement of income in ‘Dividendincome’ when the Bank’s right to receive payment is established. Available-for-sale equity securities that are notlisted are carried at cost less impairment since the Bank is not able to reliably measure the fair value of theequity securities and the future cash flows relating to the securities cannot be reliably estimated.

(d) RecognitionThe Bank uses trade date accounting for regular way contracts when recording financial asset transactions.Financial assets that are transferred to a third party but do not qualify for derecognition are presented in thebalance sheet as ‘Assets pledged as collateral’, if the transferee has the right to sell or repledge them.

2.5.2 Financial liabilitiesThe Bank’s holding in financial liabilities is at amortised cost. Financial liabilities are derecognised whenextinguished.

(a) Liabilities measured at amortised costFinancial liabilities that are not classified as at fair value through profit or loss fall into this category and aremeasured at amortised cost. Financial liabilities measured at amortised cost are deposits from customers.

2.5.3 Determination of fair valueThe fair values of quoted investments in active markets are based on current bid prices. If there is no active marketfor 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 bymarket participants.

2.5.4 DerecognitionFinancial assets are derecognised when the contractual rights to receive the cash flows from these assets haveceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of theassets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the Bank testscontrol to ensure that continuing involvement on the basis of any retained powers of control does not preventderecognition). Financial liabilities are derecognised when they have been redeemed or otherwise extinguished.

2.6 Property, plant and equipmentLand and buildings comprise mainly branches and offices. Land and buildings are shown at fair value, basedon valuations by external independent valuers done every 5 years, less subsequent depreciation for buildings.Any accumulated depreciation is eliminated against the gross carrying amount of the asset and the net amountis 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.


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2.6 Property, plant and equipment…continuedSubsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, onlywhen it is probable that future economic benefits associated with the item will flow to the Bank and the cost ofthe item can be measured reliably. All other repairs and maintenance are charged to the statement of incomeduring the financial period in which they are incurred.

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

Buildings 2%Furniture and fixtures 10%Equipment 15- 25%Motor vehicles 20%

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

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

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

2.7 Impairment of financial assets(a) Assets carried at amortised costThe Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or groupof financial assets is impaired. A financial asset or a group of financial assets is impaired and impairmentlosses are incurred only if, there is objective evidence of impairment as a result of one or more events thatoccurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impacton the estimated future cash flows of the financial asset or group of financial assets that can be reliablyestimated.

The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: Delinquency in contractual payments of principal or interest; Cash flow difficulties experienced by the borrower (for example, equity ratio, net income percentage of

sales); Breach of loan covenants or conditions; Initiation of bankruptcy proceedings; Deterioration of the borrower’s competitive position; and Deterioration in the value of collateral.


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2.7 Impairment of financial assets…continued(a) Assets carried at amortised cost…continuedThe Bank first assesses whether objective evidence of impairment exists individually for financial assets thatare individually significant, and individually or collectively for financial assets that are not individuallysignificant. If the Bank determines that no objective evidence of impairment exists for an individually assessedfinancial asset, whether significant or not, it includes the asset in a group of financial assets with similar creditrisk characteristics and collectively assesses them for impairment. Assets that are individually assessed forimpairment and for which an impairment loss is or continues to be recognised are not included in a collectiveassessment of impairment.

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

The calculation of the present value of the estimated future cash flows of a collateralised financial assetreflects 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 arewritten off after all the necessary procedures have been completed and the amount of the loss has beendetermined. Subsequent recoveries of amounts previously written off decrease the amount of the provision forloan impairment in the statement of income.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be relatedobjectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’scredit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. Theamount of the reversal is recognised in the statement of income.

(b) Assets classified as available for saleThe Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or agroup of financial assets is impaired. In the case of equity investments classified as available-for-sale, asignificant or prolonged decline in the fair value of the security below its cost is considered in determiningwhether the assets are impaired. If any such evidence exists for available-for-sale financial assets, thecumulative loss – measured as the difference between the acquisition cost and the current fair value, less anyimpairment loss on that financial asset previously recognised in comprehensive income – is removed fromcomprehensive income and recognised in the statement of income. Impairment losses recognised in thestatement of income on equity instruments are not reversed through the statement of income. If in subsequentperiods, the fair value of a debt instrument classified as available-for-sale increases and the increase can beobjectively related to an event occurring after the impairment loss was recognised in profit or loss, theimpairment loss is reversed through the statement of income.


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2.7 Impairment of financial assets…continued(c) Renegotiated loansLoans that are either subject to collective impairment assessment or individually significant and whose termshave been renegotiated are no longer considered to be past due but are treated as new loans. In subsequentyears, the asset is considered to be past due and disclosed only if renegotiated.

2.8 Impairment of other non-financial assetsAssets 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 incircumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised forthe amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount isthe 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 generatingunits).

2.9 Offsetting financial instrumentsFinancial assets and liabilities are offset and the net amount reported in the balance sheet when there is alegally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, orrealise the asset and settle the liability simultaneously.

2.10 Guarantees and letters of creditGuarantees and letters of credit comprise undertakings by the Bank to pay bills of exchange drawn oncustomers. The Bank expects most guarantees and letters of credit to be settled simultaneously with thereimbursement from the customers.

Financial guarantees are initially recognised in the financial statements at fair value on the date the guaranteewas given. The fair value of a financial guarantee at the time of signature is zero because all guarantees areagreed on arm’s length terms and the value of the premium agreed corresponds to the value of the guaranteeobligation. No receivable for the future premiums is recognised. Subsequent to initial recognition, the bank’sliabilities under such guarantees are measured at the higher of the initial amount, less amortisation of feesrecognised in accordance with IAS 18, and the best estimate of the amount required to settle the guarantee.These estimates are determined based on experience of similar transactions and history of past losses,supplemented by the judgement of management. The fee income earned is recognised on a straight-line basisover the life of the guarantee. Any increase in the liability relating to guarantees is reported in the statement ofincome within other operating expenses.

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

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement isdetermined by considering the class of obligations as a whole. A provision is recognised even if the likelihoodof 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 theobligation using a pre-tax rate that reflects current market assessments of the time value of money and therisks specific to the obligation. The increase in the provision due to passage of time is recognised as interestexpense.


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2.12 Employee benefits

(a) Pension obligationThe Bank operates a defined benefit plan for all employees. The assets of the plan are held separately. Thepension plan is funded through payments from employees and the Bank, taking account of therecommendations of independent qualified actuaries. A defined benefit plan is a pension plan that defines anamount of pension that an employee will receive on retirement, usually dependent on one or more factors suchas age, years of service and compensation.

