ISSUER:

1ST NATIONAL BANK ST. LUCIA LIMITED

PROSPECTUS: OFFER FOR SALE OF ORDINARY SHARES OF 1ST NATIONAL BANK ST. LUCIA LIMITED

DATED:

August 21st, 2017

1st National Bank St. Lucia Limited offers for sale 1,000,000 Ordinary Shares of 1st National Bank St. Lucia Limited pursuant to a Special Resolution authorising the increase of the share

capital of the Bank by the raising of EC$10 million to meet capital requirements and assist in the attainment of the Bank’s growth objectives. An application shall not be made to list the Bank’s

shares on the Eastern Caribbean Securities Exchange (ECSE) at this time.

This Prospectus provides information about the offer and the issuer, 1st National Bank St. Lucia

Limited.

Applications for the purchase of the shares on offer are to be made through the offices of the

Lead Broker/ Arranger, First Citizens Investment Services Limited and / or any other licensed brokers.

This Prospectus was published on August 21st, 2017.

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Vision

In 2018, 1st National Bank St. Lucia Limited is the first choice financial services provider, ranking in the top three in profitability in the OECS, and an outstanding corporate citizen with empowered staff and visionary leaders.

Mission

To create sustainable value for shareholders by providing high quality financial solutions and services to the global market whilst contributing to national development.

Core Values Integrity \ Confidentiality \ Accountability \ Professionalism

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DEFINITIONS

The definitions set out below apply throughout this document unless the context requires otherwise. All amounts referred to in this document are in Eastern Caribbean dollars unless otherwise indicated.

CARICOM Caribbean Community and Common Market

CPI Consumer Price Index COMPANY/ISSUER/BANK 1st National Bank St. Lucia Limited DCF Discounted Cash Flow DEAP Director Education and Accreditation Program DPS Dividend per Share ECACH Eastern Caribbean Automatic Clearing House ECCSD Eastern Caribbean Central Securities Depository Limited ECCB Eastern Caribbean Central Bank ECCU Eastern Caribbean Currency Union ECSE Eastern Caribbean Securities Exchange EC$ Eastern Caribbean Dollar ECSRC Eastern Caribbean Securities Regulatory Commission ECCSR Eastern Caribbean Central Securities Registry EPS Earnings per Share FMV Fair Market Value GDP Gross Domestic Product IMF International Monetary Fund IPO Initial Public Offering IFRS International Financial Reporting Standards IVS International Valuation Standards Lead Broker/Arranger First Citizens Investment Services Limited LDR Loan Default Rate

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Market Capitalisation The total value of the tradable shares of a publicly traded company. It is

equal to the share price times the number of shares outstanding. As outstanding stock is bought and sold in public markets, capitalization could be used as a proxy for the public opinion of a company's net worth and is a determining factor in some forms of stock valuation. Preferred shares are not included in the calculation.

NAV Net Asset Value NBV Net Book Value NPL Non-Productive Loans OECS Organization of Eastern Caribbean States PB Price to Book PE Price to Earnings ROA Return on Assets ROE Return on Equity / Capital SPLY Same Period Last Year The BANK 1st National Bank St. Lucia Limited WAEIR Weighted average effective interest rate UK United Kingdom USA United States of America

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DISCLAIMERS

This Prospectus has been prepared and delivered in accordance with the Securities (Prospectus) Regulations 2001. This Prospectus has been filed with the Eastern Caribbean Securities Regulatory Commission (ECSRC), Basseterre, St Kitts pursuant to Part VII, Section 92(3) of the Securities Act of Saint Lucia No.21 of 2001. The ECSRC accepts no responsibility for the contents of this Prospectus, makes no representations as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss whatsoever arising from or reliance upon the whole or any part of the contents of this Prospectus. Prospective investors should not construe the contents of this Prospectus as legal or financial advice. If in doubt about the contents of this document or in need of financial or investment advice, prospective investors are advised to consult a person licensed under the Securities Act who specializes in providing advice on the acquisition of shares or other securities. A copy of the Prospectus along with all appended documents will be available on the premises of any of the 1st National Bank Branches or at the offices of the Lead Broker, First Citizens Investments Services, to prospective investors who may wish to inspect these documents. The Prospectus is also available online at www.1stnationalbankonline.com. Any documents appearing in this Prospectus are qualified in their entirety by reference to the complete document. The information contained in this Prospectus is accurate as at the date of publication of this Prospectus and shall not imply that there has been any change in the business, results of operation, financial condition or prospects of the Company since the date of publication of this Prospectus. This Prospectus is for subscription of ordinary shares in 1st National Bank St. Lucia Limited. These shares will not be listed on the Eastern Caribbean Securities Exchange (ECSE) at this time. The shares are offered on the terms and conditions contained in this Prospectus, and no person has been or will be authorized to give any information or to make any representation with regard to this share offering other than through this Prospectus. 1st National Bank St. Lucia Limited intends to adhere to all applicable laws and regulations. This Prospectus is issued for the purpose of giving information to prospective investors, both private and institutional, about 1st National Bank St. Lucia Limited. The Board of Directors of 1st National Bank St. Lucia Limited accepts full responsibility for the accuracy of the accounting, technical and general information given and confirm that to the best of its knowledge and belief there are no other facts, the omission of which would make any statement in this Prospectus misleading.

This Prospectus contains forward-looking statements, which are statements that are not based on historical information including, without limitation, statements regarding future financial position and results of operations, business strategy, budgets, projected costs and plans and objectives of management for future operations. Forward-looking statements reflect the Issuer’s current views with respect to future events. The words “anticipate”, “believe”, “expect”, “plan”, “estimate”, “intend”, “will”, “may”, “should”, “forecast”, “project” and similar expressions identify forward-looking statements. There is significant risk that these predictions and other forward-looking statements will not prove to be accurate. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed, projected or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking information because it is possible that predictions, forecasts, projections and other forms of forward-looking information will not be achieved by the Issuer and historical results and market data may not be indicative of future results and market prospects.

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THE CHAIRMAN’S LETTER

I am indeed pleased to inform you, our current and prospective shareholders, of the Bank’s new share offer, as a means of diversifying your investment portfolio and increasing wealth. The last shares on offer were sold in 2007 and these have been fully issued.

The Eastern Caribbean Currency Union (ECCU) in its efforts to strengthen the framework for the regulation and framework of banking business in the currency area, introduced a new Banking Act which came into force in Saint Lucia on November 12th 2015 as the Banking Act #3 of 2015.

Section 44(1) of this Act requires banks to maintain a minimum paid up or assigned capital of EC$20 million. Pursuant to this Act, 1st National Bank is undertaking to increase its share capital from approximately $7.97 million to $21 million. In this regard, we have spent many months studying the issues faced by our institution and the opportunities before us.

This work was conducted with the input of a number of consultants including business and share price valuators, strategic planners and other key experts. We agree strongly that the changes in the financial services landscape and in the banking sector in the OECS in particular, is an urgent issue and that 1st National Bank has an obligation to respond to the challenges in a manner that will ensure that the long-term sustainability of this institution and by extension, the interests of its shareholders is safeguarded.

The Board has agreed that the time is right to issue additional shares to meet our legal mandate. As a Board, we have also determined that the Bank is well placed to respond positively and decisively in pursuit of its growth objectives by investing in our human resources, information technology and enhancing our customer experience to support a clear growth strategy which is based on regional and national strategic alliances. We also recognise that our growth strategy requires the capital needed to sustain it.

The Bank has performed creditably over the last fifteen years. The Bank’s dividend payments grew from $0.08 in 2001 to $0.40 in 2012. In 2013 and 2014, as the Bank continued to grapple with the challenges posed by the global financial crisis, the Board thought it prudent not to declare a dividend. However, in the face of the Bank’s improving performance, and the Board’s satisfaction that our growth strategy would allow us to sustain it, the Board of Directors took a decision to pay dividends of $0.10 for the financial year ended 2015 and $0.11 for the financial year ended 2016.

We are grateful for the support which our existing shareholders have provided over the 79 years of the Bank's existence. We are sensitive to the fact that the banking sector is facing a challenging future; however, we believe that our planned initiatives, and the very substantial resources which this new share issue will provide represents an important step in the strengthening of an institution which is well placed to traverse the future. This is the result of a strategic decision, made several years ago, to grow the capital base so as to build our internal resilience.

As stewards of your investments, we have placed ourselves in a position to responsibly manage this eminent institution. We recognise that the Bank is grounded in a loyal tradition of Saint Lucians harnessing their resources to grow and develop collectively and by extension develop our beloved country. Indeed it is the only indigenous bank that is significantly owned by the nationals of this country.

It is in this light that I am pleased to invite St. Lucians locally and in the wider diaspora to participate in this new share offer as we work towards the further development of our Bank and our country, Saint Lucia.

Mr. Nigel A. Fulgence

Chairperson

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TABLE OF CONTENTS

1. GENERAL CORPORATE INFORMATION……………………………………………………………… 10

2. SUMMARY OF THE OFFER…………………………………………………………………………….. 13

The offer Type Price Amount Allocation blocks Subscription Period:

Address for obtaining copies of the prospectus

Contact person/persons responsible for the prospectus

3. THE ISSUE……………………………………………………………………………………………….. 15

General information 15

Purpose of the offer 15

Share Capital Profile 15

Restriction on Shareholding 16

Shares outstanding 16

Key Offer & Distribution Dates 17

Offer pricing 17

Use of proceeds 18

Subscription Procedure 18

Allotment Methodology 19

Refunds 20

Dividend Policy 21

Voting and Other Rights 21

Rights Upon Dissolution or Winding – Up 22

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4. THE ISSUER……………………………………………………………………………………………… 23

Incorporation information 23

History of the issuer 23

Business Activities 26

Risk factors and risk management /mitigation 27 Caution Statements 27 Risk Management 27 Credit Risk Management 29 Stress testing 29 Capital Management 29 Liquidity Risk Management 30 Compliance 30 Management experience 31 Legal Proceedings 31 Licenses and permits 31 Competition 32 Creditors /liabilities 32 Contingent liabilities 32 Tax issues 32 Operating permits, licenses 32 Material Contracts 33 Success factors 33 Issuer’s management/organisational structure Organisation chart 35 The Board of Directors 36 The Executive Management Team 39 Board and Board Committee Meetings 2016 43 Appointment of Directors 44 Directors Interest in Contracts 44 Employees 45

5. OPERATING PERFORMANCE…………………………………………………………………..47

Statement of Profit and Loss 48 Expenses 50 Balance sheet 52 Achievements 56 Expectations 56

6. ECONOMIC OUTLOOK……...………………………………………………………………......................57

Eastern Caribbean Currency Union 57 St. Lucia 57 Outlook 59 Banking Sector Overview 60

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7. OTHER MATERIAL DISCLOSURES………………………………………………………….. 61

Directors’ Consent and Signatures 61

8. APPENDICES…………………………………………………………………………………………….. 62

APPENDIX 1 - Summary Financial Statements 62

APPENDIX 2 - Projected Financial Statements 65

APPENDIX 3 - List of Licensed ECSE Member Broker Dealers 70

APPENDIX 4 - Subscription form 71

APPENDIX 5 – Consent forms 77

APPENDIX 6 – Financial Statements ended Dec 31 2016, 2015 and 2014 79

 

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1. GENERAL CORPORATE INFORMATION

Issuer: 1ST NATIONAL BANK ST. LUCIA LIMITED

Chairperson Nigel A. Fulgence

Managing Director Johnathan J. Johannes

Company Secretary & Legal Officer Henri-Jacques Mangal

Corporate Office 1st National Bank St. Lucia Limited Rodney Bay, Gros Islet P.O. Box 168, Castries St. Lucia, West Indies Tel: (758) 455 7000 Fax: (758) 453 1630 Website: www.1stnationalbankonline.com

Attorneys-at-Law Floissac, Fleming & Associates Corner of Brazil & Mongiraud Street. Castries, St. Lucia Tel: (758) 452 2887; (758) 452 3250

Auditors BDO Mercury Court Choc Bay P.O. Box 364, Castries St. Lucia

Tel: (758) 452 2500 Fax: (758) 452 7317 Regulators Eastern Caribbean Central Bank

P.O. Box 89 ECCB Financial Complex Basseterre St Kitts Tel: (869) 465-2537; Fax: (869) 466-8954 Eastern Caribbean Securities Regulatory Commission P.O. Box 1855 ECCB Financial Complex Basseterre St. Kitts Tel: (869) 465-2537; Fax: (869) 465-7512

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1. GENERAL CORPORATE INFORMATION CONT’D

Board of Directors Nigel A. Fulgence – President

Brenda Floissac-Fleming – 2nd Vice President Johnson Cenac Tedburt Theobalds Geraldine Lendor-Gabriel Adrian Augier Richard Monplaisir Martin Satney Jennifer Remy Johnathan J. Johannes – Managing Director

Principal Branches

Corporate Office Castries Branch Rodney Bay, Gros Islet 21 Bridge Street P.O Box 168 P. O. Box 168 Castries, Castries, St. Lucia St. Lucia, West Indies Tel: (758) 455 7000 Tel: (758) 455 7000 Fax: (758) 453 1630 Fax: (758) 453 1630

Rodney Bay Sub Branch Bureau de Change J.Q.’s Mall George F.L Charles Airport Rodney Bay, Gros Islet, Vigie, Castries, St. Lucia St. Lucia Tel: (758) 453 1683 Tel: (758) 455 7302 Fax: (758) 451 8482 Fax: (758) 452 8884 Vieux-Fort Sub Branch Marigot Bay Sub Branch P. O. Box 342 Marina Village Commercial Street Marigot Bay, Castries Vieux Fort, St. Lucia St. Lucia Tel: (758) 454 6213 Tel: (758) 458 3744 Fax: (758) 454 6137 Fax: (758) 458 3638 Choc Bay Sub Branch Rodney Bay Marina Sub Branch Mercury Court Rodney Bay, Gros Islet Choc Bay, IGY Marina, Castries, St. Lucia St. Lucia Tel: (758) 455 7042 Tel: (758) 455 7050/1 Fax: (758) 453 0943 Fax: (758) 458 4982

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1. GENERAL CORPORATE INFORMATION CONT’D

LISTING OF PERSONS INVOLVED IN THE ISSUE

Lead Broker / Arranger First Citizens Investment Services Limited John Compton Highway, San Souci, Castries St. Lucia Tel: (758) 458 6375; (758) 450 2662

Valuator Ernst & Young Services Limited 5/7 Sweet Briar Road St. Clair, Port-Of-Spain Trinidad & Tobago

Legal Advisors Floissac, Fleming & Associates

Corner of Brazil & Mongiraud Street. Castries, St. Lucia

Tel: (758) 452 2887; (758) 452 3250

Registrar Eastern Caribbean Central Securities Registry (ECCSR)

ECCB Financial Complex P.O. Box 1855 Basseterre St. Kitts Tel: (869) 465-2537 Fax: (869) 465-7512

Auditors BDO

Mercury Court Choc Bay P.O. Box 364, Castries St. Lucia

Tel: (758) 452 2500 Fax:(758) 452 7317

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2. SUMMARY OF THE OFFER

Issuer: 1st National Bank St. Lucia Limited Class of securities: Ordinary Shares Number of Ordinary Shares Offered: 1,000,000 Market Price per Ordinary Share at offer: $10.00 Minimum Offering: 100 shares Subscription Period- Opening date: September 4th, 2017

Closing date: October 13th, 2017 Currency: Eastern Caribbean Dollars Copies of Prospectus: 1st National Bank St. Lucia Limited

Corporate Office & Branches www.1stnationalbankonline.com First Citizens Investment Services John Compton Highway, San Soucis Castries Any other licensed Broker on the ECSE (see Appendix 3 for the list of licensed Broker/ Dealers)

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Contact person/persons responsible for the prospectus: Aurea Lafeuillee – Executive Manager, Finance &

Research c/o 1st National Bank, Rodney Bay Tel: (758) 455 7202 Email: aurea@1stnationalbankslu.com Henri-Jacques Mangal – Company Secretary and Legal

Officer c/o 1st National Bank, Rodney Bay Tel: (758) 455 7205 Email: hmangal@1stnationalbankslu.com

Chermaine Emmanuel – Manager, Accounting

c/o 1st National Bank, Rodney Bay Tel: (758) 455 7234 Email: cemmanuel@1stnationalbankslu.com

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3. THE ISSUE

GENERAL INFORMATION

No person has been authorised to give any information or to make any representation other than those contained in this Prospectus in connection with this Offer for Sale of ordinary shares. If such information or representation is given or made, the information or representations must not be relied on as having been authorised by the Directors other than as set out in this Prospectus. This Prospectus is intended for use in St. Lucia and the ECCU. The prospectus is also available to the Saint Lucian diaspora via the Bank’s website.

PURPOSE OF THE ISSUE

On November 12th 2015 section 44(1) (a) of the Banking Act #3 of 2015 came into force requiring banks to increase their paid up capital to $20 million. This new requirement arose out of the Central Bank’s efforts to strengthen the framework for the regulation and framework of banking business in the ECCU. 1st National Bank St. Lucia Limited, with current stated capital at $7.97 million, intends to use the proceeds of this offer to meet the new capital requirement and to assist in the attainment of the Bank’s growth objectives. SHARE CAPITAL PROFILE CURRENT SHAREHOLDING PROFILE Currently, the Ordinary Shares of the Bank are held as follows:

Shareholder name # of shares Share % Donald Monplaisir Holdings 765,288 15.3% Invest St. Lucia Ltd. 281,253 5.6% Other shareholders 3,953,425 79.1% Total shareholding 4,999,966 100.00%

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Restriction on Shareholding

The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Bank, up to a maximum of 25 votes. Section 12 (4) of the Bank’s By-Law indicates that “Every shareholder shall on a poll have one vote for every share in THE COMPANY by that person, but no shareholder shall be entitled to more than 25 votes.”

The Bank’s shares are currently widely held by Saint Lucians, and Saint Lucia nationals comprise the largest shareholders. This share offer is open only to Saint Lucian nationals and companies and other entities registered in Saint Lucia. It will also be made available to the Saint Lucian diaspora. Subscriptions received from any individual or entity that is not a Saint Lucian will be rejected and any funds submitted in respect of these subscriptions will be returned at the end of the allotment period. With this issue, the Bank will pay particular attention to new and cumulative shareholdings so that no shareholder or group of shareholders will own more than 15% of the shares of the Bank, this percentage itself, only after being authorized by the ECCB (where according to Section 20 of the Banking Act #3 of 2015, it limits holdings in financial institutions to supervisory thresholds of 10%, 20% or 50%) and the Board of 1st National Bank. Shares outstanding:

No. of

shares

2015

(XCD)

No. of

shares

2014

(XCD)

Authorized:

5,000,000 ordinary shares of no par value

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

The issuer is offering an additional $10 million of Ordinary shares of 1st National Bank St. Lucia Limited, comprising 1,000,000 ordinary shares of no par value at $10 per share, payable in full on application. This offer would represent 16.67% of the Issuer’s ordinary shares of no par value after issue and ranks equally with all ordinary shares of the issuer.

1st National Bank currently has no listed and unlisted securities not representing share capital.

No limit was imposed on the duration within which 1st National Bank is authorized to issue share capital.

No one person or persons, either directly or indirectly, jointly or severally, currently exercises or could exercise control over the Bank by virtue of ownership.

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KEY OFFER & DISTRIBUTION DATES

The following key dates with regards to the distribution should be noted:

1. Commencement date for the Offer for Sale of ordinary shares September 4th, 2017

2. Final date for lodging applications October 13th, 2017

3. Notification of allotment of securities October 20th, 2017

The offer will open on September 4th, at 9am, and will close at 4pm on October 13th or later, at the discretion of the Directors of the Issuer.

OFFER PRICING

The Offer Price per ordinary share is EC$10.00 payable in full at the time of application.

In determining the public offering price of the ordinary shares, the Issuer considered a number of factors including:

• The information set forth in this prospectus and otherwise available to the public;

• The prospects for the industry in which the Issuer competes;

• The overall economic prospects of St. Lucia;

• The assessment of the Issuer’s management;

• The Issuer’s prospects for future financial performance;

• The recent market prices of, and demand for, publicly traded shares of generally comparable companies;

• The general condition of the securities markets, and the offering market in particular, at the time of the offering; and

• Other factors deemed relevant by the Issuer, the Offeror and investors. The following approaches and methods were considered appropriate in valuing the Bank:

► The income approach and excess returns method ► The market approach and the multiple of price-to-book method

The follow details the procedures under each of the approaches considered:

Income approach – Excess Returns method

The value is estimated based on the sum of the capital invested at the valuation date and the present value of the excess returns that the Bank expects to make in the future. In applying this method, the following steps were performed:

► Determined the book value of equity at the Valuation Date ► Determined prospective levels of net income and returns on equity; ► Determined a range of appropriate discount rates (cost of equity); ► Calculated the present value of prospective excess returns.

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Market approach - Market multiple methodologies

Commonly used market based methods include the use of market observable ratios such as price-to-book on traded shares as well as sale transactions. In applying this method, the following steps were performed:

► Determined the shareholders’ equity as at the Valuation Date, adjusted where appropriate; ► Determined a range of appropriate price-to-book multiples based on market data. In determining an

appropriate price-to-book multiple consideration was given to reasonably comparable public companies to the Bank;

► Calculated the equity value by multiplying the book value of equity times the price-to-book multiples.

USE OF PROCEEDS

The Issuer is expected to incur approximately EC$300,000 in total expenses relating to this offer inclusive of the valuation of the Bank’s shares, Broker’s fees for preparing the prospectus and promoting the sale of shares and making the shares available as a public offer.

The proceeds from the issue will be a minimum of approximately EC$10 million and will be paid to 1st National Bank St. Lucia Limited. The proceeds will be used by the Bank to meet its minimum Capital requirements in accordance with the Banking Act as well as to support the Bank’s growth and expansion initiatives.

This offer will NOT be traded on the public market of the ECSE.

SUBSCRIPTION PROCEDURE

Subscriptions for ordinary shares by members of the public, institutional investors and any other investors may be made by using the services of First Citizens Investment Services Limited and/or any other licensed brokers. Subscriptions are subject to the Terms and Conditions herein.

Each Subscription Form must be completed in accordance with the Terms and Conditions of the Prospectus and the Broker-Dealer operations procedures and must be lodged with full payment with the Broker-Dealer. In addition to the subscription form, there will be other relevant documentation for completion and submission to the Broker – Dealer.

Subscriptions can be revoked within and up to two business days after submission to the Broker by way of delivery of notice to the Broker. Thereafter, the subscriptions are irrevocable. In such a case of joint applications, a primary shareholder will be identified.

As shareholders’ records will be held in electronic form at the ECCSR, no physical certificate will be issued to successful applicants in respect of the shares allotted in this Offer. The Broker –Dealer will issue a Contract Note with the details of the purchase after the shares are allocated. The ECCSR, as the Registrar, will forward by mail to each security owner an annual statement at the end of each calendar year.

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ALLOTMENT METHODOLOGY

Allotment to successful candidates will begin on October 16th, 2017 and conclude by October 20th, 2017. Shares will be allotted to subscribers as follows:

Existing shareholders will have the right to subscribe for additional shares up to a level that will not bring their ownership of shares beyond 15% of the Bank’s total shares issued and outstanding, this percentage itself, only after being authorized by the ECCB (where according to Section 20 of the Banking Act #3 of 2015, it limits holdings in financial institutions to supervisory thresholds of 10%, 20% or 50%) and the Board of 1st National Bank. The exercise of preemptive rights will take place concurrently with the sale of the shares to the general public. The overall demand for the shares and the allotment process will determine the final allocation of shares to both existing and new shareholders. After all the preemptive rights exercised by existing shareholders are satisfied, the other categories would be allocated shares as follows and in descending order of priority:

Category of Investor Percentage of Balance of $10M after exercise of preemptive rights

Staff 10%

Individuals 40%

Credit Unions 15%

National Insurance Corporation 15%

Pension Funds 10%

Companies registered in Saint Lucia 10%

Each eligible applicant in each category will have the same priority in the allotment as all other applicants in that category.

If the offer is oversubscribed, the shares shall be allotted on a prorated basis in the categories and order of priority established in the table above, such that the minimum shareholding an investor may receive would be 20 shares. If any of the categories in the table above do not subscribe for their full entitlement, the shares remaining un-allotted to those categories shall be allotted to the other categories in the same order of priority established.

Notwithstanding the foregoing, no subscriber shall be allotted such shares that would take his holding, individually, or together with any associate or associates, to more than 15% of the total shares issued and outstanding at any time, this percentage itself, only after being authorized by the ECCB (where according to Section 20 of the Banking Act #3 of 2015, it limits holdings in financial institutions to supervisory thresholds of 10%, 20% or 50%) and the Board of 1st National Bank. For purposes of this stipulation, the term associate in relation to a subscriber includes:

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a) The spouse or relatives of the first degree of kindred of that subscriber b) Any company of which that subscriber is a director or has control over it c) Any person who is a partner of that subscriber, and in the case where that person is a company –

i) Any director or any person who has control over that company, ii) Any subsidiary of that company, and iii) Any director of any such subsidiary

d) Any other person or people whose interests are sufficiently interrelated with those of that person

Under no circumstances will more than 1,000,000 shares be offered in total. Shares can be freely transferred among parties, however, subject to the limitations on ownership stated previously in this Prospectus.

The right is reserved to present for payment all Manager’s Cheques or Bankers Drafts received but this will be avoided where practicable in respect of applications for which it is not expected to make an allocation. All checks must be honored on first presentation.

Each employee will be given the right to buy a specified minimum allocation of shares in an amount of 100 shares, but each employee could purchase additional shares up to 200 shares. There will be no discount offered on shares. However, if employees do not take up the right, it can be used by other employees up to the amount allotted for this category.

Each individual investor who is a national of St. Lucia will be given the right to buy a minimum allocation of 100 shares. While each investor will be given this right, there is no guarantee that the investor will receive the number of shares for which he subscribed. If there is the case where the shares are over-subscribed, the shares will be allocated on a prorated basis in each category of investor. If the Offer is oversubscribed, consistent with the Bank’s policy of promoting the widest possible participation in share ownership, priority to receive the allocation applied for up to the limits noted (as a percentage of the maximum Offer) shall be given as follows in descending order of priority:

1. Existing shareholders of the Issuer- 1st National Bank St. Lucia 2. Staff 3. Individuals 4. Credit unions 5. National Insurance Corporation 6. Pension Funds 7. Companies registered in St. Lucia

REFUNDS

Refunds, in respect of shares applied for but not allotted, will be made by the Broker to all of the applicants concerned within seven (7) business days of the close of the allotment period. The funds will be held on a non interest bearing, segregated account until the allotment process is completed. Refunds will be made to clients in accordance with the preferred method of payment selected on the application form.

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DIVIDEND POLICY

In accordance with the Bank’s dividend policy, “Dividend payments must not exceed 40% of profits after tax and should be paid after due consideration for current cash flow.” Given the expected level of profits, a long-term dividend payout ratio of up to 40% may be considered appropriate. The Bank paid dividends consistently at 40 cents per share from 2007 to 2012, with no dividend payments in 2013 and 2014. However, dividend payments resumed in 2015 with a payment of 10 cents per share. These dividends represented approximately 21% of net income over the last 10 years. The Bank paid a dividend of 11 cents per share for the year ended December 31st, 2016.

Dividend payment constraints. The Bank’s By – Law 15.3 states no dividends shall be paid otherwise than out of profits.

Dividends cannot be paid from any capital reserves or revaluation reserves.

The Bank will adhere to the law, regulations and provisions regarding dividends in Section 51 and 52 of The Company’s Act 1996, Revised 2001, Section 45(2) of the Banking Act #3 of 2015 and Section 8 of the Banking Regulations 2005.

The Bank has demonstrated adherence to its dividends policy which states “Dividend payments must not exceed 40% of profits after tax and should be paid after due consideration (of the liquidity position)”

Changes to target dividend payout percentage. The target dividend payout percentage set out above will not be changed without the prior approval of the Directors and will be guided by the above mentioned laws, regulations and provisions.

Frequency of payments to shareholders. The Issuer will pay dividends, subject to the above noted requirements, to a maximum of twice per annum.

VOTING AND OTHER RIGHTS

The ordinary shares have the following rights attached to them:

1. the right to vote at all meetings of shareholders except meetings at which only holders of a specified class of shares are entitled to vote;

2. subject to the rights, privileges, restrictions and conditions attaching to any other class or series of shares of the Issuer, to receive dividends declared and payable by the Issuer on the ordinary shares; and

3. subject to the rights, privileges, restrictions and conditions attaching to any other class of shares of the Issuer, to receive the remaining property of the Issuer upon dissolution.

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RIGHTS UPON DISSOLUTION OR WINDING-UP

While the Issuer’s By-Law section 27 states that “In the event of THE COMPANY being wound up, the liquidator or liquidators may, with the consent of THE COMPANY in general meeting, divide among the shareholders any assets of THE COMPANY in specie, and in particular any shares, stock or securities to which THE COMPANY may be entitled,” this can only be done after the Bank has satisfied all obligations in accordance with the Banking Act #3 of 2015, Parts X and XI.

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4. THE ISSUER 1st National Bank St. Lucia Limited 1st National Bank St. Lucia Limited, formerly St. Lucia Co-operative Bank Limited, was incorporated as a limited liability company under the Companies’ Ordinance in December 1937 in Castries, Saint Lucia and continued under the Companies’ Act of the Revised Laws of St. Lucia 2008, and is licensed in accordance with section 3 (1) of the Banking Act 2015 and is also subject to the requirements of the Securities Act, Cap. 12:18 of the Laws of Saint Lucia. It is regulated by the ECCB, the Government of Saint Lucia and the ECSRC. The Bank has authority to increase its shares in its By-Laws. Section 25.1 of By-Law No.1 of the Bank states that “THE COMPANY may by special resolution in accordance with Section 213 of THE ACT and upon recommendation of the directors, increase the capital by the creation of new shares to be divided into shares of such amount as the resolution shall prescribe.” Subject to Section 21.1 of By-Law No.1, and Sections 5 and 29 of the Companies Act Cap 13.01 of the Revised Laws of St. Lucia of 2001, shares may be allotted and issued by resolution of the directors at such times and on such terms and conditions as the directors may determine. Section 20.1 of By–Law No.1 allows for capitalization of profits and indicates, “THE COMPANY in a meeting of shareholders may upon the recommendation of THE BOARD OF DIRECTORS, resolve that it is desirable to capitalize any part of the amount for the time being standing to the credit of the profit and loss account or otherwise available for distribution, and accordingly that such sum be set free for distribution by way of dividend and in the same proportions on condition that the same be not paid in cash but be applied by paying up in full unissued shares of THE COMPANY to be allotted and issued as fully paid up to and amongst such shareholders in the proportion aforesaid, or partly in the one way and partly in the other and the directors shall give effect to such resolution, provided that a capital redemption reserve fund may for the purpose of this regulation only be applied in paying up unissued shares to be allotted and issued to the shareholders of the company as fully paid bonus shares.” HISTORY The St. Lucia Co-operative Bank Limited opened its doors for business in January 1938, in a Mongiraud Street back store. The Bank started with a capital of $50,000 made up of shares of $1.00 each. As a small Savings and Loans organization, the Bank stood as a pioneer and innovator in realizing the potential of seemingly insignificant deposits towards the encouragement of thrift. The Bank was challenged by the major disaster of the second Castries fire in 1948, where it was called upon to translate its workers’ pennies into mortgage finance needed for the rebuilding of Castries– the pattern to repeat time and again into its future, as it resolutely rose to meet every challenge the nation faced, from crop failure and economic downturn to hurricane devastation. By 1948, the initial share capital had increased from $50,000 to $100,000. By 1950, the total assets were nearly $1,000,000 and Savings Bank deposits amounted to $800,000. During the period 1960 to 1978, the Bank expanded and reinvented itself to better meet the needs of its growing customer base. A steady and sustained growth of its asset base and capacity eventually caught the attention of international banking giants who actually made efforts to acquire substantial holdings in the Bank, which the Directors resisted. The Bank eventually moved into the era of technological advancement with ATMs for 24 hour convenient banking and sophisticated IT systems were purchased in order to make the institution Y2K compliant. With the rapid expansion of the tourist industry and growth in air travel, the Bank opened a Bureau de Change at the George F.L. Charles Airport in May 1999. Its overall staff complement increased to 74.

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In 2004, the Bank changed its name to 1st National Bank St. Lucia Limited. Today, the Bank’s capital position exceeds $76 million and book value stands at $15.20 per share as at December 31, 2015. The asset base, which stood at $7.5 million in 1975 and $224 million in 2005, has more than doubled in the past ten years to stand at $588 million with an average staff complement of now 126. As at April 30th 2016, the Bank reported $7.9 million in share capital and $76 million in total equity. 1938-1948

January 1938: St. Lucia Co-operative Bank opens on Mongiraud Street. Bank Start-up Capital: $50,000. January 1938: J.B.D. Osbourne appointed first Manager: served 1938 to 1954. 1948: Bank share capital was $100,000.00. Total assets: $488,892. June 1948: Castries fire.

1949-1959

1949: Bank total assets $778,081. 1950: Bank total assets $929,999. 1950: Bank acquires new premises on Bridge Street in Castries. October 1951: First general election. 1954: Mr. F.N. Theobalds is appointed Manager (Mr. J.B.D. Osbourne retired).