The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value ofthe defined benefit obligation at the balance sheet date less the fair value of plan assets, together withadjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation iscalculated annually by independent actuaries using the projected unit credit method. The present value of thedefined benefit obligation is determined by discounting the estimated future cash outflows using interest ratesof government securities that are denominated in the currency in which the benefits will be paid, and that haveterms 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 excessof the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged orcredited to income over the employees’ expected average remaining working lives. Past-service costs arerecognized immediately in the statement of income, unless the changes to the pension plan are conditional on theemployees remaining in service for a specified period of time (the vesting period). In this case, the past-servicecosts are amortized on a straight-line basis over the vesting period.

(b) Profit-sharing and bonus plansThe Bank recognises a liability and an expense for bonuses and profit-sharing, based on a formula that takesinto consideration the profit attributable to the Bank’s shareholders after certain adjustments. The Bankrecognises a provision where contractually obliged or where there is a past practice that has created aconstructive obligation.

2.13 Income taxDeferred income tax is provided in full, using the liability method, on temporary differences arising between the taxbases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax isdetermined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and areexpected 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 deferredincome tax arises from initial recognition of an asset or liability in a transaction other than a business combinationthat at the time of the transaction affects neither accounting nor 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 againstwhich 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 whichprofits arise. The tax effects of income tax losses available for carry forward are recognised as an asset when it isprobable that future taxable profits will be available against which these losses can be utilised.


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2.14 Share capital(a) Share issue costsIncremental costs directly attributable to the issue of new shares are shown in equity as a deduction from theproceeds.

(b) Dividends on ordinary sharesDividends on ordinary shares are recognised in equity in the period in which they are approved by theshareholders. Dividends for the year declared after the balance sheet date are disclosed in the notes to thefinancial statements.

2.15 Interest income and expenseInterest income and expense for all interest bearing financial instruments are recognised within “interestincome” 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 financialliability and of allocating the interest income or interest expense over the relevant period. The effective interestrate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of thefinancial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset orfinancial liability. When calculating the effective interest rate, the Bank estimates cash flows considering allcontractual terms of the financial instrument (for example, prepayment options) but does not consider futurecredit losses. The calculation includes all fees and points paid or received between parties to the contract thatare 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 impairmentloss, interest income is recognised using the rate of interest used to discount the future cash flows for thepurpose of measuring the impairment loss.

2.16 Fee and commission incomeFees and commissions are generally recognised on an accrual basis when the service has been provided. Loancommitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) andrecognised as an adjustment to the effective interest rate on the loan. Performance linked fees or feecomponents are recognised when the performance criteria are fulfilled.

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

2.18 Leases(a) The Bank is the lesseeLeases in which a significant portion of the risks and rewards of ownership are retained by the lessor areclassified as operating leases. Payments made under operating leases (net of any incentives received from thelessor) are charged to the statement of income on a straight-line basis over the period of the lease.

(b) The Bank is the lessorWhen assets are leased out under an operating lease, the assets are included in the balance sheet based on thenature of the assets. Lease income is recognised over the term of the lease on a straight line basis.


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

2.20 ComparativesExcept when a standard or an interpretation permits or requires otherwise, all amounts are reported or disclosedwith comparative information.

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

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

Risk management is mainly carried out by the Finance Department under policies approved by the Board ofDirectors. Management identifies, evaluates and hedges financial risks in close co-operation with the Bank’soperating units. The Board provides written principles for overall risk management, as well as written policiescovering specific areas, such as foreign exchange risk, interest rate risk and credit risk. In addition, internal auditis 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 riskincludes currency risk, interest rate and other price risk.


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3 Financial risk management…continued

3.1 Credit riskThe Bank takes on exposure to credit risk, which is the risk that a counterparty will cause a financial loss for theBank by failing to discharge their contractual obligation to the Bank. Significant changes in the economy, or inthe health of a particular industry segment that represents a concentration in the Bank’s portfolio, could result inlosses that are different from those provided for at the balance sheet date. Management therefore carefullymanages its exposure to credit risk. Credit exposures arise principally in lending activities that lead to loans andadvances, and investment activities that bring debt securities and other bills into the Bank’s asset portfolio. Thereis also credit risk in off-balance sheet financial instruments such as loan commitments. The credit risk ismanaged and controlled by management who reports to the Board of Directors.

3.1.1 Credit risk measurement(a) Loans and advancesEastern Caribbean Central Bank prudential guidelines are embedded in the Bank’s daily operationalmanagement. The operational measurements can be contrasted with impairment allowances required under IAS39, 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 CentralBank 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, inprinciple, exposures migrate between classes as the assessment of their probability of default changes. The Bankregularly validates the performance of the rating and their predictive power with regard to default events.

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

1 Pass2 Special Mention3 Substandard4 Doubtful5 Loss

(b) Debt securities and other billsFor debt securities and other bills, external rating such as Caricris or their equivalents are used by managementfor management of the credit risk exposures.

3.1.2 Risk limit control and mitigation policiesThe 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 inrelation to one borrower, or groups of borrowers, and to the industry segments. Such risks are monitored on arevolving 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 exposuresagainst limits are monitored daily.

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


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3.1.2 Risk limit control and mitigation policies…continued

Some other specific control and mitigation measures are outlined below.

(a) CollateralThe Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is thetaking of security for funds advanced, which is common practice. The Bank implements guidelines on theacceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans andadvances 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 facilitiesare generally unsecured. In addition, in order to minimize the credit loss the Bank will seek additional collateralfrom 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 theinstrument. Debt securities, treasury and other eligible bills are generally unsecured.

(b) Credit-related commitmentsThe 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 lettersof credit – which are written undertakings by the Bank on behalf of a customer authorising a third party to drawdrafts on the Bank up to a stipulated amount under specific terms and conditions – are collateralised by theunderlying shipments of goods to which they relate and therefore carry less risk than a direct loan.

Commitments to extend credit represent unused portions of authorizations 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 potentiallyexposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is lessthan the total unused commitments, as most commitments to extend credit are contingent upon customersmaintaining specific credit standards. The Bank monitors the term to maturity of credit commitments becauselonger-term commitments generally have a greater degree of credit risk than shorter-term commitments.