1960-1970

1961: Bank establishes a branch in Vieux Fort. 1963: the share capital of the Bank was increased to $250,000 by the creation of $100,000 ordinary

shares at $1.00 per share. 1967: The Bank increased the interest paid on Savings Bank deposits from three and one half cents

(3 ½) to four and a half (4 ½ cents). 1968: Mr. Emmanuel Theodore appointed Manager (Mr. O.H.H. Giraudy retired).

1971- 1979

1975: Total assets $7,598,000. 1975: Chequing Account facilities were introduced. 1977: Banking relations with the Bank of Montreal in Canada were established. 1977: Sale of travelers Cheques, Foreign Exchange, Commercial Letters of Credit and Bills for

Collection were introduced. 1979: Sir J.Q. Charles was elected president of the Bank. 1979: The Bank issued bonus shares to shareholders (1) for every two (2) shares held. 1979: The share capital of the Bank was increased from $500,000 to $1,000,000. 1979: Total assets $17, 791,685.

1980-1990

1980: Total assets $24,279,468. 1981: Total assets $30,900,574. 1982: A profit sharing plan for staff was agreed by the Board of Directors. 1982: The Bank made one million ($1,000,000) profit before tax. 1984: New premises acquired for Vieux Fort Branch. 1988: Two University scholarships were awarded by the Bank. 1990: Ms. Alnita Simmons was appointed first female Manager and, later, her position was

upgraded to Managing Director making her the first female to occupy such a position in the financial services sector in St. Lucia.

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1991-2000 1992: The Bank opened a branch in the community of Babonneau. 1992: The Bank established the F.J. Carasco Memorial Scholarship. 1993: The Bank introduced Auto- Mac, its first ATM. 1994: The Bank opened a Branch in Reduit, Gros- Islet. 1994: The Saint Lucia Co-operative Bank Ltd Thirteen and Under Track and Field Games began. 1997: Total assets $148,496,962. 1999: The Bank opened a Bureau de Change at the George F.L. Charles Airport.

2001-2010

2001: Mr. Carlton Glasgow appointed as Managing Director. 2003: Pre -tax profits were $3,915,767. 2003: Total assets $211,000,000. 2004: Bank received Customer Service Excellence Award from ECCB. 2004: Pre-Tax profits were $6,469,406. 2004: 22nd June 2004 the St. Lucia Co-operative Bank Limited received formal certification of

change of name to 1st National Bank St. Lucia Limited. 2005: On December 13th, 2005, the Bank’s re-imaging process culminated in an official re-launch

ceremony. 2006: The Bank received the award for Banking Institution of the Year from the St. Lucia Chamber

of Commerce, Industry and Agriculture. 2007: April 22nd The Bank opened a Branch at Marigot Bay. 2008: The Bank launched mobile banking (first to market in St. Lucia). 2009: Total assets $436,000,000. 2010: The Bank received the Prime Minister’s Award for Innovation. 2010: The Bank received the award for Corporate Social Responsibility at the St. Lucia Business

Awards. 2010: The Bank received the award for Service Excellence at the St. Lucia Business Awards.

2011-2015

2011: August 15th, the Bank opened a Branch in Choc Bay. 2011: Received the award for Corporate Leadership at the St. Lucia Business Awards. 2011: Received the award for Business of the Year at the St. Lucia Business Awards. 2011: Total assets $485,000,000. 2012: Opened a branch at the Rodney Bay Marina. 2012: Received the award for Excellence in Human Resource Development at the St. Lucia Business

Awards. 2012: Received the award for Service Excellence at the St. Lucia Business Awards. 2012: Mr. G. Carlton Glasgow retires from service as Managing Director on December 31st, 2012. The Bank celebrates 75 years of service to the community. 2013: Received the award for Corporate Social Responsibility at the St. Lucia Business Awards. 2013: Received the Highest Growth Award from the Caribbean Credit Card Corporation (4C’s) for

highest growth in International Debit Card Transactions among 4C’s member banks in the region. 2014: Mr. Andy Delmar appointed as Managing Director. 2014: Received the Good Corporate Citizen Award from the ECCB in recognition of outstanding

contribution to sports. 2014: The Bank received the Good Corporate Citizen Award from the ECCB in recognition of

outstanding contribution to Financial Education and Empowerment. 2015: Received the award for Corporate Social Responsibility at the St. Lucia Business Awards. 2015: Received the Highest Growth Award from Caribbean Credit Card Corporation (4C’s) for

highest growth in International Debit Card Transactions among 4C’s member banks in the region. 2015: Total assets $588,367,000.

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BUSINESS ACTIVITIES The Issuer conducts a broad range of banking and financial service activities throughout Saint Lucia, including consumer banking, corporate and commercial banking. An overview of the Issuer’s principal business activities follows:

Savings, Chequing and Foreign Currency Accounts Fixed Deposit Accounts Foreign Exchange transactions (USD, CAD, GBP, Euros, BDS, and TTD) Local and Foreign Drafts Wire Transfers Debit and Credit Card facilities Mobile Banking Internet Banking ATM Services Night Deposit Services Safe Deposit Box facilities Education Loans Personal Loans Residential Mortgage Loans Commercial Mortgage Loans Small Business loans Weekend Banking (Smart Banking)

The Bank places a strong focus on technology and technological advancements in the delivery of its products and services. For example, the Bank was the first financial institution on the island to offer mobile banking. The Bank is dependent on Jack Henry & Associates as its core software provider and manages this relationship to reduce risk. Outside of the normal banking license requirements and the core software licenses and maintenance, the Bank does not rely on any particular patents, intellectual property rights, or contracts as fundamental to its business. Correspondent Banking Relationships In order to negotiate foreign currencies and to facilitate trade, 1st National Bank St. Lucia Limited has established and maintains correspondent banking relationships with the following foreign banks:

Bank of New York Mellon Bank of Montreal Lloyds International Bank First Citizens Bank (Trinidad and Tobago) Republic Bank of Barbados Limited Eastern Caribbean Amalgamated Bank St. Kitts-Nevis-Anguilla National Bank (SKNA)

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RISK FACTORS AND RISK MANAGEMENT / MITIGATION CAUTION STATEMENTS Investors contemplating the purchase of the shares should carefully consider the risk factors in addition to the other information contained in this Prospectus before making an investment decision. The occurrence of any events following the issuance of this Prospectus could adversely affect the business, financial condition and operating results as well as adversely affect the value of the Company’s shares. This Prospectus contains important information for prospective investors in 1st National Bank St. Lucia Limited. All prospective investors should read this prospectus carefully in its entirety before submitting an Application Form. Investors should ensure they fully understand the risks associated with the offer and should also consider their own investment objective and risk tolerance level. Investors wishing to obtain advice should consult a person licensed under the Securities Act who specialises in advising on the acquisition of shares and other securities. The information contained in this Prospectus is accurate as at the date of publication. The information is provided on a best effort basis and shall not imply that there has been no change in the business, results of operation, financial condition or prospects of the Company since the date of publication of this Prospectus. Future financial results may differ substantially from the historical results presented in this Prospectus. There are no guarantees that the Company will be profitable, as past performance is no assurance of future performance. Risk Management

Risk taking is inherent in the industry but the management of that risk is critical to the Bank’s sustainability.

Among the critical risks that the Company is exposed to and which is of importance to the investor include credit risk, market risk, interest rate risk, operational risk, foreign exchange risk, liquidity risk and reputational risk.

Credit Risk

This is the risk of incurring financial losses should any of the Bank’s clients or market counterparties fail to fulfill their contractual obligations to the Bank. Credit risk stems primarily from commercial and consumer loans and advances, credit cards and loan commitments arising from such lending activities, in addition to the Bank’s investment portfolio.

Market Risk

The Bank is exposed to market risk. Market risk, also called systematic risk, refers to the possibility of losses due to factors affecting the overall performance of the financial markets which are influenced by various factors including interest rates, foreign exchange, volatility in the bond and equity markets among others.

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Interest Rate Risk

Interest rate risk is the risk that the future cash flows or the fair value of future financial instruments may change as a result of changes in market rates. The Bank is exposed to interest rate risk through its investments in fixed income debt instruments, loans and advances and other interest bearing assets at variable rates.

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The Bank is exposed to such risk resulting from failed internal procedures, systems and people.

Foreign Exchange Risk

Given that the Bank transacts in various currencies, there is the risk that it can suffer losses from fluctuations in these currencies. However, a total of 99.3% of transactions are not exposed to currency fluctuations.

Liquidity Risk

Liquidity risk is the risk that the Bank may not have the ability to honour its obligations due to high levels of customer withdrawals and other variable cash outflows.

Reputational Risk

The Bank may be subject to reputational risk due to factors either internally or externally that damage its good name and image. Such can then lead to actions like a run on the Bank which may then put the Bank in danger of being able to service its liquidity requirements.

The Bank aims to achieve an appropriate balance between risk and return to minimise potential adverse effects on the Bank’s financial performance.

The Bank’s risk management policies are designed to identify and analyse these risks, to set appropriate risk limits and controls and certainly to monitor and report adherence to limits. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice.

The Board of Directors has oversight of the risk management strategy and processes of the Bank, delegated to the Credit Risk Committee and the Managing Director, who manages other broad risk categories supported by the Finance Department under policies approved by the Board of Directors. Management identifies and evaluates financial risks in close co-operation with the Bank’s operating units.

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Audit

The Audit Committee has primary responsibility for assisting the Board in its oversight of the system of controls designed to provide reasonable assurance of the Bank’s management of operational risk. The Audit Committee also assists the Board in its oversight of legal and compliance risk.

Internal Audit, an independent function within the Bank, uses risk based methodologies to provide independent and objective assessments of the control environment, reports directly to the Audit Committee. Internal Audit conducts independent reviews to evaluate the Bank’s internal control structure and compliance with applicable regulatory requirements, and is responsible for providing the Audit Committee, senior management and regulators with an independent assessment of the Bank’s ability to manage and control risk.

Credit Risk Management

Credit risk presents the greatest risk to the Bank as it can have a significant impact on the Bank’s capital through provisioning. The ECCB requires that existing loans more than 365 days should be written off over three years but the impact will not reduce the Tier 1 ratio to less than 12%. This is above the new ECCB threshold of 10%.

The Credit Policy is reviewed annually by the Board of Directors to guide the decision making process when reviewing loans and advances. The Board has oversight of credit risk, with the management of that function delegated to the Managing Director. He is then assisted by the Head of Credit Assessment and a team of credit assessors. The application of the credit risk management philosophy is guided by the following:

1. establishing a comprehensive risk policy framework;

2. assigning and managing credit authorities relevant to the approval of all credit exposure;

3. managing delinquent loans;

4. determining the provision to be applied to delinquent loans in accordance with ECCB standards and IAS 39.

The Bank has also adopted a three pronged approach to reducing its non-performing loans ratio to the regulatory threshold. The Bank’s NPL ratio is planned to reduce from 15.6% at December 2016 as follows: December 2017 – 14%, December 2018 – 10%, December 2019 - 5%. The disciplined approach to risk management will enable the Bank to attain the regulatory ratio of 5% in the medium term.

Stress testing

The Bank performs quarterly stress tests on its loan and advances portfolio to determine the effect this will have on capital. The results are reported to the Board quarterly with appropriate action plans developed to remedy any potential gaps. When the ECCB stress testing parameters were applied, the Bank remained resilient.

Capital Management

A strong capital ratio is important to the Bank’s business. The Bank’s Tier 1 capital ratio is currently well above the minimum requirement at 18% thus ensuring that any unforeseen material risks are covered, particularly under stressed economic environments. A strong ratio is also necessary to grow the business by attracting larger, low risk customers and to manage shareholder expectations with respect to earning a reasonable return on their investment.

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Section 44(1) (a) of the Banking Act #3 of 2015 which came into force on November 12th 2015, requires banks to increase their paid up capital to $20 million. This new requirement arises out of the Central Bank’s efforts to strengthen the framework for the regulation and framework of banking business in the currency area. Although the Bank is well capitalized, its stated capital is $8 million.

Liquidity Risk Management

Liquidity risk is the risk that the Bank will not be able to meet its contractual and contingent obligations as they become due. The Board of Directors has oversight of the Bank’s liquidity risk, delegated to the Managing Director and supported by the Finance Department. Liquidity management is guided by the Liquidity Policy and Guidelines approved by the Board of Directors. The Department monitors established limits, indicators and thresholds and monitors liquidity positions, balance sheet variances and funding arrangements. These are reported quarterly to the Finance Planning and Investment Committee and to the Board of Directors.

Funding for the Bank’s activities is derived mainly from customer deposits and, should a liquidity need arise, from other financial institutions. A key strength of the Bank in managing liquidity risk is the well diversified portfolio of depositors. A significant portion of our existing deposits can be considered as core deposits, and these have demonstrated strong growth over time.

At December 31st, 2016, the Bank’s liquidity ratio, measured by total loans to total deposits was 78%, well within the range of 75% - 85% set by ECCB. Another measure of the Bank liquidity is its Liquid assets to deposits+short term liabilities. The minimum threshold is 25%. At December 2016, the Bank's liquidity position was 34%.

Compliance

The Board of Directors, along with management, has been keenly focused on the identification, assessment and mitigation of the various risks that the Bank faces. Prioritization of our limited resources to minimize and control the effect of any liquidity, credit, reputational or other major risks is of paramount importance.

For banks worldwide, 2015 was a year of massive penalties for various misdemeanours ranging from foreign currency and interest rate misconduct to conducting business with banned countries under US and other EU sanctions. Complying with FATCA (which St. Lucia signed up to in November 2015) and other legislation remains a priority for the bank.

Another development is that of the Common Reporting Standard (CRS). The CRS is a standard developed by the Organisation for Economic Co-operation and Development (OECD) for the automatic exchange of information. It is an effort to make the automatic exchange of information between tax authorities the global standard, effectively replacing the exchange of information on request as the usual way of doing business. Like FATCA, the CRS will require financial institutions (FI's) around the globe to play a central role in providing tax authorities with greater access and insight into taxpayer financial account data including the income earned in these accounts. Unlike FATCA, which forgives tax liability on smaller accounts (less than $50,000), all individual accounts and new accounts opened by financial entities are considered reportable.

Increasingly, banks have been facing tough new rules governing capital and other regulatory buffers which have been formulated to improve not only their credit policies but also for managing compliance and risk. Banks are being pressed by regulators to move swiftly from merely trying to uncover violations and improprieties to taking preventative defensive actions as part of our systemic business decision making. Therefore, compliance and strong governance must be intimately linked to all our business decisions.

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Consequently, as an integral part of the Bank’s comprehensive plan to reinforce internal controls and processes, 1st National Bank St. Lucia Limited has taken several bold steps in order to ensure compliance with evolving regulations. This includes changing the operating models and handling of products and inculcating a strong risk culture throughout the organization and the development of a good risk appetite.

The Bank has undertaken initiatives to ensure that its processes are robust. In May 2016, the Bank made certain that its Executive Manager, Risk & Compliance obtained certification Anti-Money Laundering. In September 2016, the Bank embarked on the installation of an automated Anti-Money Laundering platform called Yellow Hammer BSA. As a result, this has afforded the Bank the ability to have automated data monitoring, recordkeeping, and reporting thus eliminating the error-prone manual compliance process. The programme allows for the automation of the customer due diligence required at on-boarding and it also assigns a risk rating to each customer based on responses to specific questions. The profiling of our existing customers, performing peer group analyses, maintaining research analyst notes and actions and the generation of management and auditor reports are other key functions.

The Bank became a registered Financial Institution under the Foreign Account Tax Compliance Act (FATCA) and as such we were due to report to our designated local competent authority (The Inland Revenue Department, Saint Lucia) for the years 2014 and 2015 by September 16, 2016. Despite numerous challenges and setbacks, the Bank was able to successfully identify the customers who were required to be reported to the IRD and the information was effectively uploaded via the portal by the designated date.

In effect, the Risk, Compliance, Recoveries and Securities unit continued to focus efforts on updating policies and training of staff. Efforts to improve monitoring, analysing and reporting capabilities for the business will continue. The unit also continues to work closely with other regulators to strengthen existing frameworks and processes. Management experience The Bank has been in existence for 79 years and since then, it has seen a cadre of leaders with experience in regional and international banking. The current executive team has benefitted from this expertise with each Executive Manager serving in a management capacity for over ten years. Legal Proceedings The Directors of the Bank are not aware of any lawsuits or arbitration proceedings that are expected to materially affect the operations or financial results of the Bank. The Bank employs an in-house Legal Officer and retains the services of Floissac, Fleming & Associates to manage any legal issues that may arise. Licenses and permits The Bank requires a license from the Central Bank to provide banking services to its clients and the public. In the view of the Directors, the Bank is not at risk to lose its license as it has paid its Annual License fee for 2017 as required by Section 9 of the Banking Act #3 of 2015. The Bank’s capital is strong, with a current capital adequacy ratio of 19%. The capital adequacy ratio has been above 18% for the last 10 years. It is currently not in breach of any of the tenets of the Banking Act. Further, the Bank has operating licences with its software providers and is in compliance with its regulators as it has not received any correspondence to indicate otherwise.

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Competition The Bank operates in a very competitive environment serving a limited market in St. Lucia. This includes banks, credit unions, insurance companies, an investment brokerage house, leasing companies and other loans and savings financial institutions. Three international banks operate in St. Lucia. Competition for loans and advances, deposits and other products is stiff in an environment of falling interest rates. This can have a significant impact on our portfolio of deposits and loans. However, we are mitigating this risk by offering new products specifically geared to the local market namely, Saturday banking, personalised service and quicker turnaround times in the decision making process for credit products. We maintain a close relationship with our customers who have remained loyal to the Bank over its 79 years of operation. Creditors/liabilities Due to the high liquidity in the system, the Bank has sufficient liquidity to meet its cash flow requirements for operations and that of its suppliers. Total liabilities to creditors represent approximately 1% of total customer deposits. The Bank maintains fair relations with its creditors. Contingent liabilities The contingent liabilities of the Bank comprise mainly those for which the Bank has given an undertaking to its customers. Total contingencies stood at $22 million as at June 2016. Reliance on any single customer/supplier or group of related customer/supplier. The Bank has a diversified customer base and consequently, does not place reliance on any individual customer. Likewise, the Bank’s suppliers are varied, and it can select from a number of suppliers for its services. However, some of its operations are very technical and it relies on a select set of service providers due to the nature of the service. In particular, the Bank relies on Jack Henry & Associates for its core IT infrastructure and systems. Tax issues As far as the Directors are aware, there are no outstanding or litigious issues with the Inland Revenue Department. Operating permits, licences, industry codes and standards The Bank requires a license from the Central Bank to provide banking services to its clients and the public. Further, the Bank has operating licences with its software providers and is in compliance with its regulators as it has not received any correspondence to indicate otherwise.

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Material Contracts The Bank signed a memorandum of understanding with Grenada Co-operative Bank in March 2016 to work together to achieve operational efficiencies to improve financial performance. As part of this commitment, a significant contract was signed with an established consulting service provider where the latter is to undertake a review of processes for the Branch, IT and Credit Models to identify efficiencies. Success Factors For the Bank, the success factors have been customer experience and satisfaction, offering value for money and risk management.

Our customer service survey scores have been a particularly bright spot and area of encouragement. During the financial year, we introduced quarterly surveys to measure customer satisfaction and net promoter scores. Improvements were registered in both areas, with customer satisfaction scores surpassing the 85% minimum goal in each survey. We recognize the loyalty and generosity of our customers in the feedback process as we continue to make meaningful strides in that area.

Our priority unequivocally remains the delivery of excellent customer satisfaction, whether it is providing solutions, making it easier and safer to do business with the Bank and growing with our customers. Our network of branches aims to provide customers with the right products and with the same personalized service.

We continue to pay significant attention to our initiatives to simplify our processes to make it easier for customers to do business with us while meeting the ever increasing regulatory requirements. The functional co-operation project which commenced in October 2016 after a Memorandum Of Understanding was signed with Grenada Co-operative Bank in March 2016, will assist in achieving much of our operational efficiency targets after the following have been executed:

1. Improvements to our Branch Business Model.

2. The Design and Implementation of a new Credit Operating Model and,

3. The Promotion of IT Capabilities

The Bank’s market share of deposits increased in 2016 by one percentage point to 13% according to ECCB statistics. We capitalized on the many opportunities in the market, and our strategy to grow the cost efficient deposit base continues to remain successful.

Risk mitigation is one of our key pillars of focus for the business. Pursuant to the development and approval of a strategy to manage non-performing loans (NPL) and consequently the NPL ratio, the Bank was successful at reducing the ratio from 19.5% in 2014 to 16.6% in 2016, achieving a three percentage point improvement. We believe that the Bank is positioned to execute on key strategies over the medium term. The Bank continues to adopt a conservative approach to applying provisioning standards against our loan book; the provision for loans and advances to the total non-performing loans and advances was 38% in 2016.

The Bank’s value proposition is that it is one of the strongest Banks in the ECCU, with a capital adequacy ratio of 18% as of the 2016 audited financial statements. This is because of the conservative risk management strategy that the Bank has deployed over the years, culminating in a high equity value. If a moderate stress test is performed on the loan and advances portfolio in such a manner that 100% of non-

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performing loans are written off and normal ECCB provisioning applies on other loans, the Bank’s capital adequacy ratio will be above the new minimum ratio of 10% by four percentage points.

The Bank’s conservative risk management strategy was clearly seen in its investment portfolio. At a time when most financial institutions were severely hit by the CLICO and British American debacle, the investment portfolio stood strong as it had no appetite for risky investments.

We take pride in our corporate social responsibility initiatives as we continue to support the youth, education, arts and culture. We believe in giving back to the community. To this end, the Bank spends approximately 1% of its total expenses in donations to worthwhile charities that it assesses is the right fit with its strategy.

The talent of our people is inimitable. Our staff are loyal and dedicated to the Bank and always aim for the best customer delivery experiences. Many are trained in their field and hold degrees and professional certificates. The Bank is family oriented and staff events are generally successful. Additionally, the Bank has been led by distinguished leaders over the last 15 years. Our leaders on the Board of Directors have wide experiences and varied backgrounds, all very relevant to the field of banking. Most importantly, we are proud of the founders of the Bank who had the vision to establish a bank, run by St. Lucians, for the people of this country.

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ISSUER’S ORGANIZATION CHART

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BOARD OF DIRECTORS Mr. Nigel A. Fulgence, the current President and Chairperson of the Board of Directors of 1st National Bank St. Lucia Limited, was elected to the Board of Directors in the year 2000. He has served as the Chairperson of the Audit and Corporate Governance Committees, and as a member of the Credit Risk and Human Resource Committees. Currently, he is the Chairperson of the Credit Risk Committee and a member of the Audit Committee. From 2010 to 2016, Mr. Fulgence represented 1st National Bank as a Director of the Caribbean Association of Audit Committee Members Inc. (CAACM). Additionally, Mr. Fulgence is a member of the following professional bodies namely, The Institute of Engineering and Technology (UK) (4th April, 1988); The Institute of Electrical and Electronics Engineers (USA) in 2000; The Association of Professional Engineers (St. Lucia) (4th August, 1998) and The Institute of Internal Auditors (2008). He is an Electrical Engineer by profession, having graduated from John Moores University, Liverpool in 1996, where he obtained a BSc. (Hons.) degree. He is currently employed with St. Lucia Electricity Services Limited as the Construction Engineer. Mr. Fulgence is also an Accredited Director, having successfully completed the Director Education Accreditation Programme (DEAP) in February 2010 facilitated jointly by the Institute of Chartered Secretaries and Administrators of Canada, and the ECSE.

Mrs. Brenda Floissac-Fleming is the 2nd Vice-President of the Board of Directors of 1st National Bank St. Lucia Limited. She was elected to the Board of Directors in 1993 and is currently the longest serving Board member. Mrs. Floissac-Fleming is the former Chairperson of the Human Resource Committee, and has served on the Credit Risk and Corporate Governance Committees. She is presently the Chairperson of the Corporate Governance Committee, and a member of the Credit Risk Committee. Mrs. Floissac-Fleming is an Attorney-at-Law by profession having graduated on the 8th July 1982 from the Chelmsford Institute of Higher Education, Essex, England with a B.A. (Hons.) in Law, and having obtained on the 26th November 1985, the Degree of Utter Barrister from the Honourable Society of Gray’s Inn. She is a Partner in the law firm of Floissac-Fleming & Associates (formerly Floissac & Giraudy). In December 2011, she became an Accredited Director, having successfully completed the Director Education Accreditation Programme (DEAP) facilitated jointly by the Institute of Chartered Secretaries and Administrators of Canada, and the ECSE. On June 12th 2013, Mrs. Floissac-Fleming was appointed Honorary Consul to the Republic of Chile. Mr. Johnson Cenac is a member of the Board of Directors of 1st National Bank St. Lucia Limited. He was elected to the Board of Directors in the year 2008 and has served on the Credit Risk and Audit Committees. He is currently the Chairperson of the Audit Committee and a member of the Credit Risk and Human Resource Committees. Mr. Cenac is a qualified Teacher, having received the University of the West-Indies - Endorsed Teaching Certificate in August, 1969. He graduated from the UWI in August, 1976 with a B.A in Mathematics and Economics. In September, 1980 he obtained an M. Ed degree in Testing, Measurement and Evaluation from the University of Arizona in Tucson Arizona. He has had experience both in the field of education and the civil service. He is a former Parliamentary Commissioner/Ombudsman of St. Lucia. In 2011, Mr. Cenac became an Accredited Director, having successfully completed the Directors' Education Accreditation Programme (25-28 January, 2011), jointly facilitated by the Institute of Chartered Secretaries and Administrators Canada (ICSA) and the Eastern Caribbean Securities Exchange (ECSE).

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Mr. Tedburt Theobalds is a member of the Board of Directors of 1st National Bank St. Lucia Limited. He was first elected to the Board for the period 1998-2004, and he was re-elected to the Board in the year 2008. Mr. Theobalds has served on the Audit and Credit Risk Committees. At present, he is the Chairperson of the Special Building Sub-Committee, and a member of the Credit Risk and Audit Committees. Mr. Theobalds is a graduate of the University of the West Indies and holds an MBA in Business Administration (1995) as well as postgraduate Diplomas in Agricultural Extension (1984) and Mass Communication (1979). He is also a certified Mediator (2013) and an Associate Member of the Chartered Institute of Arbitrators (UK) (2011) and Past Chairman of the St. Lucia Bureau of Standards. He is a valuation surveyor and agricultural consultant who has been in public and private practice for over twenty five years. He is qualified in the fields of Agricultural Extension; Mass Communication; Valuation Science (2010) and Business Administration. He is presently the CEO and Managing Director of Theobalds and Associates Surveying Services. Mr. Theobalds is also a member of the following professional bodies, namely, The Institute of Surveyors (St. Lucia) Inc. (2003), The International Real Estate Institute (IREI) (1990), The Environmental Assessment Association (EAA) (1997), The Project Management Institute (PMI) (2005), The Institute of Internal Auditors (IAA) (2014), The Royal Institute of Chartered Surveyors (RICS) (2013). He is also a recognized valuer by the Government of Saint Lucia (1999). In 2011, Mr. Theobalds became an Accredited Director, having successfully completed the Director Education Accreditation Programme (DEAP) facilitated jointly by the Institute of Chartered Secretaries and Administrators of Canada and the ECSE. Mrs. Geraldine Lendor-Gabriel is a member of the Board of Directors of 1st National Bank St. Lucia Limited. She was elected to the Board of Directors in the year 2011 and serves on the Audit, Finance, Investment and Planning Committee and the Credit Risk Committee. She is currently the Chairperson of the Finance, Planning and Investment Committee, and a member of the Credit Risk Committee and Deputy Chairperson of the Audit Committee. She graduated from the University of the West-Indies with a BSc. Hons. Degree in Economics and Management (1991), and is a Certified General Accountant (CGA) (1997). She also holds a Post Graduate Diploma (2005) and a MSc. in Environmental Management from the University of Derby, UK (2007). Mrs. Lendor-Gabriel is a Business and Environmental Consultant at her Company BEEQ Investments Ltd. She has technical and professional training and experience in the areas of Accounting, Finance, Human Resource Management, Environmental Management and Management Consulting. She holds the designation of Certified Management Consultant (2015) from the Caribbean Institute of Certified Management Consultants which is Associated with the CMC International Global certification. She is a trained facilitator of the Stephen Covey training Programs 5 Choices to Extraordinary Productivity (2016) and the 7 habits of Highly Effective People (2015). Mrs. Lendor-Gabriel is an Accredited Director, having successfully completed the Director Education Accreditation Programme (DEAP) facilitated jointly by the Institute of Chartered Secretaries and Administrators of Canada, and the ECSE in 2007. Mr. Adrian Augier is a member of the Board of Directors of 1st National Bank St. Lucia Limited. He was elected to the Board of Directors in 2012. He presently serves on the Special Building Sub-Committee, the Corporate Governance Committee and the Finance, Planning and Investment Committee. Mr. Augier is an Economic Development Consultant with extensive Private and Public sector experience across the Caribbean and beyond. He has worked as an economist with the Government of St. Lucia (1982), the World Bank (1985). Additionally, he has worked as a Consultant for the following agencies, namely,

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USAID (1993), UNCTAD (1993-1995), OECS (1994-1995 & 1997 -1998), EU (1998 – 2004) and CARICOM (2010- 2012). His current work focuses on the creative sector as a platform for human and economic development. A former Chief Economist in the Ministry of Finance and Planning (1988), Mr. Augier returned to Public Service to assist the new government with policy re-orientation. From 1998 to 2004, he served as Economic Policy Advisor to the Prime Minister of St. Lucia, establishing the Office of Private Sector Relations (OPSR) and designing and implementing the country’s first Private Sector Development Strategy. Mr. Augier is Chairman of the Landmark Group. The group’s flagship company Landmark Events was acclaimed by the St. Lucia Chamber of Commerce as Service Exporter of the Year- 2009. The Group is active in the Tourism sector in the creative arts, events and entertainment industry across the Caribbean. Augier was named Entrepreneur of the Year in 2010. In 2012, he received an honorary Doctorate from the University of the West-Indies for his work in Economics and The Arts. Additionally, in 2016 he received the St. Lucia Medal of Merit (Gold) for his long and meritorious contribution in the field of Arts and Literature. Mr. Richard Monplaisir is a member of the Board of Directors of 1st National Bank St. Lucia Limited. He was elected to the Board of Directors in the year 2013 and has served on the Finance, Planning and Investment Committee in addition to the Special Building Sub-Committee. He currently serves on the above-mentioned Committees and the Human Resource Committee.

He graduated from the Toronto School of Business in May, 1989 with Honours in Business Administration, Accounting and Computers. Mr. Monplaisir has over fourteen years of accounting experience having begun his career as an Auditor at Price Waterhouse Coopers before joining C. O. Williams Construction as Accounts Supervisor. He was promoted to Financial Controller of C. O. Williams Group of Companies and is currently a Director of all the C. O. Williams Group of Companies in St. Lucia with direct responsibility for Administration and Finance. Mr. Monplaisir also gives of his time to serve on the Finance Committee of the Archbishop Kelvin Felix Pastoral Centre.

In 2016, Mr. Monplaisir became an Accredited Director, having successfully completed the Directors' Education Accreditation Programme jointly facilitated by the Institute of Chartered Secretaries and Administrators Canada (ICSA) and the Eastern Caribbean Securities Exchange (ECSE).

Mr. Martin Satney is a member of the Board of Directors of 1st National Bank St. Lucia Limited. He was elected to the Board of Directors in the year 2015, and currently serves on the Finance, Planning and Investment Committee in addition to the Human Resource Committee. He holds a MSc. degree in Agricultural Engineering (Mechanisation) from the Higher Institute of Agricultural Sciences of Havana (Instituto Superior de Ciencias Agropecuarias de La Habana) (ISCAH), Faculty of Agricultural Mechanisation (1986) and a MSc. degree in Management and Implementation of Development Projects (MIDP) from the University of Manchester – Institute of Science and Technology, Department of Civil and Structural Engineering, UK (1998). He has served as a public officer in Saint Lucia in various senior professional and management positions, including as Permanent Secretary (2002 – 2007). From 1998 to 2002, he championed the transformation of the national water utility entity in St. Lucia (WASA) into a fully commercialized corporate service provider. Since 2007, Mr. Satney has functioned as an Independent Management Consultant and Trainer/Instructor. Moreover, as a Project Management Specialist, Mr. Satney demonstrates his professional competence in developing change management frameworks to help guide entrepreneurs, public and private sector entities to strengthen their capacities in identifying appropriate solutions to business-related challenges and

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problems, to facilitate growth and development, particularly in areas, such as agriculture and the wider small business sector. In 2007, Mr. Satney became an Accredited Director, having successfully completed the Director Education Accreditation Programme (DEAP), facilitated jointly by the Institute of Chartered Secretaries and Administrators of Canada, and the ECSE. Ms. Jennifer Remy is a member of the Board of Directors of 1st National Bank St. Lucia Limited, having been elected in the year 2016. She currently serves on the Human Resource Committee. She graduated from the University of Western Ontario in 1971 with a B.A. (Hons.) majoring in Psychology and Philosophy. She then proceeded to the UK where she pursued Law. She was admitted as a member of the Honourable Society of the Inner Temple on the 5th June 1975, and was called to the Bar of the England and Wales on the 21st November 1978, and subsequently the Saint Lucia Bar. From 1983 to the present she has been head of the Law firm, Jennifer Remy & Associates during which time she served as President of the St. Lucia Bar Association and also as a Magistrate prior to her appointment as a High Court Judge in 2009. She retired from the Bench in 2013 having reached retirement age. Ms. Remy is still in private practice, and serves as a Court appointed mediator and is on the Roster of Mediators. THE EXECUTIVE MANAGEMENT TEAM Mr. Johnathan J. Johannes – Managing Director Mr. Johnathan Johannes, the Managing Director of 1st National Bank St. Lucia Limited brings to the position a wealth of knowledge and experience in retail, sales, operations, customer service and performance management, having spanned a career of 16 years in banking and management. Mr. Johannes distinguished himself early in his career as one of five candidates selected from 300 Caribbean applicants to join the Barclays Leadership programme. He was part of the Barclays Bank Caribbean and CIBC West Indies Integration Team in the establishment of the First Caribbean International Bank. His natural ability to lead and passion for people and Banking saw him progressed to senior positions within the OECS region and Barbados in various roles such as:

District Manager Retail Banking, Wealth Management and Business Banking (Barbados) August 2010 – Jun 2011;

OECS Business Support Manager and Country Head (Antigua and Barbuda) July 2007- July 2010; Customer Experience Manager (Barbados) February 2006 – July 2007; Retail Banking Manager (St. Kitts and Nevis) November 2004 – July 2007; and Retail Banking Manager and Country Head (Anguilla) August 2002 – November 2004.