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

2010 2009Loans and

advances(%)

Impairmentprovision

(%)

Loans andadvances

(%)

Impairmentprovision

(%)

Bank’s rating1. Pass 85.7% 20.7% 87.0 9.12. Special mention 1.4% 0.1% 1.7 –3. Sub-standard 7.6% 24.3% 5.6 12.64. Doubtful 3.4% 24.5% 3.3 37.05. Loss 1.9% 30.4% 2.4 41.3


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3.1.3 Impairment and provisioning policies…continuedThe internal rating tool assists management to determine whether objective evidence of impairment existsunder 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 (e.g. 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 leastannually or more regularly when individual circumstances require. Impairment allowances on individuallyassessed accounts are determined by an evaluation of the incurred loss at balance-sheet date on a case-by-casebasis, and are applied to all individually significant accounts. The assessment normally encompasses collateralheld (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:

Maximum exposure2010

$2009

$

Due from other banks 15,171,047 5,976,620Treasury bills 9,235,477 16,832,105Loans and advances to financial institutions 56,395,260 47,965,561Loans and advances to customers:− Overdraft 18,715,623 13,918,905− Demand loans 132,225,281 126,920,339− Promissory notes 10,694,261 11,254,777− Mortgages 143,693,469 128,853,775Investments securities:− available for sale – debt securities 9,960,812 8,607,692− held to maturity 16,264,813 22,556,356Other assets 4,697,327 1,909,761

Credit risk exposures relating to off-balance sheet items are as follows:Financial guarantees 4,042,664 4,199,510Loan commitments and other credit related facilities 30,048,273 24,695,113

At December 31 451,144,307 413,690,514

The above table represents a worse case scenario of credit risk exposure to the Bank at December 31, 2010 and2009, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheetassets, the exposures set out above are based on net carrying amounts as reported in the balance sheet.

As shown above, 80% of the total maximum exposure is derived from loans and advances to financial institutionsand customers (2009 - 80%); 6% represents investments in debt securities (2009 - 7%).


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(14)


3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements…continuedManagement is confident in its ability to continue to control and sustain minimal exposure of credit risk to theBank resulting from both its loan and advances portfolio based on the following:

87% of the loans and advances portfolio is categorised in the top two grades of the internal rating system(2009 - 89%);

Mortgage loans which represent the largest percentage of the portfolio, followed by demand loans, arebacked by collateral;

58% of the loans and advances portfolio are considered to be neither past due nor impaired (2009 - 62%); The Bank continues to grant loans and advances in accordance with its lending policies and guidelines; and 16% (2009 - 16%) of the investments in debt securities and other bills have at least an A- credit rating. Many

issuers in the region are not graded, consequently 56% of investments are not rated, compared to 84% lastyear.

3.1.5 Loans and advances

Loans and advances are summarised as follows:

2010$

2009$

Loans and advances to customersNeither past due nor impaired 177,166,054 174,530,840Past due but not impaired 92,169,506 85,436,909Impaired 51,088,178 34,142,461

Gross 320,423,738 294,110,210

Less: allowance for impairment (Notes 9 and 10) (15,095,104) (13,162,414)

Net 305,328,634 280,947,796

Loans and advances to financial institutionsNeither past due nor impaired (Note 8) 56,395,260 47,965,561


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3.1.5 Loans and advances…continued

(a) Loans and advances neither past due or impairedThe credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessedby reference to the internal rating system adopted by the Bank.

Overdrafts$

Demandloans

$

Promissorynotes

$Mortgages

$

Total Loansand advancesto customers

$

December 31, 2010

Loans and advances to customers

Grades1. Pass 17,306,843 71,387,428 3,419,791 82,011,120 174,125,1822. Special mention 927,791 253,037 – 1,304,842 2,485,6703. Sub-standard 555,202 – – – 555,2024. Doubtful – – – – –5. Loss – – – – –

Total 18,789,836 71,640,465 3,419,791 83,315,962 177,166,054

December 31, 2009

Loans and advances to customers

Grades1. Pass 11,943,628 72,543,430 4,839,336 82,329,564 171,655,9582. Special mention 1,194,480 502,893 – 1,177,509 2,874,8823. Sub-standard – – – – –4. Doubtful – – – – –5. Loss – – – – –

Total 13,138,108 73,046,323 4,839,336 83,507,073 174,530,840

Loans and advances to financial institutionsLoans and advances to financial institutions were graded 1 (Pass) as at December 31, 2010 and December 31,2009.


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(b) Loans and advances past due but not impairedLoans and advances less than 90 days past due are not considered impaired, unless other information is availableto indicate the contrary. Gross amount of loans and advances by class to customers net of unearned interest thatwere past due but not impaired were as follows:

Demandloans

$

Promissorynotes

$Mortgages

$

Total Loansand advancesto customers

$December 31, 2010Past due up to 30 days 22,559,061 1,015,135 29,846,915 53,421,111Past due 30-60 days 10,572,894 262,539 2,873,492 13,708,925Past due 60-90 days 3,048,712 263,606 3,089,069 6,401,387Past due over 90 days 8,596,939 347,032 9,694,112 18,638,083

Total 44,777,606 1,888,312 45,503,588 92,169,506

Fair value of collateral 92,624,317 6,641,563 88,139,814 187,405,694

December 31, 2009Past due up to 30 days 19,285,778 1,262,506 18,673,121 39,221,405Past due 30-60 days 5,647,423 276,873 5,650,967 11,575,263Past due 60-90 days 6,693,489 156,288 3,615,381 10,465,158Past due over 90 days 10,780,431 691,268 12,703,384 24,175,083

Total 42,407,121 2,386,935 40,642,853 85,436,909

Fair value of collateral 71,023,322 8,458,726 100,217,108 179,699,156

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

(c) Loans and advances individually impairedThe table below shows the gross amount of individually impaired loans and advances to customers by gradesbefore taking into consideration the cash flows from collateral held.

2010$

2009$

Individually impaired loansGrades:1. Pass 10,056,689 663,9642. Special mention 3,576 2,5763. Sub-standard 24,334,367 16,397,0334. Doubtful 10,632,823 9,907,6865. Loss 6,060,723 7,171,202

Total 51,088,178 34,142,461

Fair value of collateral 80,309,016 62,708,004


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(d) Loans and advances renegotiatedRestructuring activities include extended payment arrangements, approved external management plans,modification and deferral of payments. Following restructuring, a previously overdue customer account isreset to a normal status and managed together with other similar accounts. Restructuring policies andpractices are based on indicators or criteria which, in the judgment of local management, indicate thatpayment will most likely continue. These policies are kept under continuous review. Restructuring is mostcommonly applied to term loans, in particular customer finance loans. Renegotiated loans that wouldotherwise be past due or impaired as at December 31, 2010 amounted to $2,590,164 (2009- $131,788).

3.1.6 Debt securities, treasury bills and other eligible billsThe table below presents an analysis of debt securities, treasury bills and other eligible bills by rating agencydesignation at December 31, 2010, based on Caricris or their equivalent:

Investment securitiesTreasury

bills$

Held-to-maturity

$

Available-for-sale

$Total

$

AA- to AA+ – 4,097,595 1,531,808 5,629,403A- to A+ – – – –CariBBB+ 2,009,301 8,151,115 – 10,160,416Unrated 7,226,176 4,016,103 8,429,004 19,671,283

Total 9,235,477 16,264,813 9,960,812 35,461,102

3.1.7 Repossessed collateralDuring 2010, the Bank obtained assets by taking possession of collateral held as security, as follows:

Nature of assets Carryingamount

$

Vehicles 1,136,965

Repossessed vehicles are sold as soon as practicable with the proceeds used to reduce the outstandingindebtedness.

3.1.8 Concentration of risks of financial assets with credit risk exposure

(a) Geographical sectorsThe Bank operates primarily in St. Lucia and the exposure to credit risk is concentrated in this area.


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3.2 Market riskThe Bank takes on exposure to market risks, which is the risk that the fair value or future cash flows of afinancial instrument will fluctuate because of changes in market prices. Market risks arise from open positionsin interest rate and equity products, all of which are exposed to general and specific market movements andchanges in the level of volatility of market rates or prices such as interest rates, credit spreads, foreign exchangerates and equity prices. The Bank’s exposures to market risks primarily arise from the interest rate managementof the Bank’s retail and commercial banking assets and liabilities and equity risks arising from the Bank’savailable-for-sale investments.

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

At December 31, 2010, if equity securities prices had been 5% higher/lower with all variable held constantcomprehensive income for the year would have been $46,763 higher/lower (2009 - $48,465 higher/lower) as aresult of the increase/decrease in fair value of available for sale equity securities.

3.2.2 Foreign exchange riskThe Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on itsfinancial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and intotal which are monitored daily. The Bank’s exposure to currency risk is minimal since most of its assets andliabilities in foreign currencies are held in United States dollars. The exchange rate of the Eastern Caribbeandollar (EC$) to the United States dollar (US$) has been formally pegged at EC$2.70 = US$1.00 since 1976. Thefollowing table summarises the Bank’s exposure to foreign currency exchange rate risk at December 31, 2010.Included in the table are the Bank’s financial instruments at carrying amount, categorised by currency.


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(23)


3.2.3 Interest rate riskCash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuatebecause of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financialinstrument will fluctuate because of changes in market interest rates. The Bank takes on exposure to theeffects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flowrisks. Interest margins may increase as a result of such changes but may reduce losses in the event thatunexpected movements arise.


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3.2.3 Interest rate risk…continuedThe Bank’s fair value interest rate risk arises from debt securities classified as available for sale. At December31, 2010 if market interest rates had been 100 basis points higher/lower with all variables held constant,comprehensive income for the year would have been $69,015 lower/$160,392 higher (2009 - $81,693lower/$117,147 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, 2010if variable interest rates had been 100 basis points higher/lower with all other variables held constant, post-taxprofit for the year would have been $1,918,273 higher/lower (2009 - $1,865,770 higher/lower), mainly as a resultof higher/lower interest income on variable rate loans.

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

3.3.1 Liquidity risk management processThe 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 fundsas they mature or as borrowed by customers. The Bank ensures that sufficient funds are held in the one tothirty day maturity bucket to satisfy liquidity requirements.

Maintaining a portfolio of marketable assets that can easily be liquidated as protection against any unforeseenliquidity 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 anyliquidity needs that may arise.

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


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3.3.3 Non-derivative cash flowsThe table below presents the cash flows payable by the Bank under non-derivative financial liabilities and assetsheld for managing liquidity risk by remaining contractual maturities at the balance sheet date. The amountsdisclosed in the table are the contractual undiscounted cash flows, whereas the Bank manages the inherentliquidity risk based on expected undiscounted cash inflows.

Up to1 month

$1-3 months

$3-12 months

$1-5 years

$

Over 5years

$Total

$As at December 31,

2010

LiabilitiesDue to customers 244,046,506 45,849,226 97,938,079 3,902,632 – 391,736,442Other liabilities 6,819,199 – – – – 6,819,199

Total liabilities(Contractual maturity

dates) 250,865,705 45,849,226 97,938,079 3,902,632 – 398,555,641

Assets held formanaging liquidity risk(Contractual maturitydates) 68,035,767 38,489,545 70,746,796 69,674,267 209,847,070 456,793,445

As at December 31,2009

LiabilitiesDue to customers 234,017,911 43,514,407 84,622,554 5,885,395 – 368,040,267Other liabilities 3,832,385 – – – – 3,832,385

Total liabilities(Contractual maturity

dates) 237,850,296 43,514,407 84,622,554 5,885,395 – 371,872,652

Assets held formanaging liquidity risk(Contractual maturitydates) 49,757,710 45,699,912 56,249,216 67,280,190 210,586,870 429,573,898


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3.3.4 Assets held for managing liquidity riskAssets available to meet all of the liabilities and to cover outstanding loan commitments include cash, centralbank balances, items in the course of collection and treasury and other eligible bills; loans and advances tofinancial institutions; and loans and advances to customers. In the normal course of business, a proportion ofcustomer loans contractually repayable within one year will be extended. The Bank would also be able to meetunexpected net cash outflows by selling securities and accessing additional funding sources.

3.3.5 Off-balance sheet items(a) Loan commitmentsThe dates of the contractual amounts of the Bank’s off-balance sheet financial instruments that commit itto extend credit to customers and other facilities (Note 30), are summarised in the table below.

(b) Financial guarantees and other financial facilitiesFinancial guarantees (Note 30), are also included below based on the earliest contractual maturity date.

1 year$

1-5 years$

Over 5 years$

Total$

As at December 31, 2010Loan commitments 23,455,149 6,488,765 104,359 30,048,273Guarantees, acceptances and other

financial facilities – 3,930,006 112,658 4,042,664

Total 23,455,149 10,418,771 217,017 34,090,937

As at December 31, 2009Loan commitments 22,638,843 2,048,273 7,997 24,695,113Guarantees, acceptances and other

financial facilities 207,262 3,879,590 112,658 4,199,510

Total 22,846,105 5,927,863 120,655 28,894,623

3.4 Fair values of financial assets and liabilities(a) Financial instruments not measured at fair valueFair value amounts represent estimates of the consideration that would currently be agreed upon betweenknowledgeable willing parties who are under no compulsion to act and is best evidenced by a quoted marketvalue, if one exists. The following methods and assumptions were used to estimate the fair value of financialinstruments.

The fair values of cash resources, other assets and liabilities, cheques and other items in transit and due toother banks are assumed to approximate their carrying values due to their short term nature. The fair value ofoff balance sheet commitments are also assumed to approximate the amounts disclosed in Note 30 due totheir short term nature.

(i) Loans and advances to customersLoans and advances are net of provisions for impairment. The estimated fair values of loans and advancesrepresent the discounted amount of estimated future cash flow expected to be received. Expected cash flowsare discounted at current market rate to determine fair value.