As a senior banking and retail expert, he has an award winning track record for surpassing performance goals and has also been recognized for consistently implementing strategies that increase efficiencies. His most recent position at Unicomer as OECS Director of Sales saw him successfully manage various teams across six Caribbean territories with direct oversight for 200 staff. On 2nd October 2000, Mr. Johannes graduated from the University of Lincoln (UK) in the discipline of International Business Administration. In his quest to give back, he has also served as a lecturer with the Eastern Caribbean Central Bank’s Financial Education Programme (November 2004 – April 2012), a Director of the Eastern Caribbean Institute of Banking (November 2004 – July 2007) and a member of the Chartered Management Institute (13th December, 2002).

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Johnathan continues to serve his country and believes in the ingenuity of our people. His passion for service excellence will ensure that customers receive world class customer experience from a world class institution that we can all be proud to call our own. The Managing Director’s responsibilities involve direct supervision of the Executive Management team; ensuring targets are met as it relates profitability, return on assets and return on equity, ensure staff are engaged in providing exceptional service to customers. The MD has accountabilities for the risk management and compliance functions of the Bank and managing the Bank’s brand. Ms. Aurea Lafeuillee – Executive Manager, Finance & Research Aurea Lafeuillee is a Fellow of the Certified Chartered Accountants (FCCA) and a Fellow of the Institute of Canadian Bankers (FICB). She joined the Bank in 2004, with many years’ experience as an Accountant in the private sector. Her responsibilities range from, contributing to the strategic planning process, financial planning and reporting, monitoring revenue and costs and managing the Bank’s investment portfolio. Her department is also engaged in conducting research to assist in the decision making. Ms. Lafeuillee has attended several seminars and workshops in Strategy Development and Planning facilitated by her previous employers and more specifically by the Bank, the most recent of which was facilitated by Strategic Alignment Limited. In 2013, Ms. Lafeuillee was appointed to act in the capacity of Managing Director for a period of one year. She also acted in that capacity from July 2016 until June 2017 when the new Managing Director was appointed. Mrs. Valery Marshall-St. Omer - Executive Manager Human Resource, Organizational Development and Client Support Valery Marshall-St. Omer has worked with the Bank for 29 years, during which time she has gained exposure to all areas of the Bank. She rose through the ranks and in 1997 was promoted to management level and held the position of Internal Auditor. In 2007, she was reassigned to the Operations Department as Assistant Operations Manager. Due to her experience and sound work ethic, the position was quickly upgraded to that of Deputy Operations Manager. Valery Marshall – St. Omer is our Executive Manager for Human Resources, Organisational Development and Client Support. In this capacity, Mrs. St. Omer contributes to the Bank’s strategic planning process, paying particular attention to the HR & Operations strategic objectives and initiatives. She maintains and enhances the organisation’s human resources by planning, implementing, and evaluating employee relations and human resources policies, programs, and practices. As the team lead for Client Support and Operations, she constantly reviews the effectiveness of internal processes, focusing on business automation to improve efficiencies for excellent customer service delivery. Mrs. Marshall-St. Omer was granted a Post Graduate Diploma in Business Administration (Human Resource Management) and is currently completing the thesis for her MBA degree. In October 2013, her position was retitled Executive Manager Human Resource, Organizational Development and Client Support. In this new role, she was a key facilitator in the implementation of the new Organizational Structure.

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Mrs. Denise Holden-Pierre - Executive Manager, Internal Audit Denise Holden Pierre is the Executive Manager, Internal Audit and has been with the Bank for seven years. Mrs Holden-Pierre is a Fellow of the Chartered Association of Certified Accountants (FCCA) and holds a degree in Maths and Business Management from Leeds University. Before returning to St Lucia, Mrs Pierre worked as an Internal Auditor and later, Manager of a team that analyzed the arrears processes for National Provincial Building Society. On returning to St Lucia, Mrs Pierre joined PricewaterhouseCoopers as an auditor for approximately three years. She later worked as the Manager of Internal Audit with M & C Group of Companies in St Lucia for about 5 years. Mrs. Holden-Pierre is proud of her service to the community. She served on the Board of the Holy Family Children’s Home and with the St. John’s Association. She is currently on the Board of St. Lucy’s Home and is serving as an Executive of ACCA’s Voluntary Members Network – St Lucia Branch. Mrs. Holden-Pierre serves on the Training Committee for the CAACM – Caribbean Association of Audit Committee Members. Denise is responsible for conducting audits based on the approved plan, evaluating significant new or changing services, processes, systems, operations and control processes. She prepares reports on the implementation of the audit plan and on the results of the audits/consultancies performed. These deficiencies are monitored, until the findings have been addressed. Internal Audit also provides the Audit Committee with reports on a quarterly basis and assists the Committee with any technical matters as needed. Mrs. Sylvia Alcee - Executive Manager, Client Services Sylvia Alcee joined the Bank’s team in January 1981 and has moved steadily through the junior, supervisory and management levels over the years. Consequently, she has been exposed to all aspects of the Bank’s business, having served within the Operations, Customer Service, Information Systems, Lending and Internal Audit departments. She has also benefitted from the range of staff training provided and managed the Rodney Bay Branch successfully for 19 years. Mrs Alcee is responsible for leading the Sales Team in assessing the financial needs of clients and to provide options to meet those needs in pursuit of specific sales and service, growth and relationship building opportunities, with emphasis on mortgage lending, small business lending, other retail and corporate lending. Sylvia holds a Master of Business Administration (MBA) from Anglia Ruskin University and the professional banking designation of Associate of the Institute of Canadian Bankers (AICB). After the 2013 strategic review, Sylvia’s position was retitled Executive Manager, Client Services. She is passionate about customer service delivery. Mrs. Clarette Auguste-Taylor - Executive Manager, Risk, Compliance, Recoveries and Securities Clarette Auguste-Taylor has worked with 1st National Bank St. Lucia Limited from January 1994. Upon her return home from her studies in London, she was initially appointed as the Internal Auditor. In 2000 she was promoted to Head the Credit Risk Department. Currently, she is the Executive Manager, Risk, Compliance, Recoveries and Securities having been appointed to the position in October 2013. Mrs. Auguste-Taylor has a wealth of knowledge and experience in the field of Banking and Finance. As part of her duties, Mrs. Auguste-Taylor is tasked with the responsibility of contributing to the Bank’s strategic planning process by designing, developing and maintaining an effective compliance programme that is in keeping with regulatory requirements. Mrs. Auguste-Taylor provides advice on recovery of the Bank’s pledged collateral when required and ensures the active pursuit of the Bank’s bad debt portfolio so

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as to achieve the consistent reduction of same and in particular to maintain the Bank’s non-performing loan portfolio within the agreed ratio. In January 2016, Clarette was awarded the Anti-Money Laundering Certified Associate certificate with Florida International Bankers Association Inc. She continues to increase her knowledge in this field to maintain her credentials. Mr. Robert Fevrier - Executive Manager, Marketing and Public Relations Robert Fevrier is a graduate of the University of the West Indies Institute of Business (St. Augustine). He is a banker by profession, having worked in the banking industry for the past 27 years, with a further 6 years in the Finance Department of Cable and Wireless. The majority of his banking experience was obtained with the International Banks operating locally. Robert joined 1st National Bank St. Lucia Limited in December 2004 in the capacity of Manager, Projects and Services. When the Bank was restructured in 2013, his position was changed to Executive Manager, Marketing & Public Relations. Robert is responsible for preparing and managing the Bank’s annual marketing plan/strategy and budget. He manages the Bank’s brand and collateral material, advertising and promotional initiatives, and coordinates quarterly customer surveys. Mr. Fevrier makes media appearances on behalf of the Bank as it relates to interviews on products and services on both radio and television. He also has responsibility for the Bank’s corporate social responsibility initiatives. A devout catholic and family oriented individual, Robert believes that hard work and determination is the key to success. Mr. Henri-Jacques N. Mangal - Corporate Secretary & Legal Officer Henri-Jacques Mangal, a former employee of 1st National Bank St. Lucia Limited in his formative working years, is currently a practicing Attorney having been admitted to practice in the Saint Lucia and Grenada circuits of the Eastern Caribbean Supreme Court. He joined the Bank in December 2015. A graduate of the St. Mary’s College and Sir Arthur Lewis Community College, he commenced his legal education at the University of the West Indies Cave Hill Campus where he obtained a Bachelor of Laws Degree. He then completed his in-service training at the prestigious Law Firm of Clarke Gittens Farmer in Barbados prior to concluding his legal education at the Hugh Wooding Law School, where he obtained the Legal Education Certificate. Immediately preceding his appointment, Mr. Mangal was an Associate Attorney at the Law Firm Chong & Co. where his practice primarily consisted of Civil Litigation. He has a keen interest in Corporate Law, Intellectual Property Law and Legislative Drafting.

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BOARD AND BOARD COMMITTEE MEETINGS 2016

BOARD OF DIRECTORS AND EXECUTIVE MANAGEMENT Under the Companies Act Chap. 81:01, directors and executive officers are entitled to be indemnified for any liability incurred by them for any acts they take (or do not take) in the performance of their duties unless such liability is the result of wilful neglect or failure to act on the part of the relevant director or executive officer. The Issuer has insurance coverage for directors’ and officers’ liability.

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APPOINTMENT OF DIRECTORS The number of directors is set out in the Issuer’s By-Laws which stipulates that “Until otherwise determined, the number of directors shall be not less than seven nor more than fifteen”. DIRECTORS’ INTEREST IN CONTRACTS Under By-Laws Section 5.3 of the Issuer, “A director may enter into or be interested in contracts or arrangements with THE COMPANY (whether with regard to any such office or place of profit or any such person acting in a professional capacity or as vendor, purchaser or otherwise howsoever) and may have or be interested in dealings of any nature whatsoever with THE COMPANY and shall not be disqualified from office thereby. NO such contract, arrangement or dealing shall be liable to be avoided nor shall any director so contracting, dealing or being so interested be liable to account to THE COMPANY for any profit arising out of such contract, arrangement, or dealing to which that person is a party or in which that person is interested by reason of that person being a director of THE COMPANY or of the fiduciary relationship thereby established. Except as provided in Section 91 of THE ACT, a director may not vote as a director in respect of any contract or arrangement in which that person is so interested as aforesaid and shall not be present at the time such matter is considered. Nothing contained in the BY-LAW shall authorize a director or any firm with which he or she is associated to act as auditor to THE Company.” DIRECTORS’ INTEREST At April 30, 2017, the members of the Board of Directors of the Bank own a combined total of 39,651 shares, comprising .8% of the total shareholding.

Directors Number of shares as at April 30, 2017

Interest

Nigel Fulgence 11,000 Beneficial Brenda Floissac-Fleming 4,799 Beneficial Johnson Cenac 10,810 Beneficial Tedburt Theobalds 1,125 Beneficial Geraldine Lendor-Gabriel 2,100 Beneficial Adrian Augier 2,600 Beneficial Richard Monplaisir 1,125 Beneficial Martin Satney 1,000 Beneficial Jennifer Remy 3,692 Beneficial Total 38,251

No Director has any material contract with the Issuer or is receiving any consideration with respect to the promotion of the Offer for Sale. Other than the shares listed above, there were no shares held by Directors with non-beneficial interests.

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DIRECTORS’ CONTRACTS OR ARRANGEMENTS The Bank has a long standing arrangement with Fleming & Associates, whereby the Bank pays to the firm an annual retainer of EC$6,000. The Firm provides legal advice to the Bank as required for a separate fee. The Bank’s loan customers have the right to seek legal advice from their lawyers, inclusive of lawyers with Floissac Fleming and Associates. If another lawyer is selected, Mrs. Floissac-Fleming is required to visae the document.

DIRECTOR RENUMERATION

2016 2015 Directors’ fees and expenses $298,620 $297,200 Directors’ gratuity $99,073 $88,303

MATERIAL RELATIONSHIPS The Bank is not aware of any family relationships that exist between any Director and any other person who performs an important administrative, management or supervisory function. EMPLOYEES Staff costs

2016

$ 2015

$

Salaries and wages 5,572,522 5,491,334Other employee benefits 1,180,635 948,461Profit sharing - -Social security costs 237,040 222,158Pension costs (Note 19) (15,000) 19,000

6,975,197 6,680,953

Key management personnel compensation

2016

$ 2015

$

Salaries and other short-term benefits 1,051,623 1,223,623Post and other employment benefits 202,389 404,278 1,254,012 1,627,901

The average number of employees during the year 2016 was 138. (2015 -126) At 1st National Bank St. Lucia Limited, we see our staff as our most valuable asset and we therefore focus on creating opportunities for team members to develop and grow in tandem with the organization. Our continuous bank-wide staff training and development programs place appropriate emphasis on career development, building leadership capacity and core skills. The development of effective sales strategies, our in-house customer service training Program, anti-money laundering certification programs as well certification of our lenders are among our key areas of focus. These initiatives make it possible for staff to

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be aligned to the Bank’s vision and strategy hence fostering a stable, healthy and harmonious working environment. We also ensure that team members are crossed trained within the various departments to enable them to acquire new skills and increase knowledge base. We tailor our training activities to support the Organization’s strategic priorities. 1st National Bank St. Lucia Limited is an equal opportunity employer, considering applications for employment from across the island and all socio-economic demographics. After the global recession, the Bank increased its staff complement to implement its automation initiatives. It is heartening to note that to date the Bank has not retrenched any staff. On the contrary, due to the high turnover of entry level staff exiting the Bank to take up full time tertiary level education the Bank is constantly in orientation and training mode. The Bank has and continues to enjoy a very stable industrial climate. To date the Bank is one of the few remaining financial institutions that is not unionized. This stability has been re-enforced through the following actions:

Creation of a working environment conducive to growth and positive attitudes. Living out the Bank’s core values of Integrity, Confidentiality, Accountability, and professionalism

which are all incorporated into all in-house training sessions and guides the ethical behavior and high standards to which leadership is held.

The promotion of employees to supervisory level grades, in line with building leaders at all levels throughout the organization.

Identification of suitable staff from within to fill vacant and new positions in keeping with the succession policy.

Regular review of the existing salary grade structure to ensure alignment with comparable position ranges in the financial services sector in order to remain relatively competitive and attract and retain quality personnel.

The granting of annual performance based salary increments as an incentive to all staff for their respective contribution throughout the year.

Payment of a share of the Bank’s profits to all eligible staff having regard to their collective efforts at generating profit within the year.

Continuous revision of existing and development of new policies. Conducting staff engagement surveys annually

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5. OPERATING PERFORMANCE FINANCIAL PERFORMANCE REVIEW

Restated2016 2015 2014 2013 2012

$ ' 000 $ ' 000 $ ' 000 $ ' 000 $ ' 000

Operating results

Gross income 38,822 40,055 42,165 40,168 42,769

Interest income 29,340 30,976 34,796 32,759 34,604

Interest expense 10,557 12,374 14,055 13,737 14,023

Net interest income 18,783 18,602 20,742 19,022 20,581

Other income 9,481 9,079 7,369 7,410 8,165

Other operating expenses 17,241 17,274 16,841 16,606 15,435

After tax income 1,457 1,028 481 (218) 2,695

Balance sheet data

Customer deposits 540,515 506,388 470,299 432,383 402,328

Common shareholder equity 7,971 7,971 7,971 7,971 7,971

Total shareholder equity 77,289 76,006 75,185 74,838 77,099

Total Assets 626,269 588,367 551,458 511,727 485,038

Common shares issued & paid ('000) 5,000 5,000 5,000 5,000 5,000

Performance $ $ $ $ $

Dividends Declared 0.11 0.10 0.00 0.00 0.40

Earnings per share 0.29 0.21 0.10 (0.04) 0.54

Book Value 15.46 15.20 15.04 14.97 15.42

Return on average assets 0.24% 0.18% 0.09% -0.04% 0.55%

Return on average equity 1.90% 1.36% 0.64% -0.29% 3.51%

Net Interest Margin 3.09% 3.26% 3.90% 3.82% 4.24%

Productivity 61.0% 62.4% 59.9% 62.8% 53.7%

Average # of employees 138 126 125 122 112

Financial Highlights for 1st National Bank St. Lucia Limited

STATEMENT OF PROFIT AND LOSS

Profit before tax increased by 44% over 2015 Despite the continued challenges of stiff competition for quality loans, lower interest rate margins and limited investment opportunities, 1st National Bank was able to report a profit for the financial year ending December 2016. Profit before tax increased by 44% over 2015. This increase was driven by increases in other operating income and lower cost of funds. Operating expenses for the financial year were marginally in line with that recorded for 2015. Overall Profit before tax has increased by 14% over 2014. These results demonstrate continued efforts at cost containment and the generation of other revenue opportunities. Notwithstanding the very competitive market, the Bank’s strategy to competitively manage cost of funding resulted in a 15% decline in interest expense.

Revenue Total revenue decreased by 3%, from $40.1 million in 2015 to $38.8 million in 2016 ($42.2 million – 2014). This adverse performance was mainly attributed to a $2.1 million reduction in interest on loan and advances due to lower weighted average interest rate and loan volume. Fee income also decreased by 9% (an increase of 36% compared to 2014), primarily because of a decrease in bad debts collections, a

stark reminder of the challenges in converting foreclosed properties within reasonable time. A net loss on disposal of assets of $0.33 million was also recorded, which mainly resulted from a fixed assets verification exercise undertaken by the Bank. However, these adverse variances were offset by increases in the following areas: Investment income increased by 16%

against prior year due to an increase of $18 million in the total investment portfolio. This increase comes amidst the challenges of declining interest rates in a very liquid market. Although there is need to convert liquid non-interest bearing assets, management continues to exercise caution in placing investments in what was previously considered safe instruments.

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Commission and other income recorded an 8% growth (47% growth as at December 2014) mainly from increases in commission on credit and debit cards, in keeping with the Bank’s revenue growth strategy. To date, a sturdy growth in transaction volumes and number of cards has been recorded.

Foreign exchange recorded a 12% increase against 2015 (16% increase as at December 2014). This revenue stream derives from the strategic positioning of two (2) of our branches, thus maximizing revenue opportunities.

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Expenses Interest Expense and Similar Charges The Bank’s strategy to manage the cost of deposits, coupled with the full effect of the new minimum savings rate announced by the Eastern Caribbean Central Bank (ECCB) during 2015, has resulted in a significant decrease in interest expense of 15% or $1.8 million in 2015 and a 25% decline from 2014. This favourable result significantly cushioned the decline in loan interest income to return a marginal 1% increase in net interest income.

Other Operating Expenses During the year, the movement on total operating expenses before impairment losses was negligible when compared to prior year. This result was mainly driven by decreases in administrative, rent and depreciation expenses, offset by an increase in staff costs. Over the last five (5) years, the Bank recorded a constant increase in expenses until 2016, where a marginal negative growth was recorded. In response to the challenges with growing the credit portfolio, cost efficiency initiatives were pursued, including seeking synergies with another regional bank. Administrative expenses declined by 1% over the prior year primarily because of decreases in advertising, professional fees, postage, telephone and telexes. This was partially offset by increases in card and computer related expenses. These decreases resulted from non-recurring expenses as well as cost-reduction strategies.

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The Bank’s commitment to empower and build staff capability to achieve its strategic objectives resulted in a 35% increase in costs for training, seminars and conferences. Allowances for impairment The Bank made a significant allowance for impairment of loans and advances of $9.4 million, representing a 1% increase over 2015. The total allowances for impairment comprises 38% of the non-performing loan portfolio (40% - 2015). An aggressive approach at loan recovery was maintained throughout the year.

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BALANCE SHEET Asset growth of 6% We are pleased to report that the Bank recorded asset growth of 6% for the year ended December 2016, surpassing its projected asset growth of 3%. This represented 13.6% growth since December 2014. Total assets stood at $626 million, compared to $551 million recorded for 2014. The main component driving this increase was strong growth in customer deposits, demonstrating customer confidence and strength of the 1st National Bank brand.

Cash and Due from Banks The balances held with ECCB and due from banks increased by 40% and 22% respectively over 2015. These increases are due in part to the increase in customer deposits, and limited loan and investment options arising from a very liquid market. The excess funds are generally held with the originating banks, predominantly with the Bank of New York.

Investments The market’s high liquidity presented its fair share of challenges in securing good investments at reasonable rates of return. In keeping with our investment strategy, the portfolio grew by 22% over 2015. No allowances for impairment were made against the portfolio during the year, principally because cash flows were received as agreed. At year end, 85% of the portfolio will mature within one (1) year and 31% of the portfolio matures within three (3) months.

Treasury Bills increased by a net of 10% with new investments in the Governments of St. Lucia and Antigua. At year end, the Bank held investments in Governments of St. Lucia, St. Vincent and Antigua. The weighted average interest rate on these Treasury Bills was 3.88%, a decline from 4.82% for 2015.

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Loan and advances to financial institutions comprise reverse repurchase agreements. The category increased by 39% during the year because of new investments in the Government of Trinidad & Tobago (Rated A- by Standard & Poors). The weighted average interest rate of this class of investment has also declined to 2.32%, from 2.89% in 2015.

Available for sale investments decreased by a net of 6% mainly as a result of scheduled and

unscheduled repayments of principal. This was offset by additional investments in the existing portfolio and the increase in price of a publicly traded security. The weighted average effective interest rate on available for sale investments also declined to 6.22% from 6.57% in 2015.

Held to maturity portfolio increased by 38% from 2015 due to additions in the Government of St.

Lucia and ECHMB portfolio. The weighted average effective interest rate on this category of investments increased to 4.97% from 4.92% in 2015.

Loans and advances to customers The total loan and advances portfolio regressed by 3% against the result for 2015. The decline is mainly attributable to loans written off totalling $10.9 million for 2016. The Bank continues to manage challenges from stiff competition and the non-performing portfolio. Notwithstanding these challenges, efforts are geared at implementing policy guidelines to improve the quality of new loans added to the portfolio. Additionally, the Recoveries Unit works assiduously to reduce the non-performing loan

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portfolio to more acceptable levels. It is heartening to note that some success was achieved. At year end, 80% of loans and advances received a pass rating, up from 79% in 2015. The non-performing loan and advances ratio was 15.6% compared to 16.7% and 19.5% in 2015 and 2014 respectively.

Property and Equipment The net book value of property and equipment decreased by 8% from 2015, due mainly to depreciation. Another reason for the reduction in the net book value arose from the disposal of assets subsequent to an asset verification exercise which was undertaken during the year. The net book value of those items was $0.29 million and charged as a loss on disposal. Other disposals during the year were conducted in the normal course of operations and resulting in a charge of approximately $0.01 million.

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The Bank spent $0.41 million in acquiring new property and equipment. Of this amount, $0.17 million was spent on computers, printers and scanners and upgrading the current equipment to improve efficiencies. $0.06 million was also spent availing card machines to our merchants and enhancing the security of card services. Renovations to the Castries building were also carried out at a cost of $0.05 million. Intangible Assets The movement on intangible assets was due to amortization and, like property and equipment, there were write offs from the verification exercise. A net book value of $0.05 million was charged to loss on disposal for items written off which were no longer in use.

Income tax recoverable The tax recoverable is the balance brought forward from 2015 less the tax charge for the year. The charge for the year was reduced by the decrease in the deferred tax liability as a result of the losses on disposal.

Other assets This asset category grew principally because of amounts receivable from Caribbean Credit Card Corporation (4C’s) for credit card activities at the end of the reporting period.

Customer Deposits Customer deposits increased by 7% over the last audited position at December 2015 (15% increase as at December 2014), thus continuing a steady growth trajectory. This trend is spurred by our deliberate strategy to grow the deposit portfolio.

Equity Capital and reserves increased by 2% from 2015, mainly because of the net profit of $1.4 million and an increase in the market value of available for sale investments of $0.28 million offset by the dividend distribution of $0.5 million for 2015.

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Off balance sheet arrangements The Bank has made commitments to customers that would require cash outflows totalling $22 million. Some of these commitments expire without being drawn. The amount represents the total risk that the Bank may be exposed to in this category.

EXPECTATIONS

In 2017, the focus for the Bank will remain on its customer initiatives and, more specifically, strengthening its existing operations and reviewing its processes and strategies to build resilience and sustained growth for its stakeholders. Management anticipates that the competition for the limited investments options, quality loans and rate wars will be more prevalent. However, a key mechanism to deliver on its initiative will be the Memorandum of Understanding between the Bank and Grenada Co-operative Bank Ltd. Phase 1 of the project will be completed by July 2017 and it promises to deliver enhanced customer experience, increased efficiencies and synergies which will translate to increased benefit to our shareholders, customers and employees. The anticipated development in the south of the island to include world-class horse racing facilities, leisure and accommodation amenities is expected to generate economic activity and transform the south. The Bank is positioning itself to capitalize on any increased business activity and has begun the process of relocating its Vieux Fort branch to a more central point of access by the end of the second quarter. The Bank will continue to maintain its conservative position to loan loss provisioning. The Eastern Caribbean Central Bank (ECCB) has made progress with its efforts to stabilize financial services in its member territories. The Asset Management Corporation has been established and work is continuing on deposit insurance and the development of a Credit Bureau. These will assist with our debt recovery strategy. Effective risk management is essential to the Bank’s success and thus, our efforts at mitigating risk will be heightened, particularly in an environment with numerous uncertainties. As the cost of compliance continues to increase, risk management strategies including pre-risking and de-risking strategies are being deployed. The Bank has invested in technology geared at assisting with monitoring and alerting to risky transactions. Pre-risking and de-risking refers to strategies implemented to reduce riskiness or the likelihood of financial loss. Pre-risking initiatives include ensuring that all data is collected for every customer at the point of first contact on opening the account. The information must enable the Bank to know its customer and includes date of birth, address, salary and deposit data, employer, company information if not an individual. De-risking strategies include continuous review of customer data to ensure there are no breaches of the laws and regulations. It includes subscribing to published lists of the Office of Foreign Assets Control, Thomson Reuters World Check and other lists for searches of customers and potential customers on World Check and OFAC lists. Refusal to provide necessary data or substantiate data to ascertain illegal activities will result in exiting of a relationship with a customer. Our legacy of caring for people continues to hold true in 2017 as we build capabilities for our employees and focus on building value for our customers that would redound to value for our shareholders.

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6. ECONOMIC OUTLOOK

EASTERN CARIBBEAN CURRENCY UNION Data released by the ECCB indicates that Real Gross Domestic Product (GDP) in the ECCU decreased from 2.59% in 2015 to 2.20% in 2016. Growth in 2017 is projected at 2.78%. The hotels & restaurant sector is expected to expand 2.59% in 2017, following a 4.08% expansion in 2016. Output of agriculture, livestock and forestry is forecasted to grow by 5.54% in 2017, following a 2.07% decline in 2016. The construction sector is expected to grow by 5.32% in 2017 after growth of 7.01% in 2016. Growth is forecasted in most member countries in 2017, with contractions in Anguilla (-1.00%), Antigua & Barbuda (-1.08%) and St. Vincent & the Grenadines (0.57%). Expansions are expected in St. Lucia (+2.20%), Dominica (+1.57%) and Grenada (+1.20%). Meanwhile, the International Monetary Fund (IMF), in its October 2016 World Economic Outlook, estimated economic growth in the region at 2.2% in 2016 and 2.60% in 2017. The region’s external current account deficit widened to an average of 13.8% of GDP in 2017 from 12.6% of GDP in 2016. Inflation is forecasted to recover to 2.2% in 2016 (0.3% in 2016). The IMF directors agreed that, while low commodity prices continue to support tourism, fiscal vulnerabilities and the strengthening of the financial sector must be addressed. Total public debt (as a % of GDP) is expected to decline slightly from 82.3% in 2015 to 80.4% in 2016, but will then moderate further by the end of 2019. Foreign reserves in the ECCU were previously projected at US$1,618 million for 2015, which will provide 5.9 months of import cover. This compares to US$1,125 million in 2012, which provided 4.4 months of coverage

ST. LUCIA (Rating - CariCris: CariBBB+) The St Lucian economy is estimated to have expanded by 0.8% in 2016, down from growth of 1.80% in 2015. The performance was driven by activity in both the construction and the agriculture sectors. According to the ECCB, the construction sector increased by 2.47% while the hotels and restaurants sector, a proxy for the tourism sector, fell by 2.65%. The major declines were in the manufacturing sector (7.43%) and the transport, storage and communications sector (5.51%). Growth was registered in the agriculture, livestock and forestry sector (7.9%), financial intermediation sector (2.03%). Visitor arrivals fell 12% in first 9 months of 2016, led by a sharp fall in cruise arrivals (-19.7%) due to a 4.5% fall in cruise ship calls from 266 in 2015. Stay over arrivals rose 0.6%, supported by an increase in arrivals from the Caribbean (+9.7%) and the US (+2.8%). Airlift from the US increased during the period, accounting for

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the rise in the US market. Stay-overs from Canada (-6.6%) and Europe (-7%) led the declines. In the case of Canada, the Canadian market has been hit by rising employment due to the fallout in energy prices whilst in the case of Europe, the decline stemmed from increased uncertainties regarding Brexit. The ECCB has projected growth of 1.48% in 2017 while the IMF has projected growth of 0.5% and 1.5% in 2018. The current account on the fiscal account ended the FY 2015/ 2016 with a deficit of 3.1% of GDP from 3.8% in the previous year, largely due to the rebound in economic activity as well as the implementation of revenue enhancement measures. Total revenue rose 9.4% with the implementation of an increase in customs service charge rate from 5% to 6%, an increase in fuel surcharge rate and adjustments to motor vehicle licensing fee structure. On the expenditure side, total expenditure rose 5.7% due to a significant increase in interest payments, which rose 9.2% as the stock of debt continues to rise. There was also an increase in current transfers (transfers to the public sector grew 10.8% (largely a one-off transfer to a statutory board, increase in retirement benefits caused by the rise in the number of retirees). Wages and salaries, which is the largest contributor to current expenditure remained stable reflecting a wage freeze between government and unions. Capital expenditure rose 13.4%, resulting from increased infrastructural spending on two major areas which include the St Jude's Hospital and other projects under the Constituency Development Program and the Tourism marketing Promotion (XCD36.35 million), the largest spend under the CAPEX program for 2015/ 2016. During FY 2015/ 2016, government was able to raise XCD220.7 million in new financing, majority through Treasury Bills, reflecting a shift in the market appetite to shorter dated securities. While Treasury bill issues were consistently oversubscribed, longer dated bonds were sometimes undersubscribed reflective of current market conditions and investor risk appetite. The stock of public debt rose 5.2% in FY 2016 to end at 82.9% of GDP. The share of central government debt held by domestic creditors accounted for 52.6% while the share held by external creditors accounted for remaining 47.4%. In March 2017, the IMF concluded its Article IV Mission to St Lucia and below are the key points from the report:

Weakness in tourism activity continues to dampen growth: while the number of hotel rooms and new direct flights from the US increased, there may be a fallout due to a new airport tax.

Short term outlook is mildly positive, but presents some risks: Growth to be supported by agriculture and construction activity.

Medium term outlook remains subdued as structural weakness impinges on competitiveness and potential growth: low global growth can affect tourism inflows; US dollar appreciation could increase interest costs on debt. On the upside, stronger FDI flows due to economic reforms to address structural vulnerabilities.

New administration is launching program of economic reforms, but key policies are being shaped ahead of upcoming budget: pro-growth reform agenda – lowering tax burden, increasing tax system efficiency, reorganization of public sector, reviewing CIB programs, enacting structural reforms to improve business climate and encourage FDI. However, the reduction in VAT will undermine the fiscal position and shifting the tax burden to the tourism sector may impact competitiveness and growth.

Multi-year fiscal consolidation to stabilize debt dynamics and attain 2030 target of 60% of GDP (currently debt is 82% of GDP): to ensure fiscal responsibility.

Political On June 6th, 2016, the United Workers Party (UWP) defeated the incumbent St. Lucia Labour Party (SLP) by a margin of 11 seats to 6. Outgoing Prime Minister Dr. Kenny Anthony had announced snap elections on May 19th 2016, ten months before it was constitutionally due. The new prime minister is UWP leader Allen Chastanet. The new administration has embarked on a pro-growth reform agenda

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including lowering tax burden, increasing tax system efficiency, reorganization of public sector, reviewing CIB programs, enacting structural reforms to improve business climate and encouraging FDI. Outlook In its April 2017 World Economic Outlook, revised growth in the United States upwards, reflecting the expected fiscal policy easing and an uptick in confidence, especially after the November elections. Further, the outlook has also improved for Europe and Japan based on a cyclical recovery in global manufacturing and trade which began in the second half of 2016. Advanced economies are expected to pick up pace in 2017 and 2018 which should help St Lucia’s tourism sector. These developments have the potential to provide a further boost to the island’s tourism sector. There is also the possible threat of Cuba whose recent removal from embargo can result in the island becoming a major competitor to St. Lucia and the OECS. The IMF has warned that the increase in the number of hotel rooms and new direct flights from the United States may be tempered by the impact of the new airport tax. Notable also was the launch of St. Lucia's Citizen by Investment program and its recent reform by the St. Lucian government which has the potential to provide a significant boost to the economy. 2017 Outlook

Indicator 2016 2017 (Forecasts from MoF)

2017 IMF Forecast

Real GDP Growth (%) -0.7% 1.5% 0.5%

Tourism Sector Growth (%)* -2.7% -2.1% ND

Construction Growth (%) 2.5% 6.4% (2018: 15.1%) ND

Agriculture Growth (%) 5.1% 5.5% ND

Estimates provided by : Ministry of Finance

2015/2016 (Approved Estimates)

2016/2017 (Budget estimate)

2017 IMF Forecast

Total Revenue Growth (%) 12.2% 5.1% ND

Total Expenditure Growth (%) 22.3% -2.6% ND

Current Account Balance (% of GDP)

1.4% 1.7% ND

Fiscal Deficit (% of GDP) -5.8% -3.2% -5.3%

Central Government Debt (% of GDP)

82.9% ND 85.4%

*Hotels and restaurants in GDP composition used as proxy for tourism industry Source: First Citizens Research& Analytics, International Monetary Fund, Eastern Caribbean Central Bank1

                                                            1 Eastern Caribbean Central Bank : http://eccb‐centralbank.org/    International Monetary Fund: http://www.imf.org/external/index.htm    CariCris: http://www.caricris.com/ 

 

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BANKING SECTOR OVERVIEW Banks in the ECCU have continued to report high non - productive loans (NPLs) and loan delinquency ratios (LDRs), and weak earnings. 1st National Bank St. Lucia achieved 1.90% ROE and 0.24% ROA which improved from 1.36% and 0.18% (from FY15) respectively. The Bank’s results fell within the wide performance range of ECCU banks, which reported ROE from -4.6% to 5.8% and ROA from -0.2% to 0.8% in FY15. 1st National Bank St. Lucia held 10.6% of the market share in commercial loans and 10.3% of the overall market share in personal loans as at FY15. For FY16 the industry NPL and LDR averaged 20.7% and 90%; whereas, 1st National Bank St. Lucia’s NPL and LDR were lower at 15.6% and 72% respectively. Achievements (2016)

According to the IMF, the industry’s 19% NPL limits the banking sector’s appetite to provide private sector credit. Progress in resolving NPLs is hampered by the legal foreclosure framework as well as low profitability, which banks counter by raising fees. Tighter credit conditions have intensified competition for well-established clients in the sector, while demand from smaller entities remain unsatisfied.

Stronger competition and the lower savings deposit floor resulted in a decline in prime lending interest rates, while average lending rates remained mostly unchanged. Credit growth remains negative, reflecting weak demand and the high level of NPLs still burdening banks. Credit allocation is being shifted from tourism and manufacturing to more profitable personal and professional loans, in particular mortgage and vehicle loans.

The commercial banking system in the ECCU remained very liquid during 2016. The ratio of liquid assets to total deposits plus liquid liabilities increased by 1.9 percentage points to 44.6%, well above the 25.0% minimum established by the ECCB. The loans and advances to total deposits ratio fell by 3.9 percentage points to 60.9%, which continues to be below the ECCB’s stipulated range of 75.0 to 85.0%. Domestic credit continued to contract, decreasing by 8.9% to $10.1 billion due to declines in private sector and government borrowing.

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7. OTHER MATERIAL DISCLOSURES

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APPENDICES

APPENDIX 1 – Summary Financial Statements

1st National BankBalance SheetFor the period ended 2015 2014 2013

AssetsCash and balances with Central Bank 53,002,259 37,327,895         32,998,645        

Due from banks 53,563,141 58,981,698         28,343,891        

Treasury bills 30,248,281 7,211,052           15,628,748        

Loans and advances to Financial Institutions 16,802,818 16,306,757         22,401,929        

Loans and advances to customers 374,036,347 379,780,935       357,592,217      Investment Securities: Available for sale 10,869,468 13,580,832         10,513,202        

Held to maturity 24,404,544 18,517,218         20,677,754        

Property plant and equipment 14,028,650 14,556,778         13,901,453        

Intangible Asset - Software 976,574 1,007,767           999,244             

Income tax recoverable 1,462,592 ‐                      355,462             

Defined Benefit Asset 1,673,000 1,382,000           1,074,000          

Other assets 7,299,061 2,804,607           7,240,133          

Total assets 588,366,735 551,457,537 511,726,678

LiabilitiesDue to Customers 506,388,307 470,299,112       432,382,808      

Other Liabilities 5,217,292 5,272,726           3,965,416          

Current income tax payable - 30,439                ‐                     

Deferred income tax liability 755,528 669,884              540,345             

Retirement of Pension Obligation - Total liabilities 512,361,127 476,272,160 436,888,569

EquityCapital and ReserveShare Capital 7,971,454 7,971,454           7,971,454          

Retained Earnings 55,965,120 54,772,165         54,093,406        

Reserves 12,069,034 12,441,759         12,773,249        

Total shareholders' equity 76,005,608 75,185,377 74,838,109

Total liabilities and shareholders' equity 588,366,735 551,457,537 511,726,678

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1st National Bank St. Lucia Ltd

Statement of Profit or loss

For the period ended 31‐Dec‐15 31‐Dec‐14 31‐Dec‐13

Interest and similar income  30,975,513            34,796,332          32,759,136          

Interest expense and similar charges  (12,373,543)          (14,054,528)         (13,736,717)         

Net interest income 18,601,970            20,741,804          19,022,419          

Other operating income 9,079,287              7,368,860            7,409,515             

Operating income 27,681,257            28,110,664          26,431,934          

Other operating expenses (17,274,346)          (16,841,134)         (16,606,219)         

Impairment losses on loans, advances and investments (9,267,492)             (9,829,275)           (9,460,185)           

Profit before income tax 1,139,419              1,440,255            365,530                

Income tax expense (111,833)                (958,776)              (583,962)              

Net income/(loss) for the year 1,027,586              481,479               (218,432)              

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1st National Bank St. Lucia Ltd

Statement of Cash Flow

For the period ended 2015 2014 2013

Cash flows from operating activities

Profit before income tax 1,139,419                 1,440,255                        365,530                     

Adjustments for:

Depreciation 1,572,373                 1,568,027                        1,502,921                  

Loss (gain) on disposal of property, plant and equipment ‐                                    20,078                       

Impairment losses on investments ‐                                    109,083                     

Impairment losses on loans and advances 9,267,492                 9,829,275                        9,351,102                  

Defined Benefit Costs 19,000                      67,000                             62,000                       

Dividend income (82,815)                     (145,747)                          (100,356)                    

Interest and similar income (30,975,513)             (34,796,332)                    (32,759,136)              

Interest expense and similar charges 12,373,543               14,054,528                      13,736,717                

Cash flow before changes in operating assets and liabilities (6,686,500)               (7,982,994)                      (7,712,061)                

(Increase)/decrease in mandatory reserve deposits with Central 

Bank (1,959,780)                (1,305,525)                       (1,565,430)                 

Increase in loans and advances to financial institutions (338,465)                   5,886,129                        1,665,053                  

Increase in loans and advances to customers (5,710,306)                (29,734,641)                    (21,896,243)              

(Increase)/decrease in other assets (4,494,454)                4,435,526                        (1,565,215)                 

Increase in due to customers 36,513,715               38,158,733                      29,490,061                

Increase/(decrease) in other liabilities (54,699)                     1,343,981                        (1,132,669)                 

Cash generated from/(used in) operations 17,269,511              10,801,209                     (2,716,504)                

Interest and similar income received 32,733,090               32,998,513                      33,916,776                

Interest expense and similar charges paid (12,798,060)             (14,296,957)                    (13,171,974)              

Income taxes paid (1,519,220)                (443,336)                          (1,004,009)                 

Net cash generated from/(used in) operating activities 35,685,321              29,059,429                     17,024,289               

Cash flows from investing activities

Purchase of treasury bills, net (22,701,046)             8,054,370                        3,661,000                  

Purchase of investment securities (28,236,702)             (14,977,041)                    (11,206,072)              

Proceeds from the disposal of investment securities 24,629,428               13,828,573                      8,747,203                  

Dividends received 82,815                      145,747                           100,356                     

Proceeds from disposal of property, plant and equipment ‐                            

Purchase of property, plant and equipment (744,159)                   (1,937,371)                       (2,359,963)                 

Acquisition of intangible assets (268,893)                   (294,504)                          (403,437)                    

Net cash (used in)/generated from investing activities (27,238,558)             4,819,774                        (1,460,913)                

Cash flows from financing activities

Proceeds from issuance of ordinary shares

Dividends paid on ordinary shares (735)                          (36,671)                            (1,908,129)                 

Retirement benefit contributions paid (150,000)                   (181,000)                          (185,000)                    

Net cash (used in)/generated from financing activities (150,735)                   (217,671)                          (2,093,129)                

Net increase/(decrease) in cash and cash equivalents 8,296,027                 33,661,532                      13,470,247                

Cash and cash equivalents, beginning of year 69,633,593              35,972,061                      22,501,814                

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APPENDIX 2 – PROJECTED FINANCIAL STATEMENTS

1st National Bank St. Lucia LtdBalance SheetFinancial Projections for 3 Years: 2017 - 2019 Dec-16 Dec-17 Dec-18 Dec-19Assets

Cash and balances with Central Bank 74,443,250 56,213,546 58,462,088 60,800,571 Due from banks 65,429,684 55,546,198 46,049,850 38,586,046 Treasury bills 33,350,505 50,025,757 52,527,045 55,153,397 Loans and advances to Financial Institutions 23,376,923 26,883,462 29,571,808 32,528,988 Loans and advances to customers 361,921,597 372,779,245 391,418,207 410,989,117 Investment Securities: Available for sale 10,207,001 30,621,002 38,276,252 40,190,065 Held to maturity 33,703,060 42,128,826 46,341,708 50,975,879 Property plant and equipment 12,917,020 14,109,691 13,869,818 14,887,837 Intangible Asset - Software 682,468 913,035 1,434,777 1,013,582 Income tax recoverable 1,163,267 - - - Defined Benefit Asset 1,934,000 2,134,000 2,176,680 2,220,214 Other assets 7,140,390 7,283,198 7,064,703 6,852,760

Total assets 626,269,165 658,637,958 687,192,935 714,198,456

LiabilitiesDue to Customers 540,514,864 562,135,459 584,620,877 608,005,712 Other Liabilities 7,821,375 6,519,337 7,170,357 6,844,846 Current income tax payable - 294,755 2,257,601 2,800,161 Deferred income tax liability 643,466 546,946 464,904 395,169 Retirement of Pension Obligation - Total liabilities 548,979,706 569,496,497 594,513,739 618,045,888

EquityCapital and ReserveShare Capital 7,971,454 20,671,454 20,671,454 20,671,454 Retained Earnings 51,377,584 51,032,185 54,499,372 57,816,815 Reserves 17,940,421 17,437,822 17,508,369 17,664,300 Total shareholders' equity 77,289,459 89,141,462 92,679,195 96,152,568

Total liabilities and shareholders' equity 626,269,165 658,637,958 687,192,935 714,198,456

Actual Projections

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1st National Bank St. Lucia LtdStatement of Profit or lossFinancial Projections for 3 Years: 2017 - 2019

Actual31‐Dec‐16 31‐Dec‐17 31‐Dec‐18 31‐Dec‐19

Interest and similar income  29,340,315          32,051,621          34,615,751          36,346,538         

Interest expense and similar charges  (10,557,017)         (10,961,641)         (11,400,107)         (12,160,114)        

Net interest income 18,783,298          21,089,979          23,215,643          24,186,424         

Other operating income 9,481,491            11,851,864          13,029,608          13,681,089         

Operating income 28,264,789          32,941,843          36,245,252          37,867,513         

Other operating expenses (17,241,095)         (20,943,662)         (20,542,351)         (20,962,854)        

Impairment losses on loans, advances and 

investments (9,379,683)           (7,788,157)           (8,177,565)           (8,586,443)          

Profit before income tax 1,644,011            4,210,024            7,525,336            8,318,215           

Income tax expense (187,264)              (1,458,022)           (2,618,474)           (2,800,161)          

Net income/(loss) for the year 1,456,747            2,752,003            4,906,861            5,518,054           

Projections

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1st National Bank St. Lucia Ltd

Statement of Cash Flow

Financial Projections for 3 Years: 2017 - 2019Actual

2016 2017 2018 2019

Cash flows from operating activities

Profit before income tax 1,644,011                      4,210,024                       7,525,336                           8,318,215                      

Adjustments for:

Depreciation 1,365,183                      1,336,528                       1,775,631                           1,760,676                      

Loss (gain) on disposal of property, plant and equipment 327,989                        

Loss (gain) on disposal of investment (9,972)                           

Impairment losses on loans and advances 9,379,683                      7,788,157                       8,177,565                           8,586,443                      

Defined Benefit Costs (15,000)                          30,000                             31,000                                35,000                            

Dividend income (120,772)                        (150,000)                         (150,000)                             (165,000)                        

Interest and similar income (29,340,315)                  (32,051,621)                    (34,615,751)                       (36,346,538)                   

Interest expense and similar charges 10,557,017                    10,961,641                     11,400,107                         12,160,114                    

Cash flow before changes in operating assets and liabilities (6,212,176)                    (7,875,269)                     (5,856,112)                         (5,651,090)                     

(Increase)/decrease in mandatory reserve deposits with Central 

Bank                  (11,471,870)                        6,379,522                          (1,349,125)                      (1,403,090)

Increase in loans and advances to financial institutions (6,472,285)                     (3,506,538)                      (2,688,346)                         (2,957,181)                     

Increase in loans and advances to customers (166,481)                        (18,707,807)                    (25,547,528)                       (26,792,353)                   

(Increase)/decrease in other assets 158,671                         (142,808)                         218,496                              211,941                          

Increase in due to customers 34,128,890                    21,623,595                     22,488,418                         23,387,835                    

Increase/(decrease) in other liabilities 2,580,269                      (1,322,038)                      651,020                              (325,509)                        

Cash generated from/(used in) operations 12,545,018                   (3,551,343)                     (12,083,177)                       (13,529,447)                  

Interest and similar income received 32,004,105                    32,051,621                     33,515,751                         35,146,538                    

Interest expense and similar charges paid (10,559,349)                  (10,964,641)                    (11,403,107)                       (12,163,114)                   

Income taxes paid ‐                                  (96,520)                           (419,477)                             (2,370,870)                     

Net cash generated from/(used in) operating activities 33,989,774                   17,439,116                     9,609,990                          7,083,107                      

Cash flows from investing activities

Purchase of treasury bills, net (3,114,775)                     (16,675,252)                    (2,501,288)                         (2,626,352)                     

Purchase of investment securities (8,198,487)                     (28,839,766)                    (11,848,133)                       (6,492,665)                     

Dividends received 120,772                         150,000                          150,000                              165,000                          

Proceeds from sale of property and equipment 118,835                        

Purchase of property, plant and equipment (406,271)                        (2,759,767)                      (2,057,500)                         (2,357,500)                     

Net cash (used in)/generated from investing activities (11,479,926)                  (48,124,785)                   (16,256,921)                       (11,311,518)                  

Cash flows from financing activities

Proceeds from issuance of ordinary shares 9,700,000                       ‐                                      ‐                                  

Dividends paid on ordinary shares (476,183)                        (550,000)                         (1,750,000)                         (2,100,000)                     

Retirement benefit contributions paid (198,000)                        (198,000)                         (200,000)                             (200,000)                        

Net cash (used in)/generated from financing activities (674,183)                        8,952,000                       (1,950,000)                         (2,300,000)                     

Net increase/(decrease) in cash and cash equivalents 21,835,665                   (21,733,669)                   (8,596,931)                         (6,528,410)                     

Cash and cash equivalents, beginning of year 77,929,620                   99,765,285                     78,031,617                        69,434,685                    

Cash and cash equivalents, end of year  99,765,285                   78,031,617                     69,434,685                        62,906,275                    

Projections

68  

KPI - PROJECTED RETURNS

Discussion of growth prospects and projections

As we venture into 2017 and beyond, we do so with clarity of strategy and strength of our brand. We acknowledge the difficult economic environments both at the regional and global levels along with numerous regulatory changes, challenges related to corresponding banking relationships and increased competition.

In compiling the data for the financial projections, the Bank took into consideration the IMF Projection for GDP growth of approximately 2% per annum for the financial years to 2019.

Increasingly, banks have been facing tough new rules governing capital and other regulatory buffers which have been formulated to improve not only their credit policies but also for managing compliance and risk. Banks are being pressed by regulators to swiftly move from merely trying to uncover violations and improprieties to taking preventative defensive actions as part of our systemic business decision making. The Bank continues to focus on risk and compliance and this will remain a priority for us. The cost of compliance is increasing but the cost of non-compliance can have severe implications for the Bank. Recently, Wells Fargo was slapped with a USD$180 million penalty for non-compliance. We continue to inculcate a strong risk culture throughout the organization.

The financial forecasts have been prepared with the foregoing in mind. Some of the key assumptions are as follows:

1. Customer deposits will continue to drive growth of the balance sheet. This is expected to grow by 4% per year for the forecast period. This growth is modest, in light of the fact that the Bank will continue to deploy its market growth strategy to:

a. Target a larger share of the wallet of existing customers through personalized solutions;

b. Focus on acquisition of salaried customers;

c. Increase the customer’s ease of doing business;

d. Focus on value for our clients by understanding their needs.

2. Loan growth is expected to follow a similar growth trend as deposits, as we continue to leverage our local knowledge to expand our domestic market share through aggressive customer acquisition, with

69  

a continued focus on retail banking segments. Our functional co-operation efforts will spur organic growth of the credit portfolio and allow us access to new markets to assist with our risk mitigation efforts, which will drive income.

3. Operating expenses are expected to grow by 18% in 2017 mostly because of the cost of the functional co-operation project. However, growth will be marginal thereafter during the forecast period. This is as a result of our anticipated savings from functional co-operation. It is expected that most of the professional cost of the project will be expensed in 2017. The implementation of IFRS 9 will have a negative impact on expenses. Salaries are expected to increase by an average of 3% over each period. Cost reduction and containment measures will remain in effect throughout the period. It is anticipated that correspondent banking costs will increase by approximately 500%.

4. Interest income is projected to increase by 3% in 2017 over estimates for the period to December 2016. Additionally, we have projected that interest income will increase by 5% for each of the years 2018 and 2019. This is due to the expectation that the functional co-operation project will provide the platform to increase revenue from our existing customer base, whilst improving our capacity to process loans quicker.

5. We expect that interest expense growth will be negligible as we anticipate deposit portfolio growth of 4% each year. This would be partially offset by a reduction in the interest rate offered to customers whilst ensuring that our rates are competitive.

6. Our response to a reduced net interest income spread is to grow market share and to deploy strategies to increase other income and to tap into new non-interest income streams. The Bank will seek other investment opportunities to channel idle funds. We expect to be responsible yet remain competitive in this thrust.

7. We expect that other operating income will increase year on year, driven by functional co-operation initiatives and the fact that the Bank intends to increase its market share of loans and deposits in the market. The Bank will also seek to increase the income category by seeking new and untapped revenue streams available to it.

8. With the foregoing in mind, the Bank believes that it is well placed to continue to gain market share in the retail banking space and improve on its quality of customer experience. The functional co-operation agreement will result in the implementation of technology to simplify business processes. The Bank plans to remain ahead of the technological curve to provide excellent customer satisfaction, achieve cost reductions and operational efficiencies to redound to the benefit of stakeholders. We anticipate some level of increase in non-interest expenses as we fund this agreement but we are confident that the project will augment our results in the medium term. Consequently, this drives our revenue and expense forecast numbers for the next few years.

9. The Bank will maintain its conservative position as it relates to loan loss provisioning while adhering to ECCB’s prudential guidelines. We believe that this disciplined approach will place 1st National Bank in a strong position for any revision of regulatory changes related to credit prudential guidelines. Provisioning has significantly impacted our financial performance and we expect this will continue to be so in the medium term. The establishment of an Asset Management Company to rid Banks of toxic assets is progressing and will assist in the management of the Bank’s credit risk.

10. The Bank has used a tax rate of 30% in the operating performance computations.

70  

APPENDIX 3 – LIST OF LICENSED ECSE MEMBER BROKER DEALERS

71  

APPENDIX 4 – Subscription Form

SHARE SUBSCRIPTION FORM FOR SHARES IN THE 1st NATIONAL BANK ST. LUCIA LIMITED OFFER FOR SALE

1,000,000 ordinary shares of no par value in 1ST NATIONAL BANK ST.LUCIA LIMITED at a price of $10.00 per share (TO BE COMPLETED IN BLOCK LETTERS)

BROKER NAME ECCSR ACCOUNT NUMBER

JOINTLY HELD (Y/N)

ORDER NUMBER:………………

INVESTOR ID ____________________________ DATE RECEIVED:…………………………. TIME RECEIVED:………………………

TO BE COMPLETED BY COMPANY/NOMINEE/INSTITUTION APPLICANT 1 COMPANY/INSTITUTION OR

NOMINEE AND RELATED COMPANY: DATE OF INCORPORATION REGISTRATION NUMBER _____________________________ TO BE COMPLETED BY INDIVIDUAL APPLICANTS/UNDERLYING NOMINEE HOLDER

PRIMARY ACCOUNT HOLDER:

DATE OF BIRTH:

IDENTIFICATION: (2 FORMS REQ)

CONTACT INFORMATION: TELEPHONE # ____________________________ E-MAIL ______________________________________

JOINT ACCOUNT HOLDER # 1

ID TYPE: TELEPHONE # _____________________________ E-MAIL ______________________________________

JOINT ACCOUNT HOLDER # 2

ID TYPE: TELEPHONE # ____________________________ E-MAIL ______________________________________

JOINT ACCOUNT HOLDER # 3

ID TYPE: TELEPHONE # ____________________________ E-MAIL _______________________________________

PASSPORT

DRIVER’S LICENCE

NATIONAL ID

 

M M D D Y Y

M M D D Y Y

 

TITLE FIRST NAME MIDDLE NAME LAST NAME

TITLE FIRST NAME MIDDLE NAME LAST NAME

TITLE FIRST NAME MIDDLE NAME LAST NAME

TITLE FIRST NAME MIDDLE NAME LAST NAME

PP NAT ID

DL

PP NAT ID

DL

PP NAT ID

DL

72  

APPLICATION DETAILS

PRIMARY HOLDER 1. Are you the spouse of or related in the first degree to any existing shareholder of 1st National Bank? YES______ NO_______

If YES, please state name of Shareholder _______________________________________________________.

2. Are you the spouse of or related in the first degree to any director of 1st National Bank? YES_______ NO_________ If YES, please state name of Director __________________________________________________.

3. Are you the Director of any entity that holds shares in 1st National Bank? YES______ NO__________. If YES, please state name of Company _____________________________________________________________________

4. Is there any company of which you are a Director (or subsidiary of that company) applying for shares in this issue? YES______

NO______ If YES, please state name of Company, ___________________________________________ and where it is the subsidiary of that Company that is applying for the shares, state name of Subsidiary____________________________________________________.

5. Are you aware of any related/ interrelated person already a shareholder or who is applying for shares, not named above? YES___

NO__________. If YES, please state name of Person_________________________________________________________

JOINT ACCOUNT HOLDER #1 1. Are you the spouse of or related in the first degree to any existing shareholder of 1st National Bank? YES______ NO_______

If YES, please state name of Shareholder _______________________________________________________.

2. Are you the spouse of or related in the first degree to any director of 1st National Bank? YES_______ NO_________ If YES, please state name of Director __________________________________________________.

3. Are you the Director of any entity that holds shares in 1st National Bank? YES______ NO__________. If YES, please state name of Company _____________________________________________________________________

4. Is there any company of which you are a Director (or subsidiary of that company) applying for shares in this issue? YES______

NO______ If YES, please state name of Company, ___________________________________________ and where it is the subsidiary of that Company that is applying for the shares, state name of Subsidiary____________________________________________________.

5. Are you aware of any related/ interrelated person already a shareholder or who is applying for shares, not named above? YES___

NO__________. If YES, please state name of Person_________________________________________________________

INVESTOR TYPE (PRIMARY ACCOUNT HOLDER):(Insert the number as outlined in part (g) in the Terms & Conditions on the reverse of this page)

EMPLOYEE # Applicable to only Eligible employees

73  

JOINT ACCOUNT HOLDER #2 1. Are you the spouse of or related in the first degree to any existing shareholder of 1st National Bank? YES______ NO_______

If YES, please state name of Shareholder _______________________________________________________.

2. Are you the spouse of or related in the first degree to any director of 1st National Bank? YES_______ NO_________ If YES, please state name of Director __________________________________________________.

3. Are you the Director of any entity that holds shares in 1st National Bank? YES______ NO__________. If YES, please state name of Company _____________________________________________________________________

4. Is there any company of which you are a Director (or subsidiary of that company) applying for shares in this issue? YES______

NO______ If YES, please state name of Company, ___________________________________________ and where it is the subsidiary of that Company that is applying for the shares, state name of Subsidiary____________________________________________________.

5. Are you aware of any related/ interrelated person already a shareholder or who is applying for shares, not named above? YES___

NO__________. If YES, please state name of Person_________________________________________________________

JOINT HOLDER #3 1. Are you the spouse of or related in the first degree to any existing shareholder of 1st National Bank? YES______ NO_______

If YES, please state name of Shareholder _______________________________________________________.

2. Are you the spouse of or related in the first degree to any director of 1st National Bank? YES_______ NO_________ If YES, please state name of Director __________________________________________________.

3. Are you the Director of any entity that holds shares in 1st National Bank? YES______ NO__________. If YES, please state name of Company _____________________________________________________________________

4. Is there any company of which you are a Director (or subsidiary of that company) applying for shares in this issue? YES______

NO______ If YES, please state name of Company, ___________________________________________ and where it is the subsidiary of that Company that is applying for the shares, state name of Subsidiary____________________________________________________.

5. Are you aware of any related/ interrelated person already a shareholder or who is applying for shares, not named above? YES___

NO__________. If YES, please state name of Person_________________________________________________________

Number of shares applied for: Cost of shares EC$ ECSE fee* EC$ Broker’s fee EC$ Total Cost EC$ *ECSE fee - 0.3% of cost; minimum EC$12.00; 0.2% for excesses of $1M Cheques must be made to First Citizens Investment Services Ltd or the broker being utilized for the total cost of the shares, inclusive of the ECSE and broker fees

74  

REMITTANCE DETAILS (will be used for refunds where applicable)

NOTE: CURRENCY OF THE ACCOUNT FOR REMITTANCE MUST BE IN EASTERN CARIBBEAN DOLLARS

NAME ON ACCOUNT: BANK: ACCOUNT NUMBER: BRANCH: ACCOUNT TYPE: CHEQUING/ CURRENT SAVINGS Disclaimer: The Lead Broker/Broker will not be held responsible for incorrect/incomplete/invalid banking instructions submitted.

I/we agree: (1) that the information stated above is true and correct and (2) to the terms & conditions on the reverse of this page. I/We declare that I/We are not under 18 years of age on the date of application. I/We declare that I/We have read the Prospectus and will not rely on any other information or representation outside the Prospectus. No person responsible for the Prospectus or any part of it will have any liability for any such other information or representation. SIGNATURES/AUTHORISATION - COMPANY/NOMINEE/INSTITUTION APPLICANT

DIRECTOR SECRETARY

SIGNATORY DATE & TIME

SIGNATURES/AUTHORISATION- INDIVIDUALAPPLICANTS PRIMARY ACCOUNT HOLDER JOINT ACCOUNT HOLDER # 1

DATE & TIME

JOINT ACCOUNT HOLDER # 2 JOINT ACCOUNT HOLDER # 3

OFFER CLOSES ON OCTOBER 13TH, 2017 AT 4 PM BROKER/DISTRIBUTOR SIGNATURE - REPRESENTIVE DATE & TIME BROKER/DISTRIBUTOR SIGNATURE – PRINCIPAL DATE & TIME

 

  

 

BROKER/DISTRIBUTORSTAMP

COMPANY STAMP

Lead

 Broker Copy 

75  

SUBSCRIPTION FORM

TERMS AND CONDITIONS

a. I/We agree that this application made by way of submitting a Share Subscription Form shall not be binding on me/us if I/we provide written notice to the Lead Broker or any licensed Broker on the ECSE, within two business days after submission of this application that I/we intend to withdraw my/our application. This written notice should be addressed and delivered to that respective Broker.

b. I/We apply for Shares as indicated in this form (or such lesser number of Shares as may be allotted to

me/us) on the terms and conditions of the Prospectus. If the Shares are allotted to me/us, I/we hereby instruct the Authorised Stockbroker to proceed with any necessary actions in order to establish a valid account, as provided overleaf, with the Eastern Caribbean Central Securities Registry (ECCSR) to receive the allotted Shares.

c. I/We agree that I/we have read and understood the definition of an “associate” as mentioned on page 21 of this Prospectus and I/we have declared to the best of my/our knowledge, all associates that I/we believe may be existing shareholders or may be party to this public offering.

d. Subject to (a) above, I/We undertake to buy the said number of Shares set out in the front of this application and shall not revoke this subscription.

e. I certify that all supporting documents (source of funds, etc.) submitted with this application are true and correct.

f. I/We understand that the trading value of the Shares is not guaranteed as they can fluctuate.

g. If the maximum Offer is oversubscribed, consistent with the Company’s policy of promoting the widest possible participation in share ownership, priority to receive the allocation applied for up to the limits noted (as a percentage of the maximum Offer) shall be given in descending order of priority to the categories identified below:

1 Existing shareholders of 1st National Bank Saint Lucia who have the ability to exercise their pre-emptive rights

Of the balance of the $10M after the exercise of existing shareholders’ pre-emptive rights,

2 Staff 10%

3 Individuals 40%

4 Credit Unions 15%

5 National Insurance Corporation 15%

6 Pension Funds 10%

7 Companies registered in St Lucia 10%

76  

h. Applications may be rejected for the following reasons:

i. If the application for purchase is incomplete; ii. If the investor’s identity is fictitious and not supported by valid identification; and

iii. If the investor is not classified into one of the approved categories of investors iv. If the investor has failed to disclose all of his/her existing associates and their existing or potential

interests in the shares of 1st National Bank v. If the application for purchase, as presented, contravenes any existing law or statute.

NOTES 1. No certificates for registered holdings will be issued. The Broker –Dealer will issue a Contract Note with the

details of the purchase after the shares are allocated. Thereafter, quarterly statements will be sent by post to the applicant’s address provided that there is activity on the Eastern Caribbean Central Securities Depository (ECCSD) account during the quarter. If there is no activity, a statement will be sent out annually beginning January 2018.

2. When this Share Subscription Form is duly completed, it must be delivered to the Lead Broker whose address is stated below or to any licensed Broker (see Appendix 4):

First Citizens Investment Services Limited John Compton Highway, Sans Souci P.O. Box 1294 Castries

A copy of the Prospectus can be obtained at First Citizens Investment Services Limited or any licensed Broker on the ECSE and at www.1stnationalbankonline.com

 

APPENDIX 5 – Auditor’s Consent Form

    78 

APPENDIX 5 – Valuator’s Consent Form

    79 

APPENDIX 6 – FINANCIAL STATEMENTS FOR YEARS ENDED 31 DEC 2016, 2015 and 2014 1st NATIONAL BANK ST. LUCIA LIMITED Financial Statements December 31, 2016, December 31, 2015, December 31, 2014 (Expressed in Eastern Caribbean dollars)

1st NATIONAL BANK ST. LUCIA LIMITED

Financial Statements

December 31, 2016

(Expressed in Eastern Caribbean dollars)

1st NATIONAL BANK ST. LUCIA LIMITED

Table of Contents Page

Independent Auditors’ Report 1 - 3 Statement of Financial Position 4 Statement of Income 5 Statement of Profit or Loss and Other Comprehensive Income 6 Statement of Changes in Equity 7-8 Statement of Cash Flows 9 Notes to Financial Statements 10 – 75

Tel: 758-452-2500 Fax: 758-452-7317 www.bdo.lc

Mercury Court Choc Estate P.O. Box 364 Castries LC04 101 St. Lucia

INDEPENDENT AUDITORS’ REPORT The Shareholders 1st National Bank St. Lucia Limited Opinion

We have audited the financial statements of 1st National Bank St. Lucia Limited (“the Bank”), which comprise the statement of financial position as at December 31, 2016, the statements of income, profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 2016, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Saint Lucia, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis of Matter

The Bank’s financial statements as at and for the year ended December 31, 2015 were audited by another auditor who expressed an unmodified opinion on those statements on April 22, 2016.