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3.4 Fair values of financial assets and liabilities…continued(ii) Investment securitiesInvestment securities include only interest bearing assets held to maturity; assets classified as available-for-sale are measured at fair value except for available-for-sale equity securities – unlisted which are carried atcost less impairment. The fair value of equity securities carried at cost less impairment is not disclosed as itcan not be reliably estimated (Note 11). The fair value for held-to-maturity assets is based on market pricesor broker/dealer price quotations. Where this information is not available, fair value is estimated usingquoted market prices for securities with similar credit maturity and yield characteristics.

(iii) Due to customersThe estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, isthe amount repayable on demand.

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

The table below summarises the carrying amounts and fair values of those financial assets and liabilities notpresented on the Bank’s balance sheet at their fair value.

Carrying value Fair value2010

$2009

$2010

$2009

$Financial assets

Loans and advances to financial institutions 56,395,260 47,965,561 56,395,260 47,965,561Loans and advances to customers: 305,327,634 280,947,796 357,662,684 286,801,939− Overdraft 18,715,623 13,918,905 18,715,623 13,872,273− Demand loans 132,225,282 126,920,339 172,106,624 130,848,499− Promissory notes 10,694,261 11,254,777 10,977,734 8,288,869− Mortgages 143,693,469 128,853,775 155,862,703 133,792,298Investment securities− Held to maturity 16,264,713 22,556,356 15,176,080 22,247,917

Financial liabilities

Due to customers: 388,402,319 365,377,016 385,939,680 363,421,316− Time deposits 162,176,015 143,041,123 159,713,376 141,085,423− Savings accounts 194,992,697 187,915,027 194,992,697 187,915,027− Demand accounts 31,233,607 34,420,866 31,233,607 34,420,866


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3.4 Fair values of financial assets and liabilities…continued

(b) Fair value hierarchy

IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques areobservable or unobservable. Observable inputs reflect market data obtained from independent sources;unobservable inputs reflect the Bank’s market assumptions. These two types of inputs have created the followingfair value hierarchy:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includeslisted equity securities and debt instruments on exchanges.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,either directly (that is, as prices) or indirectly (that is, derived from prices).

Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs).This level includes equity investments and debt instruments with significant unobservable components.

This hierarchy requires the use of observable market data when available. The Bank considers relevant andobservable market prices in its valuations where possible.

3.4.1 Assets measured at fair value

December 31, 2009 Level 1$

Level 2$

Level 3$

Total$

Available-for-sale financial assets

- Investment securities - debt – 5,538,959 3,068,733 8,607,692- Investment securities - equity – 969,310 – 969,310

Total assets – 6,508,269 3,068,733 9,577,002

December 31, 2010 Level 1$

Level 2$

Level 3$

Total$

Available-for-sale financial assets

- Investment securities - debt – 5,039,192 4,921,621 9,960,813- Investment securities - equity – 935,270 – 935,270

Total assets – 5,974,462 4,921,621 10,896,083


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Reconciliation of Level 3 Items

Available-for-salefinancial assetsDebt securities

$

At January 1, 2010 3,068,733

Additions 2,215,000Interest accrued 174,250Settlements (536,362)

At December 31, 2010 4,921,621

At January 1, 2009 4,427,490

Settlements (1,358,757)Transfer into or out of Level 3 –

At December 31, 2009 3,068,733


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3.4.1 Assets measured at fair value…continued

The following table shows the sensitivity of level 3 measurements to reasonably possible alternativeassumptions:

Reflected in equityFavourable

changes$

Unfavourablechanges

$At December 31, 2010

Available-for-sale financial assets 28,875 385,164

The above favourable and unfavourable changes are calculated independently from each other.

3.5 Capital managementThe Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face ofbalance 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, employingtechniques based on the guidelines developed by the East Caribbean Central Bank (‘the Authority’) for supervisorypurposes. The required information is filed with the Authority on a quarterly basis.

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

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 gainsarising 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 thenature of − and reflecting an estimate of credit, market and other risks associated with − each asset andcounterparty, 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.


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3.5 Capital management…continuedThe table below summarises the composition of regulatory capital and the ratios of the Bank for the years endedDecember 31, 2010 and 2009. During those two years, the Bank complied with all of the externally imposedcapital requirements to which they are subject.

2010$

2009$

Tier 1 capitalShare capital 7,971,454 7,971,454Statutory reserve 7,971,454 7,971,454Retained earnings 49,299,114 44,700,869

Total qualifying Tier 1 capital 65,242,022 60,643,777

Tier 2 capitalRevaluation reserve – available-for-sale investments 586,880 620,920Revaluation reserve – property, plant and equipment 4,892,812 4,939,400

Total qualifying Tier 2 capital 5,479,692 5,560,320

Total regulatory capital 70,721,714 66,204,097

Risk-weighted assets:On-balance sheet 302,582,508 279,719,643Off-balance sheet 6,798,422 5,778,925

Total risk-weighted assets 309,380,930 285,498,568

Capital adequacy ratio 21% 21%

Basel ratio 23% 23%

The capital adequacy ratio is calculated as total qualifying Tier 1 capital divided by total risk-weighted assets.The Basel ratio is calculated as total regulatory capital divided by total risk-weighted assets.


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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 withinthe next financial year. Estimates and judgements are continually evaluated and are based on historicalexperience and other factors, including expectations of future events that are believed to be reasonable underthe circumstances.

(a) Impairment losses on loans and advancesThe Bank reviews its loan portfolio to assess impairment at least on a quarterly basis. In determining whetheran impairment loss should be recorded in the statement of income, the Bank makes judgement as to whetherthere is any observable data indicating that there is a measurable decrease in the estimated future cash flowsfrom a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. Thisevidence may include observable data indicating that there has been an adverse change in the payment status ofborrowers 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 andobjective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. Themethodology and assumptions used for estimating both the amount and timing of future cash flows arereviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extentthat the net present value of estimated cash flows differs by +/-5%, the portfolio provision would be estimated$33,037 lower/higher (2009 - $38,499 lower/higher).

(b) Impairment of available-for-sale equity investmentsThe Bank determines that available-for-sale equity investments are impaired when there has been a significant orprolonged decline in the fair value below its cost. This determination of what is significant or prolonged requiresjudgement. In making this judgment, the Bank evaluates among other factors, when there is evidence ofdeterioration in the financial health of the investee industry and sector performance, changes in technology andoperational and financing cash flows. There were no declines in fair value below cost considered significant orprolonged as at December 31, 2010.