Responsibilities of Management and Board of Directors for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, 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.

In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.

BDO Eastern Caribbean, a network of firms registered in Anguilla, Antigua and Barbuda, St. Lucia and St. Vincent and the Grenadines, is a member of BDO International Limited, a UK company Limited by guarantee, and forms part of the international BDO network of independent member firms.

The Board of Directors are responsible for overseeing the Bank’s financial reporting process. Auditors’ Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements,

whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit 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 Bank’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of

accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of

accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Bank to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements,

including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

2

We communicate with the Board of Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Castries, St. Lucia April 19, 2017

3

1st National Bank St. Lucia Limited

Statement of Income

For the year ended December 31, 2016 (Expressed in Eastern Caribbean dollars)

Note

2016

$ 2015

$

Interest and similar income 24 29,340,315 30,975,513 Interest expense and similar charges 24 (10,557,017 ) (12,373,543 ) Net interest income 18,783,298 18,601,970 Other operating income 25 9,481,491 9,079,287 Net interest and other operating income 28,264,789 27,681,257 Other expenses 26 (17,241,095 ) (17,274,346 ) Impairment losses 29 (9,379,683 ) (9,267,492 ) Profit before income tax 1,644,011 1,139,419 Income tax expense 30 (187,264 ) (111,833 ) Profit for the year 1,456,747 1,027,586 Earnings per share (expressed in EC$ per share) - basic 31 0.29 0.21

The notes on pages 10 to 75 are an integral part of these financial statements.

5

1st National Bank St. Lucia Limited

Statement of Profit or Loss and Other Comprehensive Income

For the year ended December 31, 2016 (Expressed in Eastern Caribbean dollars)

2016

$ 2015

$

Profit for the year 1,456,747 1,027,586 Other comprehensive income:

Items that will never be reclassified to profit or loss: Re-measurement of defined benefit asset (Note 20): 48,000 160,000 Items that are or may be reclassified to profit or loss Net fair value gains/(losses) on available-for-sale financial assets 279,101 (367,356 ) Other comprehensive income/(loss) for the year 327,101 (207,356 ) Total comprehensive income for the year 1,783,848 820,230

The notes on pages 10 to 75 are an integral part of these financial statements.

6

1st National Bank St. Lucia Limited

Statement of Changes in Equity

For the year ended December 31, 2016 (Expressed in Eastern Caribbean dollars)

Share

Capital $

Statutory Reserve

$

Revaluation Reserve

$

Revaluation Reserve –

available – for-sale

investments $

Other Reserves

$

Retained Earnings

$

Total Equity

$

Balance at January 1, 2016 7,971,454 7,971,454 3,722,256 375,324 - 55,965,120 76,005,608 Total comprehensive income

Profit for the year - - - - - 1,456,747 1,456,747

Other comprehensive income Fair value gain on available-for- sale financial assets - - - 279,101 -

- 279,101

Re-measurement of defined benefit asset (Note 20) - - - - - 48,000 48,000

Total other comprehensive income - - - 279,101 - 48,000 327,101

Total comprehensive income - - - 279,101 - 1,504,747 1,783,848

Transfer to retained earnings - - (6,829) - - 6,829 -

Reserve for loan loss provision (Note 23) - - - - 1,216,353 (1,216,353) - Reserve for interest recognised on non-performing loans (Note 23)

- - - - 4,382,764

(4,382,764) -

Transactions with owners

Dividends to shareholders (Note 32) - - - - - (499,996) (499,996 )

Balance at December 31, 2016 7,971,454 7,971,454 3,715,427 654,425 5,599,117 51,377,583 77,289,460

The notes on pages 10 to 75 are an integral part of these financial statements.

7

1st National Bank St. Lucia Limited

Statement of Changes in Equity

For the year ended December 31, 2016 (Expressed in Eastern Caribbean dollars)

Share

Capital $

Statutory Reserve

$

Revaluation Reserve

$

Revaluation Reserve –

available – for-sale

investments $

Other Reserves

$

Retained Earnings

$

Total Equity

$

Balance at January 1, 2015 7,971,454 7,971,454 3,727,625 742,680 -

54,772,165 75,185,378 Total comprehensive income Profit for the year - - - - - 1,027,586 1,027,586

Other comprehensive income Fair value loss on available-for- sale financial assets - - - (367,356 ) -

- (367,356 )

Re-measurement of defined benefit asset (Note 20) - - - - - 160,000 160,000

Total other comprehensive income - - - (367,356 ) - 160,000 (207,356 )

Total comprehensive income - - - (367,356 ) - 1,187,586 820,230

Transfer to retained earnings - - (5,369 ) - - 5,369 -

Balance at December 31, 2015 7,971,454 7,971,454 3,722,256 375,324 - 55,965,120 76,005,608

The notes on pages 10 to 75 are an integral part of these financial statements.

8

1st National Bank St. Lucia Limited

Statement of Cash Flows

For the year ended December 31, 2016 (Expressed in Eastern Caribbean dollars)

Note

2016

$ 2015

$ Cash flows from operating activities Profit for the year 1,456,747 1,027,586 Adjustments for: Depreciation and amortisation 14, 15 1,365,183 1,572,373 Loss on disposal of property and equipment 25 327,989 - Gain on disposal of investment 25 (9,972) - Impairment losses 29 9,379,683 9,267,492 Defined benefit (income)/expense 20 (15,000) 19,000 Dividend income 25 (120,772) (82,815 ) Income tax expense 30 187,264 111,833 Interest and similar income 24 (29,340,315) (30,975,513 ) Interest expense and similar charges 24 10,557,017 12,373,543 Cash flows before changes in operating assets and liabilities (6,212,176) (6,686,501 ) Increase in mandatory reserve deposits with Central Bank (11,471,870) (1,959,780 ) Increase in loans and advances to financial institutions (6,472,285) (338,465 ) Increase in loans and advances to customers (166,481) (5,710,312 ) Decrease/(increase) in other assets 158,671 (4,494,455 ) Increase in due to customers 34,128,890 36,513,714 Increase/(decrease) in other liabilities 2,580,269 (54,692 )

Cash from operations 12,545,018 17,269,510 Interest and similar income received 32,004,105 32,733,092 Interest expense and similar charges paid (10,559,349) (12,798,062 ) Defined benefit contributions paid (198,000) (150,000 ) Income taxes paid - (1,519,220 ) Net cash generated from operating activities 33,791,774 35,535,320 Cash flows from investing activities Purchase of treasury bills (10,412,007) (46,462,851 ) Proceeds from sale of treasury bills 7,297,232 23,761,804 Purchase of investment securities (15,495,521) (28,236,702 ) Proceeds from sale of investment securities 7,297,034 24,629,427 Dividends received 120,772 82,815 Proceeds from sale of property and equipment 118,834 - Purchase of property and equipment 14 (406,271) (744,159 ) Acquisition of intangible assets 15 - (268,893 ) Net cash used in investing activities (11,479,927) (27,238,558 ) Cash flows from financing activities Dividends paid on ordinary shares 32 (476,182) (735 ) Net cash used in financing activities (476,182) (735 ) Net increase in cash and cash equivalents 21,835,665 8,296,027 Cash and cash equivalents, beginning of year 77,929,620 69,633,593

Cash and cash equivalents, end of year 16 99,765,285 77,929,620

The notes on pages 10 to 75 are an integral part of these financial statements.

9

1st National Bank St. Lucia Limited

Notes to Financial Statements

December 31, 2016 (Expressed in Eastern Caribbean dollars) 1 Reporting entity

1st National Bank St. Lucia Limited, (“the Bank”) was incorporated in Saint Lucia in December 1937 and continued under the Companies Act of 1996. It commenced trading in January 1938 and provides commercial and retail banking services, including the acceptance of deposits, granting of loans and advances, credit and debit cards, foreign exchange services, and online and mobile banking services.

The Bank is subject to the provisions of the Banking Act of Saint Lucia No. 3 of 2015 and the Companies Act, Cap 13.01 of the revised laws of St. Lucia. It is regulated by the Eastern Caribbean Central Bank (ECCB), the Financial Services Regulatory Authority and the Eastern Caribbean Securities Regulatory Commission.

The Bank serves the public from six branches and one Bureau De Change all located in Saint Lucia. The registered office and principal place of business of the Bank is #21 Bridge Street, Castries, Saint Lucia.

2 Basis of preparation

(a) Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”).

The financial statements were approved by the Board of Directors and authorized for issue on March 30, 2017.

(b) Basis of preparation

These financial statements have been prepared on the historical cost basis, except for the following material items in the statement of financial position that are measured at fair value:

• Available-for-sale financial assets. • Land and buildings measured at revalued amounts. • Net defined benefit asset, which is measured at the fair value of plan assets less the present

value of the defined benefit obligation, as explained in Note 20.

(c) Functional and presentation currency These financial statements are presented in Eastern Caribbean dollars, which is the Bank’s functional currency, except when otherwise indicated. All amounts have been rounded to the nearest dollar.

(d) Use of estimates and judgments The preparation of the financial statements in conformity with IFRS requires management to make estimates, based on assumptions, and judgements. The estimates and judgements affect the reported amounts of, and disclosures relating to, assets, liabilities, contingent assets and contingent liabilities at the reporting date and the income and expenses for the year then ended. Actual amounts could differ from those estimates.

The estimates, and the assumptions underlying them, are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

.

10

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 2 Basis of preparation (Cont’d)

(d) Use of estimates and judgments (Cont’d)

Judgements and estimates made by management in the application of IFRS that have a significant effect on these financial statements and/or have a significant risk of material adjustment in the next financial year are set out below:

Judgements

(i) For the purpose of these financial statements, which are prepared in accordance with IFRS, judgement refers to the informed identification and analysis of reasonable alternatives, considering all relevant facts and circumstances, and the well-reasoned, objective and unbiased choice of the alternative that is most consistent with the agreed principles set out in IFRS.

(a) Classification of investments as held-to-maturity The Bank follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgement about the Bank’s intention and ability to hold the security to maturity. In making this judgement, the Bank evaluates its intention and ability to hold such investments to maturity. If the Bank fails to keep these investments to maturity other than for the specific circumstances – for example, selling an insignificant amount close to maturity – it will reclassify the entire class as available-for-sale. The investments would thereafter be measured at fair value not amortised cost. If the entire held-to-maturity portfolio of investments were tainted, the carrying value would decrease by $2,465,649 (2015-$797,658) with a corresponding entry in the fair value reserve in other comprehensive income.

(b) Impairment of available-for-sale equity investments The Bank determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgement. In making this judgment, the Bank evaluates, among other factors, when there is evidence of deterioration in the financial health of the investee industry and sector performance, changes in technology and operational and financing cash flows. During the year the Bank did not recognise impairment losses on available-for-sale equity investments, (2015 - $nil).

(c) Income taxes Significant judgment is required in determining the provision for income taxes including any liabilities for tax audit issues. There are some transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business.

(ii) Uncertainties arising from the use of estimates

(a) Impairment losses on loans and advances

The Bank reviews its loan portfolio to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in profit or loss, the Bank makes judgement as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment

11

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 2 Basis of preparation (Cont’d)

(d) Use of estimates and judgments (Cont’d)

(ii) Uncertainties arising from the use of estimates (Cont’d)

(a) Impairment losses on loans and advances (Cont’d) status of borrowers in a Bank, or local economic conditions that correlate with defaults on assets in the Bank. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extent that the net present value of estimated cash flows differs by +/-5%, the portfolio provision would be estimated to be $1,486,353 (2015–$1,496,625) lower/higher.

Assets accounted for at amortised cost are evaluated for impairment on a basis described in Note 3(e) (vi).

The specific component of the total allowances for impairment applies to financial assets evaluated individually for impairment (those that have been outstanding for more than 90 days and considered non-performing according to the guidelines of the regulators, the Eastern Caribbean Central Bank (ECCB) and is based upon management’s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgements about a debtor’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merit, and the workout strategy and estimate of cash flows considered recoverable are independently approved by the credit risk function.

A collective component of the total allowance is established for:

• Groups of homogenous loans that are not considered individually significant; and

• Groups of assets that are individually significant but that were not found to be individually impaired (Incurred but not reported - IBNR).

Collective allowance for groups of homogenous loans is established using a formula approach based on historic loss rate experience.

Collective impairment for groups of assets that are individually significant but that were not found to be individually impaired (IBNR) cover credit losses inherent in portfolios of loans and advances, and held-to-maturity investment securities with similar credit risk characteristics when there is objective evidence to suggest that they contain impaired loans and advances, and held-to-maturity investment securities, but the individual impaired items cannot yet be identified.

In assessing the need for collective loss allowances, management considers factors such as credit quality, portfolio size, concentrations and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowances depends on the estimates of future cash flows for specific counterparty allowances and the model assumptions and parameters used in determining collective allowances.

12

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 2 Basis of preparation (Cont’d)

(d) Use of estimates and judgments (Cont’d)

(ii) Uncertainties arising from the use of estimates (Cont’d)

(b) Determination of fair values The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described in Note 3(e)(vi). For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.

The Bank’s accounting policy on fair value measurements is set out in Note 5.

When measuring the fair value of an asset or a liability, the Bank uses observable market data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

• Level 1: Quoted market price (unadjusted) in an active market for identical assets and liabilities.

• Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

If the inputs used to measure the fair value of an asset or a liability fall into different levels of the same fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations.

The Bank recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

(e) Adoption of new accounting standards or amendments to standards

The Bank has adopted the following amendments to standards and new interpretations effective from January 1, 2016. Except as otherwise indicated, the adoption of these amendments to standards and interpretations did not have any significant impact on the Bank’s financial statements.

• IFRS 13, Fair Value Measurement, has been amended to clarify that issuing of the standard, and consequential amendments to IAS 39 and IFRS 9, did not intend to prevent entities from measuring short-term receivables and payables that have no stated interest rate at their invoiced amounts without discounting, if the effect of not discounting is immaterial.

13

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars)

2 Basis of preparation (Cont’d)

(e) Adoption of new accounting standards or amendments to standards (Cont’d)

• IAS 16, Property, Plant and Equipment, and IAS 38, Intangible Assets, have been amended to clarify that, at the date of revaluation:

(i) the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset and the accumulated depreciation (amortization) is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking account of accumulated impairment losses or

(ii) the accumulated depreciation (amortization) is eliminated against the gross carrying amount of the asset.

• Amendments to IAS 16 and IAS 38, Clarification of Acceptable Methods of Depreciation and Amortisation.

• The amendment to IAS 16, Property, Plant and Equipment, explicitly state that revenue-based methods of depreciation cannot be used. This is because such methods reflect factors other than the consumption of economic benefits embodied in the assets.

• The amendment to IAS 38, Intangible Assets, introduce a rebuttable presumption that

the use of revenue-based amortisation methods is inappropriate for intangible assets.

• IAS 1, Presentation of Financial Statements, has been amended to clarify or state the

following:

- specific single disclosures that are not material do not have to be presented even if they are minimum requirements of a standard;

- the order of notes to the financial statements is not prescribed;

- line items on the statement of financial position and the statement of profit or loss and other comprehensive income (OCI) should be disaggregated if this provides helpful information to users. Line items can be aggregated if they are not material;

- specific criteria are now provided for presenting subtotals on the statement of financial position and in the statement of profit or loss and OCI, with additional reconciliation requirements for the statement of profit or loss and OCI; and

- the presentation in the statement of OCI of items of OCI arising from joint ventures and associates accounted for using the equity method follows the IAS 1 approach of splitting items that may, or that will never, be reclassified to profit or loss.

14

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 2 Basis of preparation (Cont’d)

(e) Adoption of new accounting standards or amendments to standards (Cont’d)

• IFRS 7, Financial Instruments: Disclosures, has been amended to clarify when servicing arrangements are in the scope of its disclosure requirements on continuing involvement in transferred assets in cases when they are derecognized in their entirety. A servicer is deemed to have continuing involvement if it has an interest in the future performance of the transferred asset, e.g. if the servicing fee is dependent on the amount or timing of the cash flows collected from the transferred financial asset; however, the collection and remittance of cash flows from the transferred asset to the transferee is not, in itself, sufficient to be considered ‘continuing involvement’.

• IAS 19, Employee Benefits, has been amended to clarify that high-quality corporate bonds or government bonds used in determining the discount rate should be issued in the same currency in which the benefits are to be paid. Consequently, the depth of the market for high-quality corporate bonds should be assessed at the currency level and not the country level.

(f) New standards, and interpretations of and amendments to existing standards that are not yet effective

A number of new standards and amendments to standards are effective for annual periods beginning after January 1, 2016. The Bank has not early adopted the following new or amended standards in preparing these financial statements.

• IFRS 15, Revenue from Contracts with Customers, is effective for annual reporting periods beginning on or after January 1, 2018. It replaces IAS 11, Construction Contracts, IAS 18, Revenue, IFRIC 13, Customer Loyalty Programmes, IFRIC 15, Agreements for the Construction of Real Estate, IFRIC 18, Transfer of Assets from Customers, and SIC-31, Revenue – Barter Transactions Involving Advertising Services. The new standard applies to contracts with customers. However, it does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs. It also does not apply if two companies in the same line of business exchange non-monetary assets to facilitate sales to other parties. Furthermore, if a contract with a customer is partly in the scope of another IFRS, then the guidance on separation and measurement contained in the other IFRS will take precedence.

The Bank will assess the impact that this standard will have on its 2018 financial statements.

15

1st National Bank St. Lucia Limited

Notes to Financial Statements

December 31, 2016 (Expressed in Eastern Caribbean dollars) 2. Basis of preparation (Cont’d)

(f) New standards, and interpretations of and amendments to existing standards that are not yet effective (Cont’d)

• IFRS 9, Financial Instruments, which is effective for annual reporting periods beginning on or after January 1, 2018, replaces the existing guidance in IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial assets and liabilities, including a new expected credit loss model for calculating impairment on financial assets and the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. Although the permissible measurement bases for financial assets – amortised cost, fair value through other comprehensive income (FVOCI) and fair value though profit or loss (FVTPL) - are similar to IAS 39, the criteria for classification into the appropriate measurement category are significantly different. IFRS 9 replaces the “incurred loss” model in IAS 39 with an “expected credit loss” model, which means that a loss event will no longer need to occur before an impairment allowance is recognized.

The new standard is to be applied retrospectively for annual periods beginning on or after January 1, 2018, with early adoption permitted.

The Bank is assessing the impact that this standard will have on its 2018 financial statements.

• IFRS 16, Leases, which is effective for annual reporting periods beginning on or after January 1, 2019, eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. Companies will be required to bring all major leases on-balance sheet, recognising new assets and liabilities. The on-balance sheet liability will attract interest; the total lease expense will be higher in the early years of a lease even if a lease has fixed regular cash rentals. Optional lessee exemption will apply to short-term leases and for low-value items with a value of US$5,000 or less.

Lessor accounting remains similar to current practice as the lessor will continue to classify leases as finance and operating leases. Finance lease accounting will be based on IAS 17 lease accounting, with recognition of net investment in lease comprising lease receivable and residual asset. Operating lease accounting will be based on IAS 17 operating lease accounting.

Early adoption is permitted if IFRS 15, Revenue from Contracts with Customers, is also adopted. The Bank is assessing the impact that this standard will have on its 2019 financial statements.

16

1st National Bank St. Lucia Limited

Notes to Financial Statements

December 31, 2016 (Expressed in Eastern Caribbean dollars)

3 Significant accounting policies

The accounting policies set out below have been consistently applied to all periods presented in these financial statements unless otherwise stated.

(a) Functional and presentation currency These financial statements are presented in Eastern Caribbean dollars, which is the Bank’s functional currency, except when otherwise indicated. All amounts presented in Eastern Caribbean dollars have been rounded to the nearest dollar.

(b) Foreign currency transactions

Transactions in foreign currencies are translated at the foreign exchange rate ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognized in profit or loss. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the functional currency at foreign exchange rates ruling at the dates the values were determined.

(c) Cash and cash equivalents

For the purposes of the statement of cash flows, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and non-restricted balances with the Central Bank and deposits with other banks.

(d) Sale and repurchase agreements Securities purchased under agreements to resell (“reverse repos”) are recorded as loans and advances to financial institutions or customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method. They are measured at amortised cost using the effective interest rate.

(e) Financial instruments The Bank classifies non-derivative financial assets into the following categories:

• Financial assets at fair value through profit or loss A financial asset is classified as at fair value through profit or loss if it is classified as held-for-trading or is designated as such on initial recognition.

• Held-to-maturity financial assets Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank’s management has the positive intention and ability to hold to maturity, other than: (a) those that the Bank upon initial recognition designates as at fair value through profit or loss; (b) those that the Bank designates as available for sale; and (c) those that meet the definition of loans and receivables. If the Bank were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available for sale.

17

1st National Bank St. Lucia Limited

Notes to Financial Statements

December 31, 2016 (Expressed in Eastern Caribbean dollars) 3 Significant accounting policies (Cont’d)

(e) Financial instruments (Cont’d) • Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: (a) those that the entity intends to sell immediately or in the short term, which are classified as held for trading, and those that the entity upon initial recognition designates as at fair value through profit or loss; (b) those that the entity upon initial recognition designates as available for sale; or (c) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration.

• Available-for-sale financial assets Available-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 prices or that are not classified as loans and receivables, held to-maturity investments or financial assets at fair value through profit or loss.

The Bank classifies non-derivative financial liabilities, other than financial guarantees and loan commitments, into the following categories:

• financial liabilities at fair value through profit or loss, and

• other liabilities.

(i) Non-derivative financial assets and financial liabilities – Recognition and derecognition The Bank initially recognizes loans and receivables (advances) and debt securities on the date they are originated. All other financial assets and financial liabilities are initially recognized on the trade date when the entity becomes a party to the contractual provisions of the instrument.

The Bank derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred, or it neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control, over the transferred asset. Any interest in such derecognized financial assets that is created or retained by the Bank is recognized as a separate asset or liability.

The Bank derecognizes a financial liability when its contractual obligations are discharged, or cancelled, or when they expire.

Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Bank has a legally enforceable right to offset the amounts and intends either to settle them on a net basis or to realize the assets and settle the liability simultaneously.

Financial assets that are transferred to a third party but do not qualify for derecognition are presented in the statement of financial position as “Assets pledged as collateral”, if the transferee has the right to sell or re-pledge them.

18

1st National Bank St. Lucia Limited

Notes to Financial Statements

December 31, 2016 (Expressed in Eastern Caribbean dollars) 3 Significant accounting policies (Cont’d)

(e) Financial instruments (Cont’d) (ii) Non-derivative financial assets – Measurement

Financial assets at fair value through profit or loss

A financial asset is classified as at fair value through profit or loss if it is classified as held-for-trading or is designated as such on initial recognition. Directly attributable transaction costs are recognized in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value and changes therein, including any interest or dividend income, are recognized in profit or loss.

Held-to-maturity financial assets

These assets are initially measured at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortized cost using the effective interest method.

Loans and receivables

These assets are initially measured at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortized cost using the effective interest method.

Available-for-sale financial assets

These assets are initially measured at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses and foreign currency differences on debt instruments are recognized in OCI and accumulated in fair value reserve. When these assets are derecognized, the gain or loss accumulated in equity is reclassified to profit or loss.

(iii) Offsetting Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Bank has a legal right to set off the amounts and it intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously.

Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a Bank of similar transactions similar to the Bank’s trading activities.

(iv) Amortised cost measurement The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization, using the effective interest method, of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment.

(v) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk.

A number of the Bank’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities.

19

1st National Bank St. Lucia Limited

Notes to Financial Statements

December 31, 2016 (Expressed in Eastern Caribbean dollars) 3 Significant accounting policies (Cont’d)

(e) Financial instruments (Cont’d) (v) Fair value measurement (Cont’d)

When one is available, the bank measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an on-going basis.

If there is no quoted price in an active market, then the Bank uses valuation techniques that maximize the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.

If an asset or a liability measured at fair value has a bid price and an ask price, then the Bank measures assets and long positions at a bid price, and liabilities and short positions at an ask price.

The best evidence of the fair value of a financial instrument on initial recognition is normally the transaction price – i.e. the fair value of the consideration given or received. If the Bank determines that the fair value on initial recognition differs from the transaction price, and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability not based on a valuation technique for which any unobservable inputs are judged to be insignificant in relation to the measurement, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value on initial recognition and the transaction price. Subsequently, that difference is recognized in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out.

(vi) Identification and measurement of impairment

a) Non-derivative financial assets

At each reporting date, the Bank assesses whether there is objective evidence that financial assets not classified as at fair value through profit or loss are impaired.

Objective evidence that financial assets are impaired can include:

1. significant financial difficulty of the borrower or issuer; 2. default or delinquency by a borrower; 3. restructuring of a loan or advance by the Bank on terms that the Bank would not

otherwise consider; 4. indications that a borrower or issuer will enter bankruptcy; 5. the disappearance of an active market for a security because of financial difficulties;

or 6. other observable data indicating that there is a measureable decrease in the expected

cash flows from a group of financial assets.

For an investment in an equity security, objective evidence of impairment includes a significant or prolonged decline in its fair value below its cost. In general, the Bank considers a decline of 20% to be significant and a period of nine (9) months to be prolonged.

20

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 3 Significant accounting policies (Cont’d) (e) Financial instruments (Cont’d)

(vi) Identification and measurement of impairment (Cont’d)

a) Non-derivative financial assets (Cont’d)

Financial assets measured at amortised cost

The Bank considers evidence of impairment for loans and advances and held-to-maturity investment securities both at an individual asset and a collective level. All individually significant loans and advances and held-to-maturity investments are assessed for specific impairment. Those not found to be impaired are then collectively assessed for any impairment that has been incurred but not yet individually identified. Assets that are not individually significant are collectively assessed for impairment. Collective assessment is carried out by grouping together assets with similar risk characteristics.

In assessing collective impairment, the Bank uses historical information on the timing of recoveries and the amount of the loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends.

An impairment loss is calculated as the difference between an asset’s carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account. When the bank considered that there are no realistic prospects of recovery of the asset, the relevant amounts are written off. If the amount of the impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, then the previously recognized impairment loss is reversed through profit or loss.

Available-for-sale financial assets

Impairment losses on available-for-sale investment securities are recognized by reclassifying the losses accumulated in the fair value reserve to profit or loss. The amount reclassified is the difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss recognized previously in profit or loss. If the fair value of an impaired available-for-sale debt security subsequently increases and the increase can be related objectively to an event occurring after the impairment loss was recognized, then the impairment loss is reversed through profit or loss. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available-for-sale are not reversed through profit or loss.

Equity-accounted investees

An impairment loss in respect of an equity accounted investee is measured by comparing the recoverable amount of the investment with its carrying amount. An impairment loss is recognized in profit or loss, and is reversed if there has been a favourable change in the estimates used to determine the recoverable amount.

21

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 3 Significant accounting policies (Cont’d)

(e) Financial instruments (Cont’d) (vi) Identification and measurement of impairment (Cont’d)

b) Non-financial assets

At each reporting date, the Bank reviews the carrying amounts of its non-financial assets (other than inventories and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.

For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs.

The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.

An impairment loss is recognized if the carrying amount of an asset or CGU exceeds its recoverable amount.

Impairment losses are recognized in profit or loss.

(f) Property and equipment

(i) Recognition and measurement Land and buildings, which comprise mainly branches and offices, are shown at fair value, based on valuations done by external independent valuers every 5 years, less subsequent depreciation for buildings. Any accumulated depreciation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset.

All other assets are stated at cost less accumulated depreciation. Cost includes expenditure that is directly attributable to the acquisition of the items. The cost of self constructed assets includes:

• the cost of materials and direct labour;

• any other costs directly attributable to bringing the asset to a working condition for its intended use;

• in instances when the Bank has an obligation to remove the asset or restore the site, an estimate of the costs of dismantling and removing the items and restoring the site on which they are located; and

• capitalised borrowing costs.

When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment.

Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net within other income in profit or loss.

22

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 3 Significant accounting policies (Cont’d)

(f) Property and equipment (Cont’d)

(ii) Subsequent expenditure Subsequent expenditure is capitalised only if it is probable that the future economic benefits

associated with the expenditure will flow to the Bank. All other related expenditures are charged to profit or loss during the period in which they are incurred.

(iii) Depreciation Depreciation for buildings is calculated to write off their costs less their estimated residual

values using the straight-line method over their estimated useful lives, and the reducing balance method for all other property and equipment as follows:

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

Depreciation methods, residual values and useful lives are reviewed, and adjusted if

appropriate, at each reporting date.

Land is not depreciated.

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

(g) Intangible assets

Intangible assets comprise separately identifiable intangible items arising from computer software licenses and other intangible assets. Intangible assets are recognized at cost less accumulated amortisation and any accumulated impairment losses. Intangible assets with a definite useful life are amortized using the straight-line method over their estimated useful economic life, generally not exceeding 4 years. Intangible assets with an indefinite useful life are not amortized. Generally, the identified intangible assets of the Bank have a definite useful life.

At each reporting date intangible assets are reviewed for indications of impairment or changes in estimated future economic benefits. If such indications exist, the intangible assets are analyzed to assess whether their carrying amount is fully recoverable. An impairment loss is recognized if the carrying amount exceeds the recoverable amount. The Bank chooses to use the cost model for the measurement after recognition. Intangible assets with indefinite useful life are annually tested for impairment and whenever there is an indication that the asset may be impaired, the intangible asset is analyzed to assess whether their carrying amount is fully recoverable.

Computer software licenses

Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring the specific software to use. These costs are amortized on the basis of the expected useful lives. Software has a maximum expected useful life of 4 years (25% per annum).

23

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 3 Significant accounting policies (Cont’d)

(h) Guarantees and letters of credit Guarantees and letters of credit comprise undertakings by the Bank to pay bills of exchange drawn on customers. The Bank expects most guarantees and letters of credit to be settled simultaneously with the reimbursement from the customers.

Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee was given. The fair value of a financial guarantee at the time of signature is zero because all guarantees are agreed on arm’s length terms and the value of the premium agreed corresponds to the value of the guarantee obligation. No receivable for the future premiums is recognised. Subsequent to initial recognition, the Bank’s liabilities under such guarantees are measured at the higher of the initial amount, less amortisation of fees recognised 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 basis over the life of the guarantee. Any increase in the liability relating to guarantees is reported in profit or loss within other operating expenses.

24

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 3 Significant accounting policies (Cont’d)

(i) Provisions Provisions are recognised when:

• the Bank has a present legal or constructive obligation as a result of past events;

• it is more likely than not that an outflow of resources will be required to settle the obligation;

• and the amount has been reliably estimated.

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

Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as a finance cost.

(j) Employee benefits (i) Pension obligation

The Bank operates a defined benefit plan for all employees. The assets of the plan are held separately from those of the Bank. The pension plan is funded through payments from employees and the Bank, taking account of the recommendations of independent qualified actuaries. The Bank’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets.

The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the Bank, the recognised asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements.

Re-measurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest) are recognised immediately in OCI. The Bank determines the net interest expense/(income) on the net defined benefit liability/(asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability/(asset), taking into account any changes in the net defined benefit liability/(asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in personnel expenses in profit or loss.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The Bank recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs.

25

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 3 Significant accounting policies (Cont’d)

(j) Employee benefits (Cont’d) (ii) Profit-sharing and bonus plans

The Bank recognises a liability and an expense for bonuses and profit-sharing, based on a formula that takes into consideration the profit attributable to the Bank’s shareholders after certain adjustments. The Bank recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

(k) Income tax Income tax expense comprises current and deferred tax. It is recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in OCI.

a) Current tax

Current tax comprises the expected tax payable or recoverable on the taxable profit or loss for the year and any adjustments to the tax payable or recoverable in respect of previous years. The amount of the current tax payable or receivable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to taxes, if any. It is measured using tax rates enacted or substantively enacted at the reporting date.

Current tax assets and liabilities are offset only if certain criteria are met.

b) Deferred tax

Deferred income tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The principal temporary differences arise from depreciation of property and equipment. Deferred tax is not recognised for temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss.

Deferred tax assets are recognised for unused tax losses and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Future taxable profits are determined based on the Bank’s business plans and the reversal of temporary differences. Deferred tax assets are reviewed at each reported date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised; such reductions are reversed when the probability of future taxable profits improves.

Unrecognised deferred tax assets are reassessed at each reporting date and recognised to the extent that it has become probable that future taxable profits will be available against which they can be used.

Deferred income tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date and which are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred tax assets and liabilities are offset only if certain criteria are met.

26

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 3 Significant accounting policies (Cont’d)

(l) Share capital (i) Ordinary shares

Holders of ordinary shares are entitled to dividends as declared from time to time and are entitled to one vote per share at general meetings of the Bank. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds.

(ii) Dividends on ordinary shares

Dividends on ordinary shares are recognised in equity in the period in which they are approved by the shareholders. Dividends for the year declared after the reporting date are disclosed in the notes to the financial statements.

(m) Interest income and expense Interest income and expense for all interest-bearing financial instruments are recognised within “interest income” and “interest expense” in profit or loss using the effective interest method.

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

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

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

(o) Dividend income Dividends are recognised in profit or loss when the Bank’s right to receive payment is established.

(p) Leases (i) The Bank is the lessee

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on the straight-line basis over the period of the lease.

27

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars)

3 Significant accounting policies (Cont’d)

(p) Leases (Cont’d) (ii) The Bank is the lessor

When assets are leased out under an operating lease, the assets are included in the statement of financial position based on the nature of the assets. Lease income is recognised over the term of the lease on the straight line basis.

4 Financial risk management

The Bank has exposure to the following risks from financial instruments:

• Credit risk

• Liquidity risk;

• Market risk (including currency risk, interest rate and other price risk); and

• Operational risk

4.1 Risk management framework

The Bank’s Board of Directors has overall responsibility for the establishment and oversight of its risk management framework. 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 retail banking, and operational risks are an inevitable consequence of being in business. The Bank’s aim is therefore to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Bank’s financial performance.

The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Bank’s activities. The Bank, through its training and management standards and procedures, aims to maintain a disciplined and constructive control environment in which all employees understand their roles and obligations.

The audit committee oversees how management, through the finance department, monitors compliance with the Bank’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Bank. Management identifies and evaluates financial risks in close co-operation with the Bank’s operating units. The Board provides oversight for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk and credit risk. In addition, internal audit is responsible for the independent review of risk management and the control environment. It undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the audit committee.

28

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.2 Credit risk

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Bank’s loans and advances to customers and other banks, and investment debt securities in investment securities and other bills. Significant changes in the economy, or in the health of a particular industry segment that represents a concentration in the Bank’s portfolio, could result in losses that are different from those provided for at the reporting date. There is also credit risk in off-balance sheet financial instruments such as loan commitments. Credit risk is managed and controlled by management which reports to the Board of Directors.

4.2.1 Credit risk measurement

(a) Loans and advances

Eastern Caribbean Central Bank’s prudential guidelines are embedded in the Bank’s daily operational management. The operational measurements can be compared with impairment allowances required under IAS 39, which are based on losses that have been incurred at the reporting date (the “incurred loss model”).

The Bank assesses the probability of default of individual counterparties using the Eastern Caribbean Central Bank prudential guidelines. Clients of the Bank are segmented into five rating classes. The Bank’s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class.

Bank’s rating Description of the grade 1 Pass 2 Special Mention 3 Sub-standard 4 Doubtful 5 Loss

This means that, in principle, exposures migrate between classes as the assessment of their probability of default changes. The Bank regularly validates the performance of the rating and their predictive power with regard to default events.

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

4.2.2 Risk limit control and mitigation policies

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

The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to the industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review by the Board of Directors.

The exposure to any one borrower including banks and brokers is further restricted by sub-limits.

29

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 4 Financial risk management Cont’d)

4.2 Credit risk (Cont’d)

4.2.2 Risk limit control and mitigation policies (Cont’d)

covering on-balance sheet and off-balance sheet exposures, and daily delivery risk limits in relation to trading items. Actual exposures against limits are monitored daily.

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

Some other specific control and mitigation measures are outlined below.

(a) Collateral The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of

these is the taking of security for funds advanced, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are:

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

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

Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured.

(b) Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as

required. Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit (which are written undertakings by the Bank on behalf of a

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

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

30

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.2 Credit risk (Cont’d)

4.2.3 Impairment and provisioning policies

The impairment provision shown in the statement of financial position at the reporting date is derived from each of the five internal rating grades. The table below shows the percentage of the Bank’s on-balance sheet items relating to loans and advances and the associated impairment provision for each of the Bank’s internal rating categories:

2016 2015 Loans and

advances (%)

Impairment provision

(%)

Loans and advances

(%)

Impairment provision

(%)

Bank’s rating 1. Pass 80.0% 20.3% 78.5% 14.7% 2. Special mention 3.2% 1.0% 3.5% 1.2% 3. Sub-standard 12.2% 51.1% 13.7% 51.6% 4. Doubtful 2.6% 15.1% 2.8% 19.5% 5. Loss 2.0% 12.5% 1.5% 13.0%

The internal rating tool assists management to determine whether objective evidence of impairment exists, based on the following factors 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 least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of the incurred loss at the reporting date on a case-by-case basis, and are applied to all individually significant accounts. The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account.

31

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.2 Credit risk (Cont’d)

4.2.4 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 exposure 2016

$ 2015

$

Due from other banks 65,429,684 53,563,141

Treasury bills 33,350,505 30,248,281

Loans and advances to financial institutions 23,376,923 16,802,818

Loans and advances to customers:

− Overdrafts 13,994,146 11,668,283

− Demand loans 183,331,023 183,415,050

− Promissory notes 5,914,728 5,817,744

− Mortgages 156,686,216 171,182,448

− Credit cards 1,995,484 1,952,822

Investment securities:

− available for sale – debt securities 7,343,963 8,198,380

− held to maturity 33,703,060 24,404,544

Other assets 6,013,311 6,055,209

531,139,043 513,308,720

Credit risk exposures relating to off-balance sheet items are as follows:

Financial guarantees 173,008 590,731

Loan commitments and other credit related facilities 22,199,587 40,213,243

22,372,595 40,803,974

At December 31 553,511,638 554,112,694

The above table represents a worst case scenario of credit risk exposure to the Bank at December 31, 2016 and 2015, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the statement of financial position. Loans and advances to customers and financial institutions comprise 73% of the total maximum exposure (2015 - 76%); investments in debt securities comprise 8% (2015 - 6%).

32

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.2 Credit risk (Cont’d)

4.2.4 Maximum exposure to credit risk before collateral held or other credit enhancements (Cont’d)

Notwithstanding the current dynamics of the economy, management is fairly confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank based on the following:

• 83% (2015 - 82%) of the loans and advances portfolio is categorised in the top two grades of the internal rating system;

• 93% (2015 - 97%) of the portfolio is backed by collateral in the form of mortgage debentures, legal mortgages, life and comprehensive insurances, bills of sale, cash and guarantees;

• 63% (2015 - 64%) of the total loans and advances portfolio is considered to be neither past due nor impaired;

• The Bank continues to grant loans and advances in accordance with its lending policies and guidelines; and

• 0.9% (2015 - 1%) of investments are rated above A- and CariA and 72% (2015 – 74%) are rated above B- and below CariA. Many issuers are not rated but only 18% (2015 – 21%) of investments in the portfolio are not rated.

4.2.5 Loans and advances

Loans and advances are summarised as follows:

2016

$ 2015

$

Loans and advances to customers Neither past due nor impaired 244,959,523 254,144,964 Past due but not impaired 77,049,948 73,496,680 Impaired 64,460,026 72,473,275 Gross 386,469,497 400,114,919 Less: allowance for impairment (Notes 11 and 12) (24,547,900 ) (26,078,572 ) Net 361,921,597 374,036,347 Loans and advances to financial institutions Neither past due nor impaired (Note 10) 23,376,923 16,802,818

33

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.2 Credit risk (Cont’d)

4.2.5 Loans and advances (Cont’d)

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

December 31, 2016 Overdrafts

$

Credit

card $

Demand loans

$

Promissory

notes $

Mortgages $

Total Loans and

advances to customers

$ Loans and advances to customers

Grades 1. Pass 13,803,272 1,217,906 133,356,162 5,063,969 89,201,650 242,642,959 2. Special mention 118,635 - 118,377 - 1,780,847 2,017,859 3. Sub-standard 282,080 - - - - 282,080 4. Doubtful 16,625 - - - - 16,625 5. Loss - - - - - - Total 14,220,612 1,217,906 133,474,539 5,063,969 90,982,497 244,959,523

December 31, 2015 Overdrafts

$

Credit

card $

Demand loans

$

Promissory

notes $

Mortgages $

Total Loans and

advances to customers

$ Loans and advances to customers

Grades 1. Pass 11,240,772 1,175,269 135,763,985 5,059,879 89,282,975 242,522,880 2. Special mention 362,606 - 205,616 - 10,831,546 11,399,768 3. Sub-standard 222,316 - - - - 222,316 4. Doubtful - - - - - - 5. Loss - - - - - - Total 11,825,694 1,175,269 135,969,601 5,059,879 100,114,521 254,144,964

34

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.2 Credit risk (Cont’d)

4.2.5 Loans and advances (Cont’d)

(a) Loans and advances neither past due or impaired (Cont’d) Loans and advances to financial institutions

Loans and advances to financial institutions were graded 1 (Pass) as at December 31, 2016 and December 31, 2015.

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

Credit cards

$

Demand loans

$

Promissory

notes $

Mortgages $

Total loans and advances to customers

$ December 31, 2016 Past due up to 30 days 559,663 27,266,613 661,688 30,405,248 58,893,212

Past due 30-60 days 123,686 2,302,395 120,710 8,143,151 10,689,942

Past due 61-90 days 70,623 4,845,849 61,948 2,464,767 7,443,187

Past due over 90 days 23,607 - - - 23,607

Total 777,579 34,414,857 844,346 41,013,166 77,049,948

Fair value of collateral - 117,253,187 1,699,941 94,980,774 213,933,902

Credit cards

$

Demand loans

$

Promissory

notes $

Mortgages $

Total loans and advances to customers

$ December 31, 2015 Past due up to 30 days 559,627 20,599,751 506,553 36,418,871 58,084,802

Past due 30-60 days 123,688 4,491,972 76,472 1,592,603 6,284,735

Past due 60-90 days 70,630 3,068,057 31,042 5,933,805 9,103,534

Past due over 90 days 23,609 - - - 23,609

Total 777,554 28,159,780 614,067 43,945,279 73,496,680

Fair value of collateral - 85,300,842 951,751 88,597,160 174,849,753

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

35

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.2 Credit risk (Cont’d)

4.2.5 Loans and advances (Cont’d) Loans and advances to financial institutions (Cont’d)

(c) Loans and advances individually impaired

The table below shows the gross amount of individually impaired loans and advances to customers by grades before taking into consideration the cash flows from collateral held.

2016

$ 2015

$ Individually impaired loans Grades: 1. Pass 276,897 209,033 2. Special mention 59,711 516,219 3. Sub-standard 46,519,323 54,794,488 4. Doubtful 10,239,904 11,130,928 5. Loss 7,364,191 5,822,607 Total 64,460,026 72,473,275

Fair value of collateral 123,005,559 138,174,144

(d) Loans and advances renegotiated

Restructuring activities include extended payment arrangements, approved external management plans, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgment of local management, indicate that payment will most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans, in particular customer finance loans. Renegotiated loans that would otherwise be past due or impaired as at December 31, 2016 amounted to $5,546,079 (2015 - $21,973,893).

36

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.2 Credit risk (Cont’d)

4.2.6 Debt securities, treasury bills and other eligible bills

The table below presents an analysis of debt securities, treasury bills and other eligible bills by rating agency designation at December 31, 2016 and 2015, based on Caricris or their equivalent:

At December 31, 2016 Investment securities

Treasury bills

$

Held-to-maturity

$

Available- for-sale

$ Total

$

A- to A+ - - 693,730 693,730

BBB- to BBB+ - - 2,521,461 2,521,461

BB- to BB+ - - 2,560,169 2,560,169

B- to B+ 4,973,114 2,020,301 - 6,993,415

CariA - - - -

CariBBB+ - 5,305,339 - 5,305,339

CariBBB 25,436,396 17,661,326 - 43,097,722

Unrated 2,940,995 8,716,094 1,568,603 13,225,692

Total 33,350,505 33,703,060 7,343,963 74,397,528

At December 31, 2015 Investment securities

Treasury bills

$

Held-to-maturity

$

Available- for-sale

$ Total

$

A- to A+ - - 678,872 678,872

BBB- to BBB+ - - 1,860,216 1,860,216

BB- to BB+ - - 1,150,359 1,150,359

B- to B+ 1,898,788 2,019,945 - 3,918,733

CariA - 2,331,116 - 2,331,116

CariBBB+ - - - -

CariBBB 28,349,493 11,606,127 - 39,955,620

Unrated - 8,447,356 4,508,933 12,956,289

Total 30,248,281 24,404,544 8,198,380 62,851,205

37

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.2 Credit risk (Cont’d)

4.2.7 Repossessed collateral

During 2016, the Bank obtained assets by taking possession of collateral held as security, as follows:

Nature of assets Carrying amount

$ Vehicles 919,409

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

38

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.2 Credit risk (Cont’d)

4.2.8 Concentration of risks of financial assets with credit risk exposure

(a) Geographical sectors The Bank operates primarily in Saint Lucia and the exposure to credit risk is concentrated there.

(b) Industry sectors The following table breaks down the Bank’s main credit exposure at their carrying amounts, as categorised by the industry sectors of counterparties.

Financial institutions

$

Manu- facturing

$ Tourism

$

Government $

Professional and other

services $

Personal $

Other

industries $

Total $

Due from other banks 65,429,679 - - - - - - 65,429,679

Treasury bills - - - 33,350,505 - - - 33,350,505

Loans and advances to financial institutions 23,376,923 - - - - - - 23,376,923

Loans and advances to customers:

- Overdraft - 13,445 2,157,959 786,379 2,379,430 1,171,643 7,485,292 13,994,148

- Credit cards - - - - - 1,396,839 598,645 1,995,484

- Demand loans - 4,744,846 18,142,774 9,745,539 14,290,364 61,461,060 74,946,438 183,331,021

- Promissory notes - 35,707 - - 8,210 5,757,466 113,345 5,914,728

- Mortgages - - 1,956,305 - 6,049,012 90,723,532 57,957,367 156,686,216 Investment securities: - available-for-sale 3,897,467 - - 896,610 - - 2,549,886 7,343,963 - held-to-maturity 13,917,859 - - 19,681,627 - - 103,574 33,703,060 Other assets 6,013,311 - - - - - - 6,013,311 As at December 31, 2016 112,635,239 4,793,998 22,257,038 64,460,660 22,727,016 160,510,540 143,754,547 531,139,038 Credit commitments - 539,493 140,206 2,500,000 7,355,134 8,761,679 3,076,083 22,372,595

39

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.2 Credit risk (Cont’d)

4.2.8 Concentration of risks of financial assets with credit risk exposure (Cont’d)

(b) Industry sectors (Cont’d)

Financial institutions

$

Manu- facturing

$ Tourism

$

Government $

Professional and other

services $

Personal $

Other

industries $

Total $

Due from other banks 53,563,141 - - - - - - 53,563,141

Treasury bills - - - 30,248,281 - - - 30,248,281

Loans and advances to financial institutions 16,802,818 - - - - - - 16,802,818

Loans and advances to customers:

- Overdraft - 95,071 112,633 22,267 4,838,757 1,153,891 5,445,664 11,668,283

- Credit cards - - - - - 1,366,975 585,847 1,952,822

- Demand loans - 7,844,836 2,631,093 10,938,244 16,151,499 63,479,126 82,370,252 183,415,050

- Promissory notes - - - - 15,050 5,724,323 78,371 5,817,744

- Mortgages - - 1,988,824 - 6,323,580 102,645,624 60,224,420 171,182,448 Investment securities: - available-for-sale 2,114,733 - - 904,303 - - 5,179,344 8,198,380 - held-to-maturity 10,674,910 - - 13,626,072 - - 103,562 24,404,544 Other assets 5,248,883 - - - - - 806,326 6,055,209 As at December 31, 2015 88,404,485 7,939,907 4,732,550 55,739,167 27,328,886 174,369,939 154,793,786 513,308,720 Credit commitments - 119,448 264,842 - 25,508,585 12,084,020 2,827,079 40,803,974

40

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.3 Market risk

Market risk is the risk that changes in market prices – e.g. equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) – will affect the Bank’s income or the value of its holdings of financial instruments. The objective of the Bank’s market risk management is to manage and control market risk exposures within acceptable parameters to ensure the bank’s solvency while optimising the return on risk.

The Bank’s exposures to market risks primarily arise from the interest rate management of the Bank’s retail and commercial banking assets and liabilities and equity risks arising from the Bank’s available-for-sale investments.

4.3.1 Other price risk

The Bank is exposed to equity securities price risk because of investments held by the Bank and classified in the statement of financial position as available-for-sale. To manage its price risk arising from investments in equity securities, the Bank diversifies its portfolio. At December 31, 2016, if equity securities prices had been 5% higher/lower with all other variables held constant, comprehensive income for the year would have been $65,923 higher/lower (2015 - $56,325 higher/lower) as a result of a reasonably possible increase/decrease in fair value of available-for-sale equity securities at the reporting date.

4.3.2 Foreign exchange risk

The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency, and in total, which are monitored daily.

The Bank’s exposure to currency risk is minimal since most of its assets and liabilities in foreign currencies are held in United States dollars. The exchange rate of the Eastern Caribbean dollar (EC$) to the United States dollar (US$) has been formally pegged at EC$2.70 = US$1.00 since 1976. The rate of exchange of EC$1 for relevant major currencies was as follows:

USD BBD CAD EUR GBP

$ $ $ $ $

At December 31, 2016 2.7000 1.3517 2.0017 2.8581 3.3249

At December 31, 2015 2.7000 1.3517 1.9452 2.9493 4.0027

The following table summarises the Bank’s exposure to foreign currency exchange rate risk at December 31, 2016 and 2015. Included in the table, are the Bank’s financial instruments at carrying amount, categorised by currency.

41

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.3 Market risk (Cont’d)

4.3.2 Foreign exchange risk (Cont’d) Concentration of currency risk – on and off balance sheet financial instruments ECD CAD EURO USD GBP TTD BD TOTAL As at December 31, 2016 Financial assets Cash and balances with Central

Bank 72,027,511 136,549 484,381 1,491,971 174,478 - 128,361 74,443,251

Due from other banks 4,693,942 187,684 530,758 58,339,675 1,407,151 58,298 212,176 65,429,684 Treasury bills 33,350,505 – – - – – - 33,350,505 Loans and advances to financial institutions 23,376,923 – – - – – – 23,376,923 Loans and advances to customers 345,721,597 – – 16,200,000 – – – 361,921,597 Investment securities - available-for-sale 1,365,729 – – 5,978,234 – – – 7,343,963 - held-to-maturity 33,703,060 – – – – – – 33,703,060

Other assets 6,013,311 – – – – – – 6,013,311 Total financial assets 520,252,578 324,233 1,015,139 82,009,880 1,581,629 58,298 340,537 605,582,294 Financial liabilities Due to customers 537,514,906 – 1,380 2,998,578 – – – 540,514,864 Other liabilities 7,821,375 – – – – – – 7,821,375 Total financial liabilities 545,336,281 – 1,380 2,998,578 – – – 548,336,239 Net on-balance sheet positions (25,083,703) 324,233 1,013,759 79,011,302 1,581,629 58,298 340,537 57,246,055

Credit commitments 22,372,595 – – – – –

– 22,372,595

42

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.3 Market risk (Cont’d)

4.3.2 Foreign exchange risk (Cont’d)

Concentration of currency risk – on and off balance sheet financial instruments (Cont’d) ECD CAD EURO USD GBP TTD BD TOTAL As at December 31, 2015 Financial assets Cash and balances with

Central Bank 51,253,306 139,121 310,212 1,067,771 106,828 - 125,021 53,002,259

Due from other banks (1,112,629) 13,507 486,993 52,550,881 1,189,441 228,796 206,152 53,563,141 Treasury bills 30,248,281 – – – – – - 30,248,281 Loans and advances to financial institutions 16,802,818 – – – – – – 16,802,818 Loans and advances to customers 374,036,347 – – – – – – 374,036,347 Investment securities - available-for-sale 4,283,502 – – 3,914,878 – – – 8,198,380 - held-to-maturity 24,404,544 – – – – – – 24,404,544

Other assets 6,055,209 – – – – – – 6,055,209 Total financial assets 505,971,378 152,628 797,205 57,533,530 1,296,269 228,796 331,173 566,310,979 Financial liabilities Due to customers 503,004,374 – 1,689 3,382,244 – – – 506,388,307 Other liabilities 5,217,292 – – – – – – 5,217,292 Total financial liabilities 508,221,666 – 1,689 3,382,244 – – – 511,605,599 Net on-balance sheet positions (2,250,288) 152,628 795,516 54,151,286 1,296,269 228,796 331,173 54,705,380

Credit commitments 40,803,974 – – – – – – 40,803,974

43

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.3 Market risk (Cont’d)

4.3.3 Interest rate risk

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

44

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.3 Market risk (Cont’d)

4.3.3 Interest rate risk (Cont’d)

The table below summarizes the Bank’s exposure to interest rate risks. It includes the Bank’s financial instruments at carrying amounts, categorized by the earlier of contractual repricing and maturity dates.

Up to 1 month

$

1-3 months

$

3-12 months

$

1-5 years

$

Over 5 years

$

Non- interest bearing

$

Total

$ As at December 31, 2016 Assets Cash and balances with Central Bank - - - - - 74,443,251 74,443,251 Due from other banks 57,177,328 - - - - 8,252,356 65,429,684 Treasury bills 8,161,753 8,025,635 17,163,117 - - - 33,350,505 Loans and advances to financial institutions - 5,498,159 17,878,764 - - - 23,376,923 Loans and advances to customers 13,726,366 9,647,104 13,175,508 57,825,639 267,546,980 - 361,921,597 Investment securities: - available-for-sale 5,775,368 229,000 1,136,722 - 202,873 - 7,343,963 - held-to-maturity 751,592 302,886 17,944,333 9,635,105 5,069,144 - 33,703,060

Other assets - - - - - 6,013,311 6,013,311 Total financial assets 85,592,407 23,702,784 67,298,444 67,460,744 272,818,997 88,708,918 605,582,294 Liabilities Due to customers 346,967,196 14,957,837 126,164,411 712,176 - 51,713,244 540,514,864

Other liabilities - - - - - 7,821,375 7,821,375 Total financial liabilities 346,967,196 14,957,837 126,164,411 712,176 - 59,534,619 548,336,239 Total interest repricing gap (261,374,789) 8,744,947 (58,865,967) 66,748,568 272,818,997 29,174,299 57,246,055

45

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 4. Financial risk management (Cont’d)

4.3 Market risk (Cont’d)

4.3.3 Interest rate risk (Cont’d)

Up to 1 month

$

1-3 months

$

3-12 months

$

1-5 years

$

Over 5 years

$

Non- interest bearing

$

Total

$ As at December 31, 2015 Assets Cash and balances with Central Bank - - - - - 53,002,259 53,002,259 Due from other banks 51,314,761 - - - - 2,248,380 53,563,141 Treasury bills 11,982,748 3,049,932 15,215,601 - - - 30,248,281 Loans and advances to financial institutions - 2,365,563 14,437,255 - - - 16,802,818 Loans and advances to customers 15,753,440 5,347,323 6,808,735 54,474,387 291,652,462 - 374,036,347 Investment securities: - available-for-sale 7,972,949 - - - 225,431 - 8,198,380 - held-to-maturity 807,003 - 11,574,651 12,022,890 - - 24,404,544

Other assets - - - - - 6,055,209 6,055,209 Total financial assets 87,830,901 10,762,818 48,036,242 66,497,277 291,877,893 61,305,848 566,310,979 Liabilities Due to customers 316,520,227 18,354,732 122,082,007 3,299,483 - 46,131,858 506,388,307

Other liabilities - - - - - 5,217,292 5,217,292 Total financial liabilities 316,520,227 18,354,732 122,082,007 3,299,483 - 51,349,150 511,605,599

Total interest repricing gap

(228,689,327) (7,591,914) (74,045,764) 63,197,794 291,877,893 9,956,698 54,705,380

46

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d)

4.3 Market risk (Cont’d)

4.3.3 Interest rate risk (Cont’d)

The Bank’s fair value interest rate risk arises from debt securities classified as available-for-sale. At December 31, 2016, if market interest rates had been 100 basis points higher/lower with all variables held constant, comprehensive income for the year would have been $145,780 higher/ $341,467 lower (2015 - $165,419 higher/$338,859 lower) 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, 2016, if variable interest rates had been 100 basis points higher/lower with all other variables held constant, post-tax profit for the year would have been $2,118,108 higher/lower (2015 - $2,290,016 higher/lower), mainly as a result of higher/lower interest income on variable rate loans.

4.4 Liquidity risk

Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.

4.4.1 Liquidity risk management process

The Board of Directors establishes the strategy and policy for the management of liquidity risk. The Bank's liquidity is managed by the Finance Department. The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation. While a significant proportion of the Bank’s liabilities fall within the current category, the Bank maintains approximately 40% (2015 – 33%) of assets to manage any payment obligations as history has shown that the assets maintained to manage these outflows is adequate.

The key elements of the liquidity management process are as follows:

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

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

• Weekly monitoring of the statement of financial position liquidity ratios against internal and regulatory requirements.

• Managing the concentration and profile of debt maturities.

• Reviewing sources of liquidity are regularly to maintain a wide diversification by currency, geography, provider, product and term.

47

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d) 4.4 Liquidity risk (Cont’d)

4.4.2 Non-derivative cash flows

The table below presents the cash flows payable by the Bank under non-derivative financial liabilities and assets held for managing liquidity risk by remaining contractual maturities at the reporting date. The amounts disclosed in the table are the contractual undiscounted cash flows; the Bank manages the inherent liquidity risk based on expected undiscounted cash inflows.

Up to 1 month

$

1-3 months

$

3-12 months

$

1-5 years

$

Over 5 years

$

Total contractual

cash flows $

As at December 31, 2016 Financial liabilities

Due to customers 398,696,052 15,040,187 128,011,074 739,401 - 542,486,714

Other liabilities 7,821,375 - - - - 7,821,375

Total financial liabilities

(Contractual maturity dates) 406,517,427 15,040,187 128,011,074 739,401 - 550,308,089

Assets held for managing liquidity risk (Contractual maturity dates) 115,077,521 23,702,784 67,298,443 67,460,744 272,818,669 546,358,161

Up to 1 month

$

1-3 months

$

3-12 months

$

1-5 years

$

Over 5 years

$

Total contractual

cash flows $

As at December 31, 2015 Financial liabilities

Due to customers 362,667,463 15,277,314 124,080,027 3,390,969 - 505,415,773

Other liabilities 5,217,292 - - - - 5,217,292

Total financial liabilities

(Contractual maturity dates) 367,884,755 15,277,314 124,080,027 3,390,969 - 510,633,065

Assets held for managing liquidity risk (Contractual maturity dates) 109,201,363 10,762,817 48,036,243 66,620,835 305,386,914 540,008,172

48

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d) 4.4 Liquidity risk (Cont’d)

4.4.3 Assets held for managing liquidity risk

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

4.4.4 Off-balance sheet items

(a) Loan commitments The dates of the contractual amounts of the Bank’s off-balance sheet financial instruments that commit it to extend credit to customers and other facilities (Note 34), are summarised in the table below.

(b) Financial guarantees and other financial facilities Financial guarantees (Note 34) are also included below based on the earliest contractual maturity date.

1 year

$ 1-5 years

$

Over 5 years

$ Total

$ As at December 31, 2016 Loan commitments 20,532,453 1,667,134 - 22,199,587 Guarantees, acceptances and other financial facilities - 173,008 - 173,008 Total 20,532,453 1,840,142 - 22,372,595 As at December 31, 2015 Loan commitments 38,667,661 1,540,386 5,196 40,213,243 Guarantees, acceptances and other financial facilities 142,843 335,230 112,658 590,731 Total 38,810,504 1,875,616 117,854 40,803,974

4.5 Operational risk

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Bank’s processes, personnel, technology and infrastructure, and from external factors other than credit, market, and liquidity risks – e.g. those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Bank’s operations. The Bank’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the bank’s reputation with overall cost effectiveness and innovation. In all cases, Bank policy requires compliance with all applicable legal and regulatory requirements.

49

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 4 Financial risk management (Cont’d) 4.5 Operational risk (Cont’d)

The Board of Directors has oversight of the operational risk management strategy and processes of the Bank, delegated to the credit risk committee and the managing director. This responsibility is supported by the development of overall standards for the management of operational risk in the following areas:

• Requirements for appropriate segregation of duties, including the independent authorisation of transaction;

• Requirements for the reconciliation and monitoring of transactions; • Compliance with regulatory and other legal requirements; • Documentation of controls and procedures; • Requirements for the periodic assessment of operational risks faced, and the adequacy of

controls and procedures to address the risks identified; • Requirements for the reporting of operational losses and proposed remedial action; • Development of contingency plans; • Training and development; • Ethical and business standards; and • Risk mitigation, including insurance where this is cost-effective.

Compliance with the Bank’s standards is supported by a programme of periodic reviews undertaken by Internal Audit, which reports direct to the Audit Committee.

5 Fair values of financial assets and liabilities Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk. The following methods and assumptions were used to estimate the fair value of financial instruments. The fair values of cash resources, other assets and liabilities, cheques and other items in transit and due to other banks are assumed to approximate their carrying values due to their short term nature.

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

Where available, the fair value of loans and advances is based on observable market transactions. Where observable market transactions are not available, fair value is estimated using valuation models such as discounted cash flow techniques. Input into the valuation techniques includes the expected lifetime credit losses, interest rates, prepayment rates and primary origination or secondary market spreads. For collateral-dependent impaired loans, the fair value is measured based on the underlying collateral. Input into the models may include data from third party brokers and information obtained from other market participants, which includes observed primary and secondary transactions. To improve the accuracy of the valuation estimates, loans are grouped into portfolios with similar characteristics such as the quality of collateral, repayment and delinquency rates.

50

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 5 Fair values of financial assets and liabilities (Cont’d)

(ii) Investment securities Investment securities include only interest-bearing assets held to maturity; assets classified as available-for-sale are measured at fair value except for unlisted available-for-sale equity securities which are carried at cost less impairment. The fair value of equity securities carried at cost less impairment is not disclosed as it cannot be reliably estimated (Note 13). The fair value for held-to-maturity assets is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit maturity and yield characteristics.

(iii) Due to customers

The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand. Deposits payable on a fixed date are at rates which reflect market conditions and are assumed to have fair values which approximate carrying values.

The table below summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s statement of financial position at their fair value: Carrying amount Fair value 2016

$ 2015

$ 2016

$ 2015

$ Financial assets Loans and advances to financial institutions 23,376,923 16,802,818 23,376,923 16,802,818 Due from other banks 65,429,684 53,563,141 65,429,684 53,563,141 Loans and advances to customers: − Overdrafts 13,994,146 11,668,283 13,994,146 11,668,283 − Demand loans 183,331,023 183,415,050 187,662,290 202,608,128 − Promissory notes 5,914,728 5,817,744 6,741,492 6,744,625 − Mortgages 156,686,216 171,182,448 154,943,922 174,415,519 − Credit cards 1,995,484 1,952,822 1,995,484 1,952,822 Investment securities − Treasury bills 33,350,505 30,248,281 33,350,505 30,248,281 − Held to maturity 33,703,060 24,404,544 31,194,221 23,650,850 Financial liabilities Due to customers: − Time deposits 158,438,054 164,722,124 156,386,068 159,303,189 − Savings accounts 318,065,299 288,540,917 318,065,299 288,540,917 − Demand accounts 64,011,511 53,125,266 64,011,511 53,125,266

51

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 5 Fair values of financial assets and liabilities (Cont’d)

Fair value hierarchy

IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable 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 following fair value hierarchy:

• Level 1 – Inputs that are quoted market prices (unadjusted) in active markets for identical instruments. This level includes listed equity securities and debt instruments on exchanges.

• Level 2 – Inputs other than quoted prices included within Level 1 that are observable either

directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.

• Level 3 – Inputs that are unobservable (not based on observable market data). This category

includes all instruments for which the valuation technique includes inputs that are not observable and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between instruments.

5.1 Assets measured at fair value

December 31, 2016 Level 1

$ Level 2

$ Level 3

$ Total

$ Available-for-sale financial assets - Investment securities - debt 5,081,630 2,262,333 - 7,343,963 - Investment securities - equity - 1,318,450 - 1,318,450 Total assets 5,081,630 3,580,783 - 8,662,413

December 31, 2015 Available-for-sale financial assets - Investment securities - debt 1,860,216 6,338,164 - 8,198,380 - Investment securities - equity - 1,126,500 - 1,126,500 Total assets 1,860,216 7,464,664 - 9,324,880

52

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 5 Fair values of financial assets and liabilities (Cont’d)

5.2 Financial instruments not measured at fair value

The following table sets out the fair values of financial instruments not measured at fair value, and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorized.