(c) Held-to-maturity investmentsThe Bank follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed ordeterminable 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 theBank fails to keep these investments to maturity other than for the specific circumstances – for example, sellingan insignificant amount close to maturity – it will reclassify the entire class as available-for-sale. Theinvestments would therefore be measured at fair value not amortised cost. If the entire held-to-maturityinvestments are tainted, the carrying value would decrease by $1,088,733 (2009- $308,439) with a correspondingentry in the fair value reserve in comprehensive income.

(d) Income taxesSignificant judgment is required in determining the provision for income taxes including any liabilities for taxaudit issues. There are some transactions and calculations for which the ultimate tax determination is uncertainduring the ordinary course of business. Where the final tax outcome of these matters is different from theamounts that were initially recorded by +/-5%, tax expenses will be $28,750 higher/lower.


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4 Critical accounting estimates, and judgements in applying accounting policies…continued

(e) Useful life of property and equipmentThe Bank’s management determines the estimated useful life and related depreciation charges for its propertyand equipment. This estimate is based on the expected life that these properties and equipment are to be usedby the Bank. It could change significantly as a result of changes in the management’s intention on whether toextend the asset’s use or to hold it for disposal as a response to competition or severe economic challenges.Management will increase the depreciation charge where useful lives are less than previously estimated lives.

As of December 31, 2010, management has changed the useful life of one of its buildings. If the actual usefullife of this property were to differ by 50% higher or 50% lower from management’s estimates, the carryingamount of the building would be estimated to be $183,234 lower or $549,701 lower, respectively.


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5 Cash and balances with Central Bank

2010$

2009$

Cash in hand 6,300,148 6,659,391Balances with Central Bank other than mandatory reserve deposits

– 955,824

Included in cash and cash equivalents (Note 29) 6,300,148 7,615,215

Mandatory reserve deposits with Central Bank 20,486,216 21,692,430

26,786,364 29,307,645

Pursuant to Section 17 of the Banking Act of St. Lucia No. 34 of 2006, the Bank is required to maintain in cashand 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 withthe Central Bank are non-interest bearing. As at December 31, 2010, the required mandatory reserve deposit is$22,834,155. Cash in hand includes an amount of $2,347,939 which is restricted to cover the increase inmandatory reserve deposits with Central Bank.

6 Due from other banks

2010$

2009$

Items in the course of collection from other banks 1,494,866 1,411,193Placements with other banks 13,676,181 4,565,427

Included in cash and cash equivalents (Note 29) 15,171,047 5,976,620

The weighted average effective interest rate in respect of interest bearing deposits at December 31, 2010 was0.58% (2009 – 0.76%).

7 Treasury bills

2010$

2009$

Treasury bills 9,235,477 16,832,105

The Bank has invested in treasury bills in the Governments of Saint Lucia, Saint Vincent, Grenada andAntigua. The weighted average effective interest rate of treasury bills in 2010 was 6.23% (2009 – 5.91%).All treasury bills have fixed interest rates.


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8 Loans and advances to financial institutions

2010$

2009$

Reverse repos 56,395,260 47,965,561

Reverse repos are securities purchased under agreements to resell. The weighted average effective interestrate of the reverse repos in 2010 was 5.55% (2009 - 5.81%).

The Bank accepted securities at fair value of $56,395,260 (2009 - $45,846,020) as collateral for the loans andadvances to financial institutions.

Allowance account for losses on loans and advances to financial institutions as at December 31, 2010 and2009 was nil.

9 Loans and advances to customers

2010$

2009$

Overdraft 18,789,836 13,927,413Demand loans 142,992,610 135,608,324Promissory notes 12,144,129 12,585,046Mortgages 146,497,163 131,989,427

320,423,738 294,110,210

Less provision for impairment of loans and advances (Note 10) (15,095,104) (13,162,414)

305,328,634 280,947,796

Current 33,950,089 20,168,920Non-current 271,378,545 260,778,876

305,328,634 280,947,796

The weighted average effective interest rate on productive loans stated at amortised cost at December 31, 2010was 9.37% (2009 – 9.59%) and productive overdraft stated at amortised cost was 12.27% (2009 - 12.39%).


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10 Provision for impairment of loans and advances

Reconciliation of allowance account for losses on loans and advances by class is as follows:

Overdraft$

Demandloans

$

Promissorynotes

$Mortgage

$Total

$

Balance at January 1, 2010 8,508 8,687,985 1,330,269 3,135,652 13,162,414Provision for loan impairment (Note 25) 83,924 2,433,924 286,405 (400,880) 2,403,373Loans written off during the year (18,219) (277,443) (153,727) (21,294) (470,683)

At December 31, 2010 74,213 10,844,466 1,462,947 2,713,478 15,095,104

Balance at January 1, 2009 9,189 9,705,385 1,459,512 3,057,236 14,231,322Provision for loan impairment (681) 879,742 (44,535) 743,245 1,577,771Loans written off during the year – (1,897,142) (84,708) (664,829) (2,646,679)

At December 31, 2009 8,508 8,687,985 1,330,269 3,135,652 13,162,414

The total impairment provision for loans and advances to customers is $15,095,104 (2009 - $13,162,414) ofwhich $14,044,457 (2009 - $12,392,434) represents the individually impaired loans and the remaining amountof $1,050,647 (2009 - $769,980) represents the portfolio provision.

11 Investment securities

2010$

2009$

Available-for-saleEquity securities- Listed 935,270 969,310- Unlisted 2,715,620 2,708,160Debt securities:- Listed 5,039,192 5,538,959- Unlisted 4,921,620 3,068,733

Total securities: available-for-sale 13,611,702 12,285,162Held-to-maturityDebt securities - at amortised cost:- Listed 10,193,711 10,253,291- Unlisted 6,071,102 12,303,065

Total securities: held-to-maturity 16,264,813 22,556,356


29,876,515 34,841,518


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11 Investment securities…continued

Available-for-sale equity securities – unlisted totalling $2,715,620 (2009 - $2,708,160) are carried at cost lessimpairment. The Bank is not able to reliably measure the fair value of the equity securities since the shares arenot traded in an active market and the future cash flows relating to the securities cannot be reliably estimated.

All debt securities have fixed interest rates.