December 31, 2016

Level 1 Level 2 Level 3 Total fair

values

Total Carrying amounts

$ $ $ $ $

Financial assets

Cash and balances with Central Bank - 74,443,251 - 74,443,251 74,443,251

Treasury bills - 33,350,505 - 33,350,505 33,350,505

Due from other banks - 65,429,684 - 65,429,684 65,429,684

Loans and advances to financial institutions - 23,376,923 - 23,376,923 23,376,923

Loans and advances to customers - 365,337,335 - 365,337,335 361,921,597

Held to maturity investments security - 31,194,221 - 31,194,221

33,703,060

Financial liabilities Deposits from customers - 538,462,879 - 538,462,879 540,514,864 Other liabilities - 7,821,375 - 7,821,375 7,821,375 - 1,139,416,172 - 1,139,416,172 1,140,561,438

December 31, 2015

Level 1 Level 2 Level 3 Total fair

values

Total Carrying amounts

$ $ $ $ $

Financial assets

Cash and balances with Central Bank - 53,002,259 - 53,002,259 53,002,259

Treasury bills - 30,248,281 - 30,248,281 30,248,281

Due from other banks - 53,563,141 - 53,563,141 53,563,141 Loans and advances to financial institutions- - 16,802,818 - 16,802,818 16,802,818

Loans and advances to customers - 397,389,377 - 397,389,377 374,036,347

Held to maturity investments security - 23,650,850 - 23,650,850 24,404,544

Financial liabilities Deposits from customers - 500,969,372 - 500,969,372 506,388,307 Other liabilities - 5,217,292 - 5,217,292 5,217,292 - 723,193,390 - 723,193,390 1,063,662,989

53

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 6 Capital management

The Bank’s objectives when managing capital, which is a broader concept than the “equity” on the face of the statement of financial position, are: • to comply with the capital requirements set by the Eastern Caribbean Central Bank;

• to safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and

• to maintain a strong capital base to support the development of its business.

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

The Central Bank requires every bank within its regulatory jurisdiction to: (a) hold the minimum level of paid up capital of $20,000,000, and (b) maintain a ratio of total regulatory capital to the risk-weighted assets (the “Basel ratio”) at or above the minimum indicated in the prudential guidelines.

The Bank’s regulatory capital, as managed by management, is divided into two tiers: • Tier 1 capital: share capital, retained earnings and reserves created by appropriations of retained

earnings. • Tier 2 capital: qualifying subordinated loan capital, collective impairment allowances and

unrealised gains arising on the fair valuation of equity instruments held as available for sale.

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

54

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 6. Capital management (Cont’d)

The table below summarises the composition of regulatory capital and the ratios of the Bank for the years ended December 31, 2016 and 2015. During those two years, the Bank complied with all of the externally imposed capital requirements. Refer to Note 36 for further information in this respect.

2016

$ 2015

$ Tier 1 capital Share capital 7,971,454 7,971,454 Statutory reserve 7,971,454 7,971,454 Retained earnings 51,377,583 55,965,116 Total qualifying Tier 1 capital 67,320,491 71,908,024 Tier 2 capital Other reserves 5,599,117 - Revaluation reserve – available-for-sale investments 654,425 375,323 Revaluation reserve – property and equipment 3,715,427 3,722,256 Total qualifying Tier 2 capital 9,968,969 4,097,579 Total regulatory capital 77,289,460 76,005,603 Risk-weighted assets: On-balance sheet 359,448,500 379,269,200 Off-balance sheet 4,457,300 8,101,700

Total risk-weighted assets 363,905,800

387,370,900 Capital adequacy ratio - required 8% 8% Capital adequacy ratio - actual 18% 19% Basel ratio - required 8% 8% Basel ratio - actual 21% 20%

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.

55

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 7 Cash and balances with Central Bank

2016

$ 2015

$

Cash in hand 14,012,909 9,714,951 Balances with Central Bank other than mandatory reserve

deposits 20,322,692 14,651,528 Included in cash and cash equivalents (Note 16) 34,335,601 24,366,479 Mandatory reserve deposits with Central Bank 40,107,650 28,635,780 74,443,251 53,002,259 The Bank is required to maintain in cash and deposits with the Central Bank, reserve balances in relation to the deposit liabilities of the institution. Mandatory reserve deposits are not available for use in the Bank’s day-to-day operations. The balances with the Central Bank are non-interest bearing.

8 Due from other banks

2016

$ 2015

$

Items in the course of collection from other banks 1,596,513 (2,362,587) Placements with other banks 63,833,171 55,925,728 Included in cash and cash equivalents (Note 16) 65,429,684 53,563,141 The weighted average effective interest rate in respect of interest bearing deposits at December 31, 2016 was 0.1% (2015 - 0.1%).

9 Treasury bills

2016

$ 2015

$ Treasury bills 33,350,505 30,248,281 The Bank has invested in treasury bills issued by the Government of Saint Lucia. The weighted average effective interest rate of the treasury bills in 2016 was 3.88% (2015 – 4.82%). All treasury bills have fixed interest rates, and they mature within one year of the end of the financial year.

56

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 10 Loans and advances to financial institutions

2016

$ 2015

$

Reverse repos 23,376,923 16,802,818 Reverse repos are securities that have been purchased under agreements to resell. The weighted average effective interest rate of the reverse repos in 2016 was 2.32% (2015 – 2.89%). Reverse repos mature within one year.

Allowance account for losses on loans and advances to financial institutions as at December 31, 2016 and 2015 was nil.

11 Loans and advances to customers

2016

$ 2015

$

Overdrafts 14,220,612 11,825,694 Demand loans 198,931,086 201,602,076 Promissory notes 7,787,838 7,645,787 Mortgages 166,733,888 180,612,992 Credit cards 1,995,484 1,952,822 389,668,908 403,639,370 Less: Deferred fees (1,519,587 ) (1,674,315 ) Less: Interest earned not collected (1,679,824 ) (1,850,136 ) 386,469,497 400,114,919 Less: Provision for impairment of loans and advances (Note 12) (24,547,900 ) (26,078,572 ) 361,921,597 374,036,347

Current 36,548,977 27,909,498 Non-current 325,372,620 346,126,849 361,921,597 374,036,347 The weighted average effective interest rate on productive loans measured at amortised cost at December 31, 2016 was 8.36% (2015 - 8.51%) and the rate on productive overdrafts measured at amortised cost was 10.51% (2015 – 10.45%).

57

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 12 Provision for impairment of loans and advances

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

Overdraft

$

Demand loans

$

Promissory notes

$ Mortgage

$

Total

$

Balance at January 1, 2016 157,411 16,871,242 265,709 8,784,210 26,078,572

Provision for loan impairment (Note 29) 69,055 2,156,128 202,609 6,951,891 9,379,683 Loans written off during the year - (4,642,946) (48,147) (6,219,262) (10,910,355) At December 31, 2016 226,466 14,384,424 420,171 9,516,839 24,547,900

Balance at January 1, 2015 166,072 20,573,387 490,132 8,937,213 30,166,804 Provision for loan impairment (Note 29) (8,661 ) 7,454,263 82,592 1,739,298 9,267,492 Loans written off during the year - (11,156,408 ) (307,015 ) (1,892,301 ) (13,355,724 ) At December 31, 2015 157,411 16,871,242 265,709 8,784,210 26,078,572 The total impairment provision for loans and advances to customers is $24,547,900 (2015 - $26,078,572) of which $18,577,476 (2015 - $20,676,407) represents the individually impaired loans and the remaining amount of $5,990,424 (2015 - $5,402,165) represents the general portfolio provision.

13 Investment securities

2016

$ 2015

$

Available-for-sale Equity securities – at fair value - Listed 1,318,450 1,126,500 Equity securities – at cost - Unlisted 1,544,588 3,251,528 Allowance for impairment - (1,706,940 ) 2,863,038 2,671,088 Debt securities – at fair value: - Listed 5,775,367 7,477,048 - Unlisted 1,762,360 915,096 Allowance for impairment (193,764 ) (193,764 ) 7,343,963 8,198,380 Total securities: available-for-sale 10,207,001 10,869,468

Held-to-maturity Debt securities - at amortised cost: - Listed 24,986,966 15,957,188 - Unlisted 8,716,094 8,447,356 Total securities: held-to-maturity 33,703,060 24,404,544 Total investment securities 43,910,061 35,274,012 Current 29,002,932 21,356,868 Non-current 14,907,129 13,917,144 43,910,061 35,274,012

58

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 13 Investment securities (Cont’d)

Unlisted available-for-sale equity securities totalling $1,544,588 (2015 - $1,544,588) are carried at cost less impairment. The Bank is unable to reliably measure the fair value of the equity securities since the shares are not traded in an active market and the future cash flows relating to the securities cannot be reliably estimated. During the current year, the Bank disposed of an investment in shares which was previously fully provided for in the amount of $1,706,940. All debt securities have fixed interest rates. The weighted average effective interest rate on securities held-to-maturity stated at amortised cost at December 31, 2016 was 4.97% (2015 – 4.92%). The movements in available-for-sale and held-to-maturity financial assets during the year are as follows:

Available-for- sale

$

Held-to- maturity

$ At January 1, 2016 10,869,468 24,404,544 Additions 2,125,823 13,369,698 Disposals (sale and redemption) (3,067,391) (4,071,182) Gain from changes in fair value 279,101 - At December 31, 2016 10,207,001 33,703,060 At January 1, 2015 13,580,832 18,517,217 Additions 3,645,245 24,591,457 Disposals (sale and redemption) (5,989,253) (18,704,130) Loss from changes in fair value (367,356) - At December 31, 2015 10,869,468 24,404,544

59

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars)

14 Property and equipment

Land and Building

$

Furniture and Fixtures

$ Equipment

$

Motor Vehicles

$

Work in progress

$ Total

$ Year ended December 31, 2015

Opening net book amount 10,098,335 854,786 3,414,769 178,388 10,500 14,556,778 Additions 175,655 74,933 467,594 - 25,977 744,159 Depreciation (Note 26) (504,300) (92,016) (640,293) (35,678) - (1,272,287) Closing net book amount 9,769,690 837,703 3,242,070 142,710 36,477 14,028,650 At December 31, 2015 Cost or valuation 12,101,683 2,171,111 14,079,374 261,000 36,477 28,649,645 Accumulated depreciation (2,331,993) (1,333,408) (10,837,304) (118,290) - (14,620,995) Net book amount 9,769,690 837,703 3,242,070 142,710 36,477 14,028,650 Year ended December 31, 2016

Opening net book amount 9,769,690 837,703 3,242,070 142,710 36,477 14,028,650

Additions 48,785 57,147 268,589 - 31,750 406,271 Disposals - - (35,238) (175,000) - (210,238) Adjustment for cost written off (22,879) (810,354) (5,196,982) - - (6,030,215) Depreciation on disposals - - 28,200 74,803 - 103,003 Adjustment for depreciation written off 202,406 639,920 4,898,261 - - 5,740,587

Depreciation (Note 26) (425,007) (86,060) (593,446) (16,526) - (1,121,039) Closing net book amount 9,572,995 638,356 2,611,454 25,987 68,227 12,917,019 At December 31, 2016

Cost or valuation 12,127,589 1,417,904 9,115,743 86,000 68,227 22,815,463

Accumulated depreciation (2,554,594) (779,548) (6,504,289) (60,013) - (9,898,444) Net book amount 9,572,995 638,356 2,611,454 25,987 68,227 12,917,019

60

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 14 Property and equipment (Cont’d)

The Bank’s lands and buildings located in Castries and Vieux Fort were revalued by Ronald Gardner FRICS in July 2012. The historical cost of land and buildings are:

2016

$ 2015

$

Cost 6,561,240 6,512,455

Accumulated depreciation based on historical cost (3,327,223 ) (3,254,562 ) Depreciated historical cost 3,234,017 3,257,893

Valuation techniques Significant unobservable

inputs Inter-relationship between key unobservable inputs and fair value measurement

Market based approach: The approach is based on the principle of substitution whereby the purchaser with perfect knowledge of the property market pays no more for the subject property than the cost of acquiring an existing comparable property, assuming no cost delay in making the substitution. The approach requires comparison of the subject property with others of inter alia similar design and utility, which were sold in the recent past. However, as no two properties are exactly alike, adjustment is made for the difference between the property subject to valuation and comparable properties.

• Details of the sales of

comparable properties • Conditions influencing

the sale of the comparable properties.

• Comparability

adjustment.

The estimated fair value would increase/(decrease) if: • Sale value of comparable

properties were higher/(lower).

• Comparability adjustment

were added/(deducted).

61

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 15 Intangible assets

Software $ Year ended December 31, 2015 Opening net book amount 1,007,767 Additions for the year 268,893 Amortization (Note 26) (300,086 ) Closing net book amount 976,574 As at December 31, 2015 Cost 3,249,318 Accumulated depreciation (2,272,744 ) Net book amount 976,574 Year ended December 31, 2016 Opening book amount 976,574 Additions for the year - Adjustment for cost written off (716,128 ) Adjustment for depreciation written off 666,166 Amortization (Note 26) (244,144 ) Closing net book amount 682,468 As at December 31, 2016 Cost 2,533,190 Accumulated depreciation (1,850,722 )

Net book amount 682,468

16 Cash and cash equivalents

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

2016

$ 2015

$

Cash and balances with Central Bank (Note 7) 34,335,601 24,366,479 Due from other banks (Note 8) 65,429,684 53,363,141 99,765,285 77,929,620

62

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 17 Other assets

2016

$ 2015

$

Accounts receivable 6,013,311 6,055,209 Inventories of stationery and supplies 181,596 213,487 Prepayments 945,483 1,030,365 7,140,390 7,299,061

18 Due to customers

2016

$ 2015

$ Time deposits 156,675,828 162,500,578 Savings accounts 318,065,293 288,540,725 Demand amounts 64,011,395 53,125,123 538,752,516 504,166,427 Interest payable 1,762,348 2,221,880 540,514,864 506,388,307 Current 539,802,688 502,987,317 Non-current 712,176 3,400,990 540,514,864 506,388,307 All deposits bear fixed interest rates. The weighted average effective interest rate of customers’ deposits at December 31, 2016 was 2.05% (2015 – 2.26%).

19 Other liabilities

2016

$ 2015

$

Manager’s cheques outstanding 2,732,146 1,501,617 Accounts payable and accrued expenses 4,412,701 3,062,961 Dividends payable on ordinary shares 676,528 652,714 7,821,375 5,217,292

63

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 20 Defined benefit asset

Net Asset in Statement of Financial Position The amount recognised in the statement of financial position at the reporting date is determined as follows:

2016

$ 2015

$

Present value of funded obligations 4,174,000 4,013,000 Fair value of plan assets (6,108,000 ) (5,686,000 ) Net defined benefit asset (1,934,000 ) (1,673,000 ) Movement in defined benefit obligations

2016

$ 2015

$

Defined benefit obligation at start of year 4,013,000 3,817,000 Current service cost 111,000 123,000 Interest cost 275,000 266,000 Members’ contributions 53,000 59,000 Experience adjustments - Actuarial gains from changes in financial

assumptions (115,000 ) (230,000 ) Benefits paid (163,000 ) (22,000 ) Defined benefit obligation at end of year 4,174,000 4,013,000

The defined benefit obligation is allocated between the Plan’s members as follows: i. Active members 78% 86%

ii. Deferred members 10% 10% iii. Pensioners 12% 4%

The weighted average duration of the defined benefit obligation at the end of the reporting period was 11.5 years (2015 – 11.8). 99% (2015 – 99%) of the benefits for active members are vested. 24% (2015 – 22%) of the defined benefit obligation for active members is conditional on future salary increases.

64

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 20 Defined benefit asset (Cont’d)

Movement in fair value of plan assets

2016

$ 2015

$

Fair value of Plan Assets at start of year 5,686,000 5,199,000 Interest income 401,000 370,000 Return on Plan Assets, excluding interest income (67,000 ) (70,000 ) Bank’s contributions 198,000 150,000 Members’ contributions 53,000 59,000 Benefits paid (163,000 ) (22,000 ) Fair value of plan assets at end of year 6,108,000 5,686,000

Actual return on plan assets 334,000 300,000 Allocation of plan assets

2016

$ 2015

$

Government issued bonds 5,935,000 5,555,000 Cash and cash equivalents 173,000 131,000 Fair value of plan assets at end of year 6,108,000 5,686,000 All asset values as at December 31, 2016 were provided by the Bank. The fair value of the government bonds has been calculated on an amortised cost basis. The Plan’s assets are invested in a strategy agreed with the Plan’s trustees, which is largely driven by the statutory constraints and asset availability. Asset-liability matching strategies are not used by the Plan. Amounts Recognised in the Statement of Income

2016

$ 2015

$

Current service cost 111,000 123,000 Net interest on net defined benefit asset (126,000 ) (104,000 ) Net pension (income)/expense (Note 28) (15,000 ) 19,000 Re-measurements recognised in Other Comprehensive Income

2016

$ 2015

$

Experience gains and total amount recognised in Other Comprehensive Income (48,000 ) (160,000 )

65

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 20 Defined benefit asset (Cont’d)

Reconciliation of opening and closing statement of financial position amounts

2016

$ 2015

$

Net defined benefit asset at January 1 (1,673,000) (1,382,000 ) Unrecognised gain charged to retained earnings - -

Opening defined benefit asset (1,673,000) (1,382,000 ) Net pension (income)/expense (15,000) 19,000 Re-measurements recognised in Other Comprehensive Income (48,000) (160,000 ) Bank contributions paid (198,000) (150,000 ) Net defined benefit asset at December 31 (1,934,000) (1,673,000 ) Summary of principal actuarial assumptions as at December 31

2016

% 2015

%

Discount rate 7 7 NIC earnings increases 2 2 Pension increases 0 0 Future salary increases 4 4 Assumptions regarding future mortality are based on published mortality tables. The life expectancies underlying the value of the defined benefit obligation as at December 31, 2016 and 2015 are as follows:

Life expectancy at age 60 for current pensioner years - Male 21 21 - Female 25 25 Life expectancy at age 60 for current members age 40 in years Future salary increases

- Male 21 21 - Female 25 25

Sensitivity analysis

The calculation of the defined benefit obligation is sensitive to the assumptions used. The following table summarises how the defined benefit obligation as at December 31, 2015 would have changed as a result of a change in assumptions.

1% pa

increase 1% p.a.

decrease

%

%

- Discount rate (409,000) 491,000 - Future salary increases 364,000 (300,000)

66

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 20 Defined benefit asset (Cont’d)

Sensitivity analysis (Cont’d)

An increase of 1 year in the assumed life expectancies shown above would have increased the defined benefit obligation at December 2016 by $45,000 (2015 - $41,000).

The duration of the benefit obligation is 11.5 years (2015: 11.8 years). These sensitivities were calculated by re-calculating the defined benefit obligations using the revised assumptions. Funding The Bank, which meets the balance of the cost of funding the defined benefit pension plan, must pay contributions at least equal to those paid by members, which are fixed. The funding requirements are based on regular (at least every 4 years) actuarial valuations of the Plan and the assumptions used to determine the funding required may differ from those set out above. The Bank expects to pay $171,000 (2015 - $184,000) to the Pension Plan during 2017/2016.

21 Deferred income tax liability Deferred income taxes are calculated on temporary differences between amounts for financial reporting purposes and those for tax purposes, using a principal tax rate of 30%.

2016

$ 2015

$ At beginning of year (755,528 ) (669,884)

Charge for the year (Note 30) 112,062 (85,644) Deferred income tax liability at end of year (643,466 ) (755,528) The deferred income tax liability comprises the following temporary differences:

2016

$ 2015

$ Accelerated capital allowances (210,888) (845,428)

Defined benefit asset (1,934,000) (1,673,000) (2,144,888) (2,518,428) Deferred tax liability at income tax rate of 30% (643,466) (755,528)

22 Share capital

No. of

Shares 2016

$ No. of

Shares 2015

$

Authorized: 5,000,000 ordinary shares of no par value

Issued and fully paid: At beginning and end of year 4,999,966 7,971,454 4,999,966 7,971,454

67

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 23 Reserves

Reserves comprise:

2016

$ 2015

$

Statutory reserve 7,971,454 7,971,454 Revaluation reserve – Property and equipment 3,715,427 3,722,256 Revaluation reserve for interest on non-performing loans 4,382,764 - Revaluation reserve for loan impairment 1,216,353 - Revaluation reserve – Available-for-sale securities 654,425 375,324 17,940,423 12,069,034 Statutory reserve Section 45 (1) of the Banking Act #3 of 2015, which was enacted in November 2015, requires all banks to maintain a reserve fund - Every licensed financial institution shall maintain a reserve fund and shall, out of its net profits of each year, transfer to that fund a sum equal to not less than twenty per cent of profits whenever the amount of the reserve fund is less than a hundred per cent of the paid-up or, or as the case may be, assigned capital of the licensed financial institution.

The share capital of the Bank is unchanged, the reserve fund is a hundred per cent of the paid-up capital and a transfer was not required at the reporting date.

Revaluation reserve – Property and equipment The revaluation reserve relates to the revaluation of property and equipment above its previous carrying amount. The Bank transfers a portion of the reserve to retained earnings annually as the asset is used by the Bank. The value of the transfer is the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost.

Revaluation reserve for interest on non-performing loans This reserve is created to set aside interest accrued on non-performing loans where certain conditions are met in accordance with International Accounting Standard (IAS 39). The Prudential Guidelines of the Eastern Caribbean Central Bank, however, do not allow for the accrual of such interest. The interest is therefore set aside in a reserve and is not available for distribution to the shareholders.

Reserve for loan impairment This reserve is created to set aside the amount by which the loan loss provision calculated under the Prudential Guidelines of the Eastern Caribbean Central Bank exceeds the loan loss provision calculated in accordance with IAS 39. The excess is therefore set aside in a reserve and is not available for distribution to the shareholders. Revaluation reserve – Available-for-sale securities The reserve comprises the cumulative net change in the fair value of available-for-sale financial assets until the assets are derecognised or impaired.

68

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars)

24 Net interest income

2016

$ 2015

$

Interest and similar income Loans and advances 25,685,061 27,853,000 Deposits with banks 32,163 5,935 Investment securities 3,623,091 3,116,578 29,340,315 30,975,513

Interest expense and similar charges Time deposits 4,006,452 5,222,423 Savings deposits 6,523,374 7,115,219 Demand deposits 27,191 35,901 10,557,017 12,373,543 Net interest income 18,783,298 18,601,970

25 Other operating income

2016

$ 2015

$

Commission and other income 5,567,603 5,145,708 Foreign exchange 3,239,819 2,889,200 Loss on disposal of property and equipment (327,989 ) - Gain on disposal of investment 9,972 - Fee income 871,314 961,564 Dividend income 120,772 82,815 9,481,491 9,079,287

26 Other expenses

2016

$ 2015

$

Administrative expenses (Note 27) 7,822,457 7,923,476 Staff costs (Note 28) 6,975,197 6,680,953 Depreciation and amortisation (Note 14 and 15) 1,365,183 1,572,373 Operating lease rental 1,078,258 1,097,544 17,241,095 17,274,346

69

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars)

27 Administrative expenses

2016

$ 2015

$

Card services expense 1,397,584 1,151,000 Computer expense 1,067,946 928,526 Other operating expenses 889,870 746,398 Postage, telephone and telexes 656,373 772,099 Security expenses 556,428 622,442 Utilities 539,494 631,689 Repairs and maintenance 528,670 426,239 Advertising 407,834 705,045 Other professional fees 401,807 603,937 Bank charges 353,384 260,550 Directors’ fees and expenses 298,620 297,200 Stationery 226,457 238,585 Audit fees 213,836 199,625 Insurance 181,478 183,098 Bank licence 80,000 128,000 Rates and taxes 22,676 29,043 Total administrative expenses 7,822,457 7,923,476

28 Staff costs

2016

$ 2015

$

Salaries and wages 5,572,522 5,491,334 Other employee benefits 1,180,635 948,461 Profit sharing - - Social security costs 237,040 222,158 Pension (income)/expense (Note 20) (15,000 ) 19,000

6,975,197 6,680,953 The average number of employees during the year was 138 (2015 -126).

29 Impairment losses

2016

$ 2015

$

Impairment losses from loans and advances (Note 12) 9,379,683 9,267,492

70

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars)

30 Income tax expense

2016

$ 2015

$

Current tax 299,326 26,189 Deferred tax (Note 21) (112,062 ) 85,644 187,264 111,833 Tax on the Bank’s profit before income tax differs from the theoretical amount that would arise using the statutory tax rate of 30% (2015 – 30%) as follows:

2016

$ 2015

$

Profit before income tax 1,644,011 1,139,419 Tax calculated at the statutory tax rate of 30% 493,203 341,826 Tax effect of exempt income (1,714,829 ) (1,606,666) Tax effect of non-deductible expenses 1,853,327 1,687,849 Tax incentives (444,437 ) (311,176) 187,624 111,833 Effective tax rate 11.4% 9.8% There was no income tax effect relating to components of other comprehensive income.

31 Earnings per share

2016

$ 2015

$

Weighted average no. of shares 4,999,966 4,999,966

Profit for the year 1,456,747 1,027,586 Earnings per share 0.29 0.21

Basic

The calculation of basic earnings per share is based on the profit attributable to shareholders of $1,456,747 (2015 - $1,027,586) divided by the weighted average number of shares in issue ranking for dividend during the year of 4,999,966 (2015 - 4,999,966).

32 Dividends

During the year, a total of $499,996 (2015 - $Nil) representing $0.10 per share, was appropriated from retained earnings relating to dividends declared in respect of the year ended December 31, 2015. As at December 31, 2016, $476,182 (2015 - $Nil) of this amount had been paid.

71

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 33 Related party transactions

A related party is a person or entity that is related to the Bank.

(a) A person or a close member of that person’s family is related to the Bank if that person: (i) has control or joint control over the Bank; (ii) has significant influence over the Bank; or (iii) is a member of the key management personnel of the Bank or of a parent of the Bank.

(b) An entity is related to the Bank if any of the following conditions applies: (i) The entity and the Bank are members of the same group (which means that each parent,

subsidiary and fellow subsidiary is related to the others). (ii) One entity is an associate or joint venture of the other entity (or an associate or joint

venture of a member of a group of which the other entity is a member). (iii) Both entities are joint ventures of the same third party. (iv) One entity is a joint venture of a third entity and the other entity is an associate of the third

entity. (v) The entity is a post-employment benefit plan for the benefit of employees of either the

Bank or an entity related to the Bank. (vi) The entity is controlled, or jointly controlled by a person identified in (a). (vii) A person identified in (a)(i) has significant influence over the Bank or is a member of the

key management personnel of the Bank (or of a parent of the Bank). (viii) The entity, or any member of a group of which it is part, provides key management

personnel services to the Bank or its parent.

A related party transaction is a transfer of resources, services or obligations between related parties, regardless of whether a price is charged.

The related party transactions, outstanding balances at the year-end and related expenses and income for the year are as follows:

Loans and advances to Directors and related entities

2016

$ 2015

$

Loans outstanding at beginning of year 8,748,568 7,879,407 Net loans (repaid)/issued for the year (4,366,671 ) 869,161 Loans outstanding at end of year 4,381,897 8,748,568 Interest income earned 223,340 611,141

72

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 33 Related party transactions (Cont’d)

Loans and advances to key management personnel

2016

$ 2015

$

Loans outstanding at beginning of year 3,842,995 3,994,277 Net loans repaid for the year (262,313 ) (151,282) Loans outstanding at end of year 3,580,682 3,842,995 Interest income earned 186,875 217,907 The loans and advances to directors and other key management personnel are secured over property of the respective borrowers.

No impairment losses have been recorded against balances outstanding during the period with directors or key management personnel, and no specific allowance has been made for impairment losses on balances with directors or key management personnel and their immediate relatives at the reporting date. Deposits from Directors and related entities

2016

$ 2015

$

Deposits at beginning of year 6,878,392 3,892,192 Net deposits received during the year 3,025,614 2,986,200 Deposits outstanding at end of year 9,904,006 6,878,392 Interest expense on deposits 162,771 130,872

Deposits from key management personnel

2016

$ 2015

$

Deposits at beginning of year 774,700 691,916 Net deposits (paid out)/received during the year (647,892 ) 82,784 Deposits outstanding at end of year 126,808 774,700 Interest expense on deposits 4,198 20,326

73

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 33 Related party transactions (Cont’d)

Key management personnel compensation

Key management personnel are those persons that have authority and responsibility for directly or indirectly planning, directing and controlling the activities of the Bank.

2016

$ 2015

$ Salaries and other short-term benefits 1,051,623 1,223,623

Post and other employment benefits 202,389 404,278 1,254,012 1,627,901

At the end of the financial year, directors’ holding of shares totalled 49,566 (2015 – 63,715) or 0.99% (2015 – 1.27%) of shares outstanding.

34 Contingent liabilities and commitments

Loan commitments, guarantees and other financial facilities

At December 31, 2016, the Bank had contractual off-balance sheet financial instruments in respect of (i) commitments to extend credit to customers, (ii) guarantees, and (iii) other facilities, as follows:

2016

$ 2015

$ Loan commitments 22,199,587 40,213,243

Guarantees and standby letters of credit 173,008 590,731 22,372,595 40,803,974 Capital expenditure commitments

At December 31, 2016, the Bank had entered into negotiations and obtained approval with respect to subsequent capital expenditure in the amount of $1,200,000.

35 Operating leases

The Bank leases a number of branches and other office facilities under operating leases. Lease payments are renegotiated when the previous lease term has expired and typically run for a period of 5 years. Some leases provide for additional rent payments that are based on changes in local price indices. At the year end, several operating lease agreements were under negotiation. At December 31, 2016 the future minimum lease payments under non-cancellable leases were as follows:

2016

2015

$ $

Within one year 1,083,380 1,078,074

Within two to five years 2,029,252

2,722,810 3,112,632 3,800,884

74

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2016 (Expressed in Eastern Caribbean dollars) 36 Subsequent event

Under the provisions of Section 44 (1)(a) of the Banking Act of Saint Lucia No. 3 of 2015, effective February 4, 2017, the Bank was required to hold a minimum level of paid up capital of $20,000,000. In order to be in compliance with this requirement, the Bank requested and received approval from its regulator to temporarily transfer $12,028,547 from retained earnings to paid-up capital. This transfer was further approved and ratified at a Board of Directors meeting held on February 7, 2017. The transfer was subsequently effected and therefore the Bank remained in compliance with this provision of the Act.

To further ensure that the Bank remains adequately capitalised, it is continuing its efforts to raise new capital injections.

75

1st NATIONAL BANK ST. LUCIA LIMITED

Financial Statements

December 31, 2015

(Expressed in Eastern Caribbean dollars)

1st NATIONAL BANK ST. LUCIA LIMITED

Table of Contents Page

Independent Auditors’ Report 1 Balance Sheet 2 Statement of Profit or Loss 3 Statement of Other Comprehensive Income 4 Statement of Changes in Equity 5 Statement of Cash Flows 6 Notes to Financial Statements 7 – 71

KPMG Eastern Caribbean Telephone (758) 453-1471 Morgan Building (758) 453-0625

L’Anse Road Fax (758) 453-6507 P.O. Box 1101 e-Mail kpmg@kpmg.lc

Castries, St. Lucia

KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We operate in155 countries and have174,000

people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG

International Cooperative ("KPMG International"), a Swiss entity. Each KPMG Frank V. Myers Brian A. Glasgow firm is a legally distinct and separate entity and describes itself as such. Cleveland S. Seaforth Reuben M. John

INDEPENDENT AUDITORS’ REPORT

The Shareholders 1st National Bank St. Lucia Limited

Report on the Financial Statements

We have audited the accompanying financial statements of 1st National Bank St. Lucia Limited (“the Bank”), which comprise the balance sheet as at December 31, 2015, the statements of profit or loss, other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. 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. Auditors’ Responsibility Our responsibility is to express an opinion on the 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 our 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, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

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

Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 2015 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

KPMG Eastern Caribbean April 22, 2016

Castries, Saint Lucia

1st National Bank St. Lucia Limited

Statement of Profit or Loss

For the year ended December 31, 2015 (Expressed in Eastern Caribbean dollars)

The notes on pages 7 to 71 are an integral part of these financial statements.

3

Note

2015

$ 2014

$

Interest and similar income 23 30,975,513 34,796,332 Interest expense and similar charges 23 (12,373,543 ) (14,054,528 ) Net interest income 18,601,970 20,741,804 Other operating income 24 9,079,287 7,368,860 Operating income 27,681,257 28,110,664 Other operating expenses 25 (17,274,346 ) (16,841,134 ) Impairment losses 28 (9,267,492 ) (9,829,275 ) Profit before income tax 1,139,419 1,440,255 Income tax expense 29 (111,833 ) (958,776 ) Net profit for the year 1,027,586 481,479 Earnings per share (expressed in EC$ per share) - basic and diluted 30 0.21 0.10

1st National Bank St. Lucia Limited

Statement of Other Comprehensive Income

For the year ended December 31, 2015

(Expressed in Eastern Caribbean dollars)

The notes on pages 7 to 71 are an integral part of these financial statements.

4

2015

$ 2014

$

Profit for the year 1,027,586 481,479 Other comprehensive income Items that will never be reclassified to profit or loss Re-measurement of defined benefit asset (Note 19) 160,000 194,000 Items that may be reclassified to profit or loss Net fair value losses on available-for-sale financial assets (367,356 ) (328,210 ) Other comprehensive income for the year (207,356 ) (134,210 ) Total comprehensive income for the year 820,230 347,269

1st National Bank St. Lucia Limited

Statement of Changes in Equity

For the year ended December 31, 2015 (Expressed in Eastern Caribbean dollars)

The notes on pages 7 to 71 are an integral part of these financial statements.