The weighted average effective interest rate on securities held-to-maturity stated at amortised cost atDecember 31, 2010 was 6.6% (2009 – 6.9%)

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

Available forsale

$

Held tomaturity

$

At January 1, 2010 12,285,162 22,556,356Additions 7,225,679 3,571,504Reclassification from HTM to AFS 1,350,000 (1,350,000)Disposals (sale and redemption) (7,148,179) (8,513,047)Gains from changes in fair value 34,040 –Allowance for non-performance (Note 25) (135,000) –

At December 31, 2010 13,611,702 16,264,813

At January 1, 2009 12,789,462 22,171,742Additions 2,009,708 23,160,649Disposals (sale and redemption) (2,570,820) (22,776,035)Gains from changes in fair value 56,812 –

At December 31, 2009 12,285,162 22,556,356


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12 Property, plant and equipment

Land andBuilding

$

Furnitureand Fixtures

$Equipment

$

MotorVehicles

$Total

$December 31, 2008

Cost or valuation 10,795,721 1,288,791 10,184,957 186,920 22,456,389Accumulated depreciation (2,038,423) (886,205) (6,967,717) (89,589) (9,981,934)

Net book amount 8,757,298 402,586 3,217,240 97,331 12,474,455

Year ended December 31, 2009

Opening net book amount 8,757,298 402,586 3,217,240 97,331 12,474,455Revaluation 2,723,259 – – – 2,723,259Additions in the year 398,934 55,475 747,245 – 1,201,654Depreciation charge (Note 22) (242,112) (43,418) (763,211) (19,466) (1,068,207)

Closing net book amount 11,637,379 414,643 3,201,274 77,865 15,331,161

At December 31, 2009

Cost or valuation 12,083,652 1,344,266 10,932,202 186,920 24,547,040Accumulated depreciation (446,273) (929,623) (7,730,928) (109,055) (9,215,879)

Net book amount 11,637,379 414,643 3,201,274 77,865 15,331,161

Year ended December 31, 2010

Opening net book amount 11,637,379 414,643 3,201,274 77,865 15,331,161Additions in the year 219,380 67,860 405,347 – 692,587Disposals in the year – – (3,398) – (3,398)Depreciation on disposals – – 709 – 709Depreciation charge (Note 22) (826,650) (43,105) (685,603) (15,573) (1,570,931)

Closing net book amount 11,030,109 439,398 2,918,329 62,292 14,450,128

At December 31, 2010

Cost or valuation 12,303,032 1 1,412,126 11,334,151 186,920 25,236,229Accumulated depreciation (1,272,923) (972,728) (8,415,822) (124,628) (10,786,101)

Net book amount 11,030,109 439,398 2,918,329 62,292 14,450,128

In 2009, land and buildings were revalued by an independent valuer based on open market value. The valuationindicated that the market value was above the carrying amount of the respective assets in the books of the Bank.As a result, the carrying amounts were increased by $2,723,259, with a corresponding increase in the revaluationreserves in equity.


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12 Property, plant and equipment …continued

During the year, the Bank changed the useful economic life of the building on #18 Bridge Street, Castries, to 2years. The change resulted in a $549,701 increase in annual depreciation charge for this building.

The historical cost of land and buildings are:

2010$

2009$

Cost 8,263,778 8,044,398Accumulated depreciation based on historical cost (2,364,286) (1,709,253)

Depreciated historical cost 5,899,492 6,335,145

13 Other assets

2010$

2009$

Accounts receivable 4,697,327 1,909,761Inventories of stationery and supplies 223,586 174,051Prepayments 2,103,093 837,018

7,024,006 2,920,830

14 Due to customers

2010$

2009$

Time deposits 162,176,015 143,041,123Savings accounts 194,992,697 187,915,027Demand amounts 31,233,607 34,420,866

388,402,319 365,377,016


388,402,319 365,377,016

All deposits carry fixed interest rates.

The weighted average effective interest rate of customers’ deposits at December 31, 2010 was 3.64%(2009 - 3.54%).


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15 Other liabilities

2010$

2009$

Manager’s cheques outstanding 1,512,825 773,237Accounts payable and accrued expenses 4,914,239 2,680,038Dividends payable on ordinary shares 392,135 379,110

6,819,199 3,832,385

16 Retirement benefit obligations

Pension benefitsThe amount recognised in the balance sheet at December 31, 2010 is determined as follows:

2010$

2009$

Present value of funded obligations 3,027,000 2,704,000Fair value of plan assets (3,410,000) (2,961,000)

(383,000) (257,000)Unrecognised actuarial loss 910,000 916,000

Liability in the balance sheet 527,000 659,000

The movement in defined benefit obligations is as follows:

2010$

2009$

At beginning of year 2,704,000 2,378,000Current service cost 122,000 123,000Interest cost 189,000 166,000Members’ contributions 45,000 41,000Actuarial (gain)/loss (14,000) 13,000Benefits paid (19,000) (17,000)

At end of year 3,027,000 2,704,000


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16 Retirement benefit obligations ...continued

The movement in fair value of plan assets for the year is as follows:

2010$

2009$

At beginning of year 2,961,000 2,613,000Expected return on plan assets 215,000 188,000Actuarial gain 21,000 3,000Bank’s contributions 187,000 133,000Members’ contributions 45,000 41,000Benefits paid (19,000) (17,000)

At end of year 3,410,000 2,961,000

The amounts recognised in the statement of income are as follows:

2010$

2009$

Current service cost 122,000 123,000Interest cost 189,000 166,000Net actuarial gains recognised in the year (41,000) (48,000)Expected return on plan assets (215,000) (188,000)

Total included in staff costs (Note 24) 55,000 53,000

The actual return on plan assets was $236,000 (2009 - $191,000).

Movement in the liability recognised in the balance sheet:

2010$

2009$

At beginning of year 659,000 739,000Pension expense 55,000 53,000Contributions paid (187,000) (133,000)

At end of year 527,000 659,000

The principal actuarial assumptions used were as follows:

2010%

2009%

Discount rate 7 7Expected return on plan assets 7 7Future salary increases 5.5 5.5


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16 Retirement benefit obligations…continued

Plan assets allocation is as follows:

2010%

2009%

Debt securities 87 86Others 13 14

100 100

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

The Bank’s expected contributions for the year 2010 is estimated at $162,000 (2009 - $149,000).

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

2010$

2009$

2008$

2007$

2006$

Defined benefit obligation 3,027,000 2,704,000 2,378,000 2,536,000 2,219,000Fair value of plan assets (3,410,000) (2,961,000) (2,613,000) (2,253,000) (1,993,000)

(Surplus)/deficit in the plan (383,000) (257,000) (235,000) 283,000 226,000

Experience adjustment on plan liabilities (14,000) 13,000 (43,000) 29,000 (87,000)Experience adjustment on plan assets 21,000 3,000 75,000 (11,000) (21,000)

17 Deferred income tax

Deferred income taxes are calculated in full on temporary differences under the liability method using aprincipal tax rate of 30%.

2010$

2009$

At beginning of year 218,194 30,846Statement of income recovery for the year (Note 26) 140,350 187,348

Deferred tax asset at end of year 358,544 218,194


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17 Deferred income tax...continued

The deferred tax asset comprises of the following temporary differences:

2010$

2009$

Accelerated capital allowances 668,147 68,312Retirement benefit obligation 527,000 659,000

1,195,147 727,312

Deferred tax asset at income tax rate of 30% 358,544 218,194

18 Share capital

No. ofShares

2010$

No. ofShares

2009$

Authorized:5,000,000 ordinary shares

At beginning and end of year 4,999,966 7,971,454 4,999,966 7,971,454

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 ofeach year transfer to that reserve a sum equal to not less than twenty percent of such profits whenever the amountof the fund is less than one hundred percent of the paid-up capital of the Bank.


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20 Net interest income

2010$

2009$

Interest and similar incomeLoans and advances 27,450,605 24,805,756Deposits with banks 15,333 10,429Investment securities 5,526,748 5,770,984

32,992,686 30,587,169

Interest expense and similar chargesTime deposits 6,547,193 5,841,078Savings deposits 6,381,914 6,003,044Demand deposits 65,775 38,910

12,994,882 11,883,032

Net interest income 19,997,804 18,704,137

21 Other operating income

2010$

2009$

Foreign exchange 2,204,592 2,552,754Commission income 1,897,121 1,678,946Fees income 378,314 356,705Dividend income 88,660 81,630Gain on investment securities 50,000 56,074Rental income – 140,000

4,618,687 4,866,109

22 Other operating expenses

2010$

2009$

Staff costs (Note 24) 5,313,632 5,172,593Administrative expenses (Note 23) 6,011,846 4,930,604Depreciation (Note 12) 1,570,931 1,068,207Operating lease rental 875,074 450,497Loss on disposal of property, plant and equipment 2,689 –

13,774,172 11,621,901


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23 Administrative expenses

2010$

2009$

Advertising 1,328,572 947,426Other operating expenses 1,053,541 702,357Postage, telephone and telexes 684,421 693,762Audit and professional fees 408,149 553,559Equipment expenses 644,230 426,701Utilities 458,009 369,748Security expenses 347,988 306,795Directors’ fees and expenses 245,296 269,408Insurance 198,078 214,437Repairs and maintenance 308,558 143,772Stationery 173,509 139,744Bank licence 120,000 120,000Rates and taxes 22,125 35,125Legal fees 19,370 7,770

Total administrative expenses 6,011,846 4,930,604

24 Staff costs

2010$

2009$

Salaries and wages 4,406,172 4,020,234Other employee benefits 415,061 570,378Profit sharing 260,001 363,266Social security costs 177,398 165,715Pension costs (Note 16) 55,000 53,000

5,313,632 5,172,593

The average number of employees during the year was 101 (2009 - 95).

25 Impairment losses

2010$

2009$

Impairment losses from loans and advances (Note 10) 2,403,373 1,577,771Impairment losses on investments (Note 11) 135,000 –

2,538,373 1,577,771


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26 Income tax expense

2010$

2009$

Current tax 1,292,653 1,443,450Tax under accrued in prior years 600,000 –Deferred tax (Note 17) (140,350) (187,348)

1,752,303 1,256,102

Tax on the Bank’s income before income tax differs from the theoretical amount that would arise using thestatutory tax rate of 30% as follows:

2010$

2009$

Profit before income tax 8,303,946 10,370,574

Tax calculated at the statutory tax rate of 30% 2,491,184 3,111,172Tax effect of exempt income (2,502,087) (1,727,011)Tax effect of expenses not deductible for tax purposes 1,163,206 69,641Tax under accrued in prior years 600,000 –Deferred tax under accrued in the prior year – (197,700)

1,752,303 1,256,102

Tax Assessments for income years 2002 to 2009 have been issued and agreed by the Inland RevenueDepartment. The basis for allocating expenses relating to exempt income of the Bank for year endedDecember 31, 2010 has not been finalised with the Inland Revenue Department at the reporting date.Adjustments arising if any, will be reflected in the period in which agreement has been reached.

There was no income tax effect relating to components of other comprehensive income.


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27 Earnings per share

Basic and dilutedThe calculation of basic and diluted earnings per share is based on the net profit attributable to shareholders of$6,551,643 (2009 - $9,114,472) divided by the weighted average number of shares in issue ranking for dividendduring the year of 4,999,966 (2009 - 4,999,966).

28 Dividends

In the financial statements for the year ended December 31, 2010 a total of $1,999,986, (2009 - $1,999,986)was appropriated from retained earnings relating to the 2009 dividend. At a meeting on March 31, 2011, theBoard of Directors declared a dividend of $0.40 per share in respect of 2010 amounting to a total of$1,999,986 (2009 - $1,999,986). This dividend will be accounted for in equity as an appropriation of retainedearnings in the year ended December 31, 2011.

29 Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents comprise the following balances withless than 3 months maturity:

2010$

2009$

Cash and balances with Central Bank (Note 5) 6,300,148 7,615,215Due from other banks (Note 6) 15,171,047 5,976,620

21,471,195 13,591,835


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30 Related party transactions

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

The volume of related-party transactions, outstanding balances at the year-end and related expenses and incomefor the year are as follows:

Loan and advances to Directors and other key management personnel

2010$

2009$

Loans outstanding at beginning of year 3,037,824 2,992,329Net loans issued for the year 1,188,539 45,496

Loans outstanding at end of year 4,226,363 3,037,825

Interest income earned 460,065 252,829

Deposits from Directors and other key management personnel

2010$

2009$

Deposits at beginning of year 2,224,629 709,978Net deposits (repaid)/received during the year (458,972) 1,514,651

Deposits outstanding at end of year 1,765,657 2,224,629

Interest expense on deposits 88,068 30,753

Key management compensation and Directors’ fees

2010$

2009$

Salaries and other short-term benefits 900,809 837,268Post and other employment benefits 160,692 146,573

` 1,061,502 983,841


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31 Contingent liabilities and commitments

(a) Loans commitment, guarantee and other financial facilitiesAt December 31, 2010, the Bank had the contractual amounts of the Bank’s off-balance sheet financialinstruments that commit it to extend credit to customers, guarantee and other facilities as follows:

2010$

2009$

Loan commitments 30,048,273 24,695,113Guarantees and standby letters of credit 4,042,664 3,992,248Acceptances – 11,832Documentary and commercial letters of credit – 195,430

34,090,937 28,894,623


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1st National Bank St. Lucia LimitedP.O. Box 168

#21 Bridge Street CastriesSt. Lucia Tel: +758 455 7000

Fax: + 758 453 1630Email: manager@1st nationalbankslu.comWebsite: www.1stnationalbankonline.com

Produced by Orange Media Group

Documents

1st National Bank Annual report 2010