5

Share

Capital $

Statutory Reserve

$

Revaluation Reserve -

PPE $

Revaluation Reserve –

available – for-sale

$

Retained Earnings

$

Total Equity

$

Balance at January 1, 2014 7,971,454

7,971,454 3,730,905 1,070,890 54,093,406 74,838,109 Total comprehensive income Profit for the year - - - - 481,479 481,479

Other comprehensive income Fair value loss on available-for- sale financial assets - - - (328,210 ) - (328,210 ) Re-measurement defined benefit asset (Note 19) 19 - - - - 194,000 194,000

Total other comprehensive income - - - (328,210 ) 675,479 347,269 Transfer to retained earnings - - (3,280 ) - 3,280 - Balance at December 31, 2014 7,971,454 7,971,454 3,727,625 742,680 54,772,165 75,185,378

Balance at January 1, 2015 7,971,454 7,971,454 3,727,625 742,680 54,772,165 75,185,378 Total comprehensive income

Profit for the year - - - - 1,027,586 1,027,586

Other comprehensive income Fair value loss on available-for- sale financial assets - - - (367,356 ) - (367,356 ) Re-measurement of defined benefit asset (Note 19) 19 - - - - 160,000 160,000

Total other comprehensive income - - - (367,356 ) 1,187,586 820,230

Transfer to retained earnings - - (5,369 ) - 5,369 -

Balance at December 31, 2015 7,971,454 7,971,454 3,722,256 375,324 55,965,120 76,005,608

1st National Bank St. Lucia Limited

Statement of Cash Flows

December 31, 2015 (Expressed in Eastern Caribbean dollars)

The notes on pages 7 to 71 are an integral part of these financial statements.

6

Note

2015

$ 2014

$ Cash flows from operating activities Profit before income tax 1,139,419 1,440,255 Adjustments for: Depreciation and amortisation 13, 14 1,572,373 1,568,027 Impairment losses on loans and advances 28 9,267,492 9,829,275 Defined benefit costs 19 19,000 67,000 Dividend income 24 (82,815 ) (145,747 ) Interest and similar income 23 (30,975,513 ) (34,796,332 ) Interest expense and similar charges 23 12,373,543 14,054,528 Cash flow before changes in operating assets and liabilities (6,686,501 ) (7,982,994 ) Increase in mandatory reserve deposits with Central Bank (1,959,780 ) (1,305,525 ) Decrease in loans and advances to financial institutions (338,465 ) 5,886,129 Increase in loans and advances to customers (5,710,306 ) (29,734,641 ) Decrease/(increase) in other assets (4,494,454 ) 4,435,526 Increase in due to customers 36,513,715 38,158,733 Increase/(decrease) in other liabilities (54,699 ) 1,343,981

Cash from operations 17,269,510 10,801,209 Interest and similar income received 32,733,092 32,998,513 Interest expense and similar charges paid (12,798,062 ) (14,296,957 ) Income taxes paid (1,519,220 ) (443,336 ) Net cash from operating activities 35,685,320 29,059,429 Cash flows from investing activities Purchase of treasury bills (46,462,851 ) (10,415,770 ) Proceeds from sale of treasury bills 23,761,804 18,470,140 Purchase of investment securities (28,236,702 ) (14,977,041 ) Proceeds from sale of investment securities 24,629,428 13,828,573 Dividends received 82,815 145,747 Purchase of property, plant and equipment 13 (744,159 ) (1,937,371 ) Acquisition of intangible assets 14 (268,893 ) (294,504 ) Net cash (used in)/from investing activities (27,238,558 ) 4,819,774 Cash flows from financing activities Dividends paid on ordinary shares (735 ) (36,671 ) Defined benefit contributions paid 19 (150,000 ) (181,000 ) Net cash used in financing activities (150,735 ) (217,671 ) Net increase in cash and cash equivalents 8,296,027 33,661,532 Cash and cash equivalents, beginning of year 69,633,593 35,972,061 Cash and cash equivalents, end of year 15 77,929,620 69,633,593

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

7

1 Reporting entity

1st National Bank St. Lucia Limited, (the Bank) was incorporated in Saint Lucia in December 1937 and continued under the Companies Act of 1996. It commenced trading in January 1938 and provides commercial and retail banking services, including the acceptance of deposits, granting of loans and advances, credit and debit cards, foreign exchange services, online and mobile banking services.

The Bank is now subject to the provisions of the revised Banking Act of Saint Lucia No. 3 of 2015, which came in to effect on November 12, 2015 and the Companies Act, Cap 13.01 of the revised laws of St. Lucia. It is regulated by the Eastern Caribbean Central Bank (ECCB), the Financial Services Regulatory Authority and the Eastern Caribbean Securities Regulatory Commission.

The Bank serves the public from six branches and one Bureau De Change, all located in St. Lucia. The registered office and principal place of business of the Bank is #21 Bridge Street, Castries, Saint Lucia.

2 Basis of preparation

(a) Statement of compliance The financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards (IFRS).

The financial statements were approved by the Board of Directors and authorized for issue on March 22, 2016.

(b) Basis of preparation

The financial statements have been prepared on the historical cost basis, except for the following material items in the balance sheet that are measured at fair value:

• available-for-sale financial assets. • land and buildings measured at revalued amounts • Net defined benefit asset, which is measured at the fair value of plan assets less the

present value of the defined benefit obligation, as explained in Note 19.

(c) Functional and presentation currency These financial statements are presented in Eastern Caribbean dollars, which is the Bank’s functional currency. All amounts presented in Eastern Caribbean dollars has been rounded to the nearest dollar, except when otherwise indicated.

(d) Use of estimates and judgments The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Bank’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 5.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized prospectively and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements are included in Note 5.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

8

2 Basis of preparation (Cont’d)

(e) Adoption of new accounting standards or amendments to standards

Certain new, revised and amended standards and interpretations came into effect during the current financial year. The Bank has assessed them and has adopted those which are relevant to its financial statements, viz: • Improvements to IFRS 2010-2012 and 2011-2013 cycles contain amendments to certain

standards and interpretations. The main amendments applicable to the Bank are as follows:

• IFRS 13, Fair Value Measurement, has been amended to clarify that issuing of the standard and consequential amendments to IAS 39 and IFRS 9 did not intend to prevent entities from measuring short-term receivables and payables that have no stated interest rate at their invoiced amounts without discounting, if the effect of not discounting is immaterial.

• IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets, have been amended

to clarify that, at the date of revaluation:

(i) the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset and the accumulated depreciation (amortization) is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking account of accumulated impairment losses ;

(ii) the accumulated depreciation (amortisation) is eliminated against the gross carrying amount of the asset.

• IAS 24, Related Party Disclosures, has been amended to extend the definition of ‘related

party’ to include a management entity that provides key management personnel services to the reporting entity, either directly or through a group entity. For related party transactions that arise when key management personnel services are provided to a reporting entity, the reporting entity is required to separately disclose the amounts that it has recognized as an expense for those services that are provided by a management entity; however, it is not required to ‘look through’ the management entity and disclose compensation paid by the management entity to the individuals providing the key management personnel services.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

9

2 Basis of preparation (Cont’d)

f) New standards, and interpretations of and amendments to existing standards that are not yet effective

Certain new, revised and amended standards and interpretations have been issued which are not yet effective for the current year and which the Bank has not early-adopted. The Bank has assessed their relevance to the its operations, and has determined that the following are likely to have an effect on the financial statements.

• IAS 1, Presentation of Financial Statements, effective for accounting periods beginning on or after January 1, 2016, has been amended to clarify or state the following:

- specific single disclosures that are not material do not have to be presented even if they are minimum requirements of a standard;

- the order of notes to the financial statements is not prescribed;

- line items on the statement of financial position and the statement of profit or loss and other comprehensive income (OCI) should be disaggregated if this provides helpful information to users. Line items can be aggregated if they are not material;

- specific criteria are now provided for presenting subtotals on the statement of financial position and in the statement of profit or loss and OCI, with additional reconciliation requirements for the statement of profit or loss and OCI; and

- the presentation in the statement of OCI of items of OCI arising from joint ventures and associates accounted for using the equity method follows the IAS 1 approach of splitting items that may, or that will never, be reclassified to profit or loss.

The Bank is assessing the impact that this amendment will have on its 2016 financial statements.

• Amendments to IAS 16 and IAS 38, Clarification of Acceptable Methods of Depreciation and Amortisation, are effective for accounting periods beginning on or after January 1, 2016.

• The amendment to IAS 16, Property, Plant and Equipment, explicitly states that revenue-based methods of depreciation cannot be used. This is because such methods reflect factors other than the consumption of economic benefits embodied in the assets.

• The amendment to IAS 38, Intangible Assets, introduces a rebuttable presumption that the use of revenue-based amortisation methods is inappropriate for intangible assets.

The Bank is assessing the impact that this amendment will have on its 2016 financial statements.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

10

2 Basis of preparation (Cont’d)

f) New standards, and interpretations of and amendments to existing standards that are not yet effective (Cont’d)

• Improvements to IFRS 2012-2014 cycle, contain amendments to certain standards and interpretations and are effective for accounting periods beginning on or after January 1, 2016. The main amendments applicable to the Bank are as follows:

• IFRS 7, Financial Instruments: Disclosures, has been amended to clarify when servicing arrangements are in the scope of its disclosure requirements on continuing involvement in transferred assets in cases when they are derecognized in their entirety. A servicer is deemed to have continuing involvement if it has an interest in the future performance of the transferred asset -e.g. if the servicing fee is dependent on the amount or timing of the cash flows collected from the transferred financial asset; however, the collection and remittance of cash flows from the transferred asset to the transferee is not, in itself, sufficient to be considered ‘continuing involvement’.

IFRS 7 has also been amended to clarify that the additional disclosures required by Disclosures: Offsetting Financial Assets and Financial Liabilities (Amendment to IFRS 7) are not specifically required for inclusion in condensed interim financial statements for all interim periods; however, they are required if the general requirements of IAS 34, Interim Financial Reporting, require their inclusion.

• IAS 19, Employee Benefits, has been amended to clarify that high-quality corporate bonds or government bonds used in determining the discount rate should be issued in the same currency in which the benefits are to be paid. Consequently, the depth of the market for high-quality corporate bonds should be assessed at the currency level and not the country level.

The Bank is assessing the impact that this amendment will have on its 2016 financial statements.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

11

2. Basis of preparation (Cont’d)

f) New standards, and interpretations of and amendments to existing standards that are not yet effective (Cont’d)

• IFRS 15, Revenue From Contracts With Customers, effective for accounting periods beginning on or after January 1, 2018, replaces IAS 11, Construction Contracts, IAS 18, Revenue, IFRIC 13, Customer Loyalty Programmes, IFRIC 15, Agreements for the Construction of Real Estate, IFRIC 18, Transfer of Assets from Customers, and SIC-31 Revenue – Barter Transactions Involving Advertising Services. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs. It also does not apply if two companies in the same line of business exchange non-monetary assets to facilitate sales to other parties.

The Bank will apply a five-step model to determine when to recognise revenue, and at what amount. The model specifies that revenue should be recognised when (or as) an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue is recognised at a point in time, when control of goods or services is transferred to the customer; or over time, in a manner that best reflects the entity’s performance.

There will be new qualitative and quantitative disclosure requirements to describe the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Bank is assessing the impact that this amendment will have on its 2018 financial statements.

• IFRS 9, Financial Instruments, which is effective for annual reporting periods beginning on or

after January 1, 2018, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial assets and liabilities, including a new expected credit loss model for calculating impairment of financial assets and the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. Although the permissible measurement bases for financial assets – amortised cost, fair value through other comprehensive income (FVOCI) and fair value though profit or loss (FVTPL) - are similar to IAS 39, the criteria for classification into the appropriate measurement category are significantly different. IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ model, which means that a loss event will no longer need to occur before an impairment allowance is recognized.

The Bank is assessing the impact that this amendment will have on its 2018 financial statements.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

12

2. Basis of preparation (Cont’d)

f) New standards, and interpretations of and amendments to existing standards that are not yet effective (Cont’d)

• IFRS 16, Leases, which is effective for annual reporting periods beginning on or after January 1, 2019, eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. Companies will be required to bring all major leases on-balance sheet, recognising new assets and liabilities. The on-balance sheet liability will attract interest; the total lease expense will be higher in the early years of a lease even if a lease has fixed regular cash rentals. Optional lessee exemption will apply to short- term leases and for low-value items with value of US$5,000 or less.

Lessor accounting remains similar to current practice as the lessor will continue to classify leases as finance and operating leases. Finance lease accounting will be based on IAS 17 lease accounting, with recognition of net investment in lease comprising lease receivable and residual asset. Operating lease accounting will be based on IAS 17 operating lease accounting.

Early adoption is permitted if IFRS 15, Revenue from Contracts with Customers is also adopted. The Bank is assessing the impact that this amendment will have on its 2019 financial statements.

g) Early adoption of standards

The Bank did not early-adopt any new or amended standards in 2015.

3 Significant accounting policies

The accounting policies set out below have been consistently applied to all periods presented in these financial statements, and have been applied consistently by the Bank, unless otherwise stated.

(a) Functional and presentation currency

Items in the financial statements are measured using the currency of the primary economic environment in which the Bank operates (“the functional currency”). The financial statements are presented in Eastern Caribbean dollars, which is the Bank’s functional and presentation currency.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

13

3 Significant accounting policies (Cont’d)

(b) Foreign currency transactions Transactions in foreign currencies are translated into the Bank’s functional currency at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rate ruling at that date. The foreign currency gain or loss on monetary items is the difference between the amortised cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortised cost in the foreign currency translated at the spot exchange rate at the end of the year.

Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated into the functional currency at the spot exchange rate at the date on which the fair value is determined. Non-monetary items that are measured based on historical cost in a foreign currency are translated using the spot exchange rate at the date of the transaction.

Foreign currency differences arising on translation are generally recognised in profit or loss. However, foreign currency differences arising from the translation of available-for-sale equity instruments are recognised in OCI.

(c) Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and non-restricted balances with the Central Bank and deposits with other banks.

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

(e) Financial assets and financial liabilities

(i) Recognition The Bank initially recognizes loans and advances and deposits on the date that they are

originated. The Bank uses trade date accounting for regular way contracts when recording financial asset transactions.

A financial asset or liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

14

3 Significant accounting policies (Cont’d)

(e) Financial assets and financial liabilities (Cont’d)

(ii) Classification

Financial assets The Bank classifies its financial assets in one of the following categories:

• Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: (a) those that the entity intends to sell immediately or in the short term, which are classified as held for trading, and those that the entity upon initial recognition designates as at fair value through profit or loss; (b) those that the entity upon initial recognition designates as available for sale; or (c) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration.

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

If the Bank were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available for sale.

• Available-for-sale Available-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 prices or that are not classified as loans and receivables, held to-maturity investments or financial assets at fair value through profit or loss.

Financial liabilities

The Bank classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost or fair value through profit or loss.

(iii) Derecognition

Financial assets

The Bank derecognizes a financial asset when the contractual rights to the cash flows from the financial assets expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial assets are transferred or in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain ownership of the financial asset. Any interest in such transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognised as a separate asset or liability.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

15

3 Significant accounting policies (Cont’d)

(e) Financial assets and financial liabilities (Cont’d)

(iii)Derecognition (Cont’d)

Financial assets (Cont’d)

On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognised as a separate asset or liability.

The Bank enters into transactions whereby it transfers assets recognized on its balance sheet, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised.

Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions.

In transactions in which the Bank neither retains or transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Bank continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.

Financial liabilities

The Bank derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire.

(iv) Offsetting

Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Bank has a legal right to set off the amounts and it intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously.

Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a Bank of similar transactions similar to the Bank’s trading activities.

(v) Amortised cost measurement

The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

16

3 Significant accounting policies (Cont’d)

(e) Financial assets and financial liabilities (Cont’d)

(vi) Fair value measurement

‘Fair value’ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk.

When one is available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If a market for a financial asset is not active, the Bank establishes fair value using a valuation technique as disclosed in Note 5. Valuation techniques include using recent arm’s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses, and option pricing models.

The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price – i.e. the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out.

If an asset or a liability measured at fair value has a bid price and an ask price, then the Bank measures assets and long positions at a bid price and liabilities and short positions at an ask price.

Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Group on the basis of the net exposure to either market or credit risk are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for a particular risk exposure. Those portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio.

The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid.

The Bank recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

17

3 Significant accounting policies (Cont’d)

(e) Financial assets and financial liabilities (Cont’d)

(vii) Identification and measurement of impairment

At each reporting date, the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a bank of financial assets is impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s), and that the loss event has an impact on the future cash flows of the assets that can be reliably estimated.

Objective evidence that financial assets are impaired can include:

1. significant financial difficulty of the borrower or issuer; 2. default or delinquency by a borrower; 3. restructuring of a loan or advance by the Bank on terms that the Bank would not

otherwise consider; 3. indications that a borrower or issuer will enter bankruptcy; 4. the disappearance of an active market for a security; or 5. other observable data relating to a Bank of assets such as:

-adverse changes in the payment status of borrowers or issuers in the Bank; or

-economic conditions that correlate with defaults on the assets in the Bank.

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. In general, the Bank considers a decline of 20% to be significant and a period of nine (9) months to be prolonged.

The Bank considers evidence of impairment for loans and advances and held-to-maturity investment securities both at a specific assets and collective level. All individually significant loans and advances and held-to-maturity investments are assessed for specific impairment. Those not found to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together loans and advances and held-to-maturity investment securities with similar risk characteristics.

In assessing collective impairment, the Bank uses statistical modeling of historical trends of the probability of default, the timing of recoveries, and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate.

Impairment losses on assets measured at amortised cost are calculated as the difference between the carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

18

3. Significant accounting policies (cont’d)

(e) Financial assets and financial liabilities (cont’d)

(vii) Identification and measurement of impairment (Cont’d)

If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made whether the financial assets should be derecognized. If the cash flows of the renegotiated assets are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognized and the new financial asset is recognized at fair value. The impairment loss is measured as follows:

• If the expected restructuring does not result in de-recognition of the existing asset, the estimated cash flows arising from the modified financial asset are included in the measurement of the existing asset based on their expected timing and the amounts are discounted at the original effective interest rate of the existing financial asset.

• If the expected restructuring results in de-recognition of the existing asset, then the expected fair value of the new assets is treated as the final cash flow from the existing financial asset at the time of its de-recognition. This amount is discounted from the expected date of de-recognition to the reporting date using the original effective interest rate of the existing financial asset.

Impairment losses are recognized in profit or loss and reflected in an allowance account against loans and advances or held-to-maturity investment securities. Interest on the impaired assets continues to be recognized through the unwinding of the discount. When an event occurring after the impairment was recognized causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

Impairment losses on available-for-sale investment securities are recognized by reclassifying the losses accumulated in the fair value reserve in equity to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss recognized previously in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income.

The Bank writes off certain loans and advances and investment securities when they are determined to be uncollectible.

Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. In subsequent years, the asset is considered to be past due and disclosed only if renegotiated.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

19

3. Significant accounting policies (Cont’d)

(f) Property, plant and equipment

(i) Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses.

Land and buildings comprise mainly branches and offices. Land and buildings are shown at fair value, based on 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 amount is restated to the revalued amount of the asset. Historical cost includes expenditure that is directly attributable to the acquisition of the items. The cost of self-constructed assets includes:

• the cost of materials and direct labour; • any other costs directly attributable to bringing the asset to a working condition for its

intended use; • when the Bank has an obligation to remove the asset or restore the site, an estimate of the

costs of dismantling and removing the items and restoring the site on which they are located; and

• capitalised borrowing costs.

When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net within other income in profit or loss.

(ii) Subsequent costs Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as

appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.

(iii)Depreciation Land is not depreciated. Depreciation is calculated using the straight-line method for buildings

and the reducing balance method for all other property, plant and equipment to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows:

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

Computers 25% The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

20

3. Significant accounting policies (cont’d)

(g) Intangible assets

Intangible assets comprise separately identifiable intangible items arising from computer software licenses and other intangible assets. Intangible assets are recognized at cost less accumulated amortisation and any accumulated impairment losses. Intangible assets with a definite useful life are amortized using the straight-line method over their estimated useful economic life, generally not exceeding 4 years. Intangible assets with an indefinite useful life are not amortized. Generally, the identified intangible assets of the Bank have a definite useful life.

At each balance sheet date intangible assets are reviewed for indications of impairment or changes in estimated future economic benefits. If such indications exist, the intangible assets are analyzed to assess whether their carrying amount is fully recoverable. An impairment loss is recognized if the carrying amount exceeds the recoverable amount. The Bank chooses to use the cost model for the measurement after recognition. Intangible assets with indefinite useful life are annually tested for impairment and whenever there is an indication that the asset may be impaired, the intangible asset is analyzed to assess whether their carrying amount is fully recoverable.

Computer software licenses

Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring the specific software to use. These costs are amortized on the basis of the expected useful lives. Software has a maximum expected useful life of 4 years (25%).

(h) Financial guarantees and letters of credit

Financial guarantees and letters of credit comprise undertakings by the Bank to pay bills of exchange drawn on customers. The Bank expects most guarantees and letters of credit to be settled simultaneously with the reimbursement from the customers.

Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee was given. The fair value of a financial guarantee at the time of signature is zero because all guarantees are agreed on arm’s length terms and the value of the premium agreed corresponds to the value of the guarantee obligation. No receivable for the future premiums is recognised. Subsequent to initial recognition, the Bank’s liabilities under such guarantees are measured at the higher of the initial amount, less amortisation of fees recognised 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 basis over the life of the guarantee. Any increase in the liability relating to guarantees is reported in profit or loss within other operating expenses.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

21

3. Significant accounting policies (cont’d)

(h) Provisions Provisions are recognised when:

• the Bank has a present legal or constructive obligation as a result of past events;

• it is more likely than not that an outflow of resources will be required to settle the obligation; and

• the amount has been reliably estimated.

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

Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as interest expense.

(i) Employee benefits

(i) Pension obligation The Bank operates a defined benefit plan for all employees. The assets of the plan are held separately. The pension plan is funded through payments from employees and the Bank, taking account of the recommendations of independent qualified actuaries. The Bank’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets.

The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the Bank, the recognised asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. The Bank determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in personnel expenses in profit or loss.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The Bank recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

22

3. Significant accounting policies (cont’d)

(i) Employee benefits (Cont’d) (ii) Profit-sharing and bonus plans

The Bank recognises a liability and an expense for bonuses and profit-sharing, based on a formula that takes into consideration the profit attributable to the Bank’s shareholders after certain adjustments. The Bank recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

(j) Income tax

Income tax expense comprises current and deferred tax. It is recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in OCI, in which case it is recognized in equity or OCI.

(i) Current tax

Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. It is measured using tax rates enacted or substantively enacted at the reporting date.

(ii) Deferred tax

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for:

• temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;

• temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future; and

• taxable temporary differences arising on the initial recognition of goodwill.

Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Unrecognised deferred tax assets are reassessed at each reporting date and recognised to the extent that it has become probable that future taxable profits will be available against which they can be used.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date.

The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Bank expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

3. Significant accounting policies (cont’d)

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

23

(k) Share capital (i) Share issue costs

Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds.

(ii) Dividends on ordinary shares

Dividends on ordinary shares are recognised in equity in the period in which they are approved by the shareholders. Dividends for the year declared after the balance sheet date are disclosed in the notes to the financial statements.

(l) Interest income and expense Interest income and expense for all interest bearing financial instruments are recognised within “interest income” and “interest expense” in profit or loss using the effective interest method.

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

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

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

(n) Dividend income Dividends are recognised in profit or loss when the Bank’s right to receive payment is established.

3. Significant accounting policies (cont’d)

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

24

(n) Leases

(i) The Bank is the lessee

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on the straight-line basis over the period of the lease.

(ii) The Bank is the lessor When assets are leased out under an operating lease, the assets are included in the balance sheet based on the nature of the assets. Lease income is recognised over the term of the lease on the straight line basis.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

25

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

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

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

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

4.1 Credit risk

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

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

26

4 Financial risk management (Cont’d)

4.1.1 Credit risk measurement

(a) Loans and advances

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

The Bank assesses the probability of default of individual counterparties using the Eastern Caribbean Central Bank prudential guidelines. Clients of the Bank are segmented into five rating classes. The Bank’s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class.

Bank’s rating Description of the grade 1 Pass 2 Special Mention 3 Substandard 4 Doubtful 5 Loss

This means that, in principle, exposures migrate between classes as the assessment of their probability of default changes. The Bank regularly validates the performance of the rating and their predictive power with regard to default events.

(b) Debt securities and other bills

For debt securities and other bills, external ratings such as Caricris or their equivalents are used by management for management of the credit risk exposures.

4.1.2 Risk limit control and mitigation policies

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

The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to the industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review by the Board of Directors.

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

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

Some other specific control and mitigation measures are outlined below.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

27

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.2 Risk limit control and mitigation policies (Cont’d)

(a) Collateral The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advanced, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are:

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

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

Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured.

(b) Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit (which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions) are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan.

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

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

28

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.3 Impairment and provisioning policies

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

2015 2014 Loans and

advances (%)

Impairment provision

(%)

Loans and advances

(%)

Impairment provision

(%) Bank’s rating 1. Pass 78.5% 14.7% 76.7% 12.4% 2. Special mention 3.5% 1.2% 3.1% 2.7% 3. Sub-standard 13.7% 51.6% 13.8% 39.4% 4. Doubtful 2.8% 19.5% 4.7% 28.9% 5. Loss 1.5% 13.0% 1.7% 16.7%

The internal rating tool assists management to determine whether objective evidence of impairment exists, 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 least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of the incurred loss at balance-sheet date on a case-by-case basis, and are applied to all individually significant accounts. The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

29

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.4 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 exposure 2015

$ 2014

$

Due from other banks 53,563,141 58,981,698

Treasury bills 30,248,281 7,211,052

Loans and advances to financial institutions 16,802,818 16,306,757

Loans and advances to customers:

− Overdraft 11,668,283 16,519,020

− Demand loans 183,415,050 186,399,332

− Promissory notes 5,817,744 3,755,115

− Mortgages 171,182,448 171,306,272

− Credit cards 1,952,822 1,801,196

Investments securities:

− available for sale – debt securities 8,198,380 10,800,543

− held to maturity 24,404,544 18,517,218

Other assets 6,055,209 1,741,121

513,308,720 493,339,324 Credit risk exposures relating to off-balance sheet items are as follows:

Financial guarantees 590,731 585,501

Loan commitments and other credit related facilities 40,213,243 17,790,036

40,803,974 18,375,537

At December 31 554,112,694 511,714,861

The above table represents a worst case scenario of credit risk exposure to the Bank at December 31, 2015 and 2014, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the balance sheet. Loans and advances to customers and financial institutions comprise 76% of the total maximum exposure (2014 - 80%) and investments in debt securities comprise 6% (2014 - 6%). Notwithstanding the current dynamics of the economy, management is reasonably confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank based on the following:

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

30

4 Financial risk management (Cont’d)

4.1 Credit risk (cont’d)

4.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements (Cont’d)

• 82% of the loans and advances portfolio is categorised in the top two grades of the internal rating system (2014 - 80%);

• 97% of the portfolio is backed by collateral in the form of mortgage debentures, legal mortgages, life and comprehensive insurances, bills of sale, cash and guarantees

• 64% of the total loans and advances portfolio is considered to be neither past due nor impaired (2014 - 56%);

• The Bank continues to grant loans and advances in accordance with its lending policies and guidelines; and

• 5% of investments are rated above A- and CariA (2014 - 3%) and 74% are rated above B- and below CariA (2014 – 56%). Many issuers are not rated but only 21% of investments in the portfolio are not rated, compared to 41% in the previous year.

4.1.5 Loans and advances

Loans and advances are summarised as follows:

2015

$ 2014

$

Loans and advances to customers Neither past due nor impaired 254,144,964 230,506,639 Past due but not impaired 73,496,680 81,601,348 Impaired 72,473,275 97,839,752 Gross 400,114,919 409,947,739 Less: allowance for impairment (Notes 10 and 11) (26,078,572 ) (30,166,804 Net 374,036,347 379,780,935 Loans and advances to financial institutions Neither past due nor impaired (Note 9) 16,802,818 16,306,757

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

31

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.5 Loans and advances (Cont’d)

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

December 31, 2015 Overdrafts

$ Credit card $

Demand loans $

Promissor

y notes

$ Mortgages

$

Total Loans and

advances to customers

$ Loans and advances to customers

Grades

1. Pass 11,240,772 1,175,269 135,763,985 5,059,879 89,282,975 242,522,880

2. Special mention 362,606 - 205,616 - 10,831,546 11,399,768 3. Sub-standard 222,316 - - - - 222,316 4. Doubtful - - - - - - 5. Loss - - - - - -

Total 11,825,694 1,175,269 135,969,601 5,059,879 100,114,52

1 254,144,964

Overdrafts

$

Credit

card $

Demand loans

$

Promissor

y notes

$ Mortgages

$

Total Loans and advances to customers

$ December 31, 2014 Loans and advances to customers

Grades 1. Pass

16,309,516 1,567,57

1 108,038,67

6 3,006,734

99,364,579 228,287,076 2. Special mention 165,844 – 468,819 – 1,375,167 2,009,830 3. Sub-standard 209,733 – – – – 209,733 4. Doubtful – – – – – – 5. Loss – – – – – – Total 16,685,093 1,567,57

1 108,507,49

5 3,006,734 100,739,74

6 230,506,639

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

32

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.5 Loans and advances (Cont’d) Loans and advances to financial institutions

Loans and advances to financial institutions were graded 1 (Pass) as at December 31, 2015 and December 31, 2014.

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

Credit cards

$

Demand loans

$

Promissory

notes $

Mortgages $

Total Loans and advances to customers

$ December 31, 2015 Past due up to 30 days 559,627 20,599,751 506,553 36,418,871 58,084,802

Past due 30-60 days 123,688 4,491,972 76,472 1,592,603 6,284,735

Past due 60-90 days 70,630 3,068,057 31,042 5,933,805 9,103,534

Past due over 90 days 23,609 - - - 23,608

Total 777,554 28,159,780 614,067 43,945,279 73,496,680 Fair value of collateral - 85,300,842 951,751 88,597,160 174,849,753

Credit cards

$

Demand loans

$

Promissory

notes $

Mortgages $

Total Loans and advances to customers

$ December 31, 2014

Past due up to 30 days 39,137,600 407,129 24,649,490 64,194,219 Past due 30-60 days 171,264 3,757,195 92,632 4,773,530 8,794,621 Past due 60-90 days 10,197 2,191,557 26,364 6,332,227 8,560,345 Past due over 90 days 52,163 – – – 52,163

Total 233,624 45,086,352 526,125 35,755,247 81,601,348 Fair value of collateral – 101,987,264 4,747,016 91,839,251 198,573,531

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

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

33

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.5 Loans and advances (Cont’d) Loans and advances to financial institutions (Cont’d)

(c) Loans and advances individually impaired

The table below shows the gross amount of individually impaired loans and advances to customers by grades before taking into consideration the cash flows from collateral held.

2015

$ 2014

$ Individually impaired loans Grades: 1. Pass 209,033 4,612,116 2. Special mention 516,219 10,770,258 3. Sub-standard 54,794,488 56,345,692 4. Doubtful 11,130,928 19,359,584 5. Loss 5,822,607 6,752,102 Total 72,473,275 97,839,752 Fair value of collateral 138,174,144 157,946,994

(d) Loans and advances renegotiated Restructuring activities include extended payment arrangements, approved external management

plans, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgment of local management, indicate that payment will most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans, in particular customer finance loans. Renegotiated loans that would otherwise be past due or impaired as at December 31, 2015 amounted to $21,973,893 (2014 - $44,936,282).

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

34

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.6 Debt securities, treasury bills and other eligible bills

The table below presents an analysis of debt securities, treasury bills and other eligible bills by rating agency designation at December 31, 2015 and 2014, based on Caricris or their equivalent:

4.1.7 Repossessed collateral

During 2015, the Bank obtained assets by taking possession of collateral held as security, as follows:

Nature of assets Carrying amount

$ Vehicles 441,010

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

At December 31, 2014 Investment securities Treasury

bills $

Held-to-maturity

$

Available- for-sale

$ Total

$

A- to A+

- - 678,872 678,872 BBB- to BBB+ - - 1,860,216 1,860,216 BB- to BB+ - - 1,150,359 1,150,359 B- to B+ 1,898,788 2,019,945 - 3,918,733 CariA - - - - CariBBB 28,349,493 13,937,243 - 42,286,736 Unrated

- 8,447,356 4,508,933 12,956,289 Total 30,248,281 24,404,544 8,198,380 62,851,205

At December 31, 2014 Investment securities Treasury

bills $

Held-to-maturity

$

Available- for-sale

$ Total

$ AA- to AA+ – – 679,767 679,767 BBB- to BBB+

– – 3,233,478 3,233,478

CariA –

302,919 – 302,919

CariBBB 7,211,052 10,114,356 – 17,325,408 Unrated – 8,099,943 6,887,298 14,987,241 Total 7,211,052 18,517,218 10,800,543 36,528,813

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

35

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.8 Concentration of risks of financial assets with credit risk exposure

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

(b) Industry sectors The following table breaks down the Bank’s main credit exposure at their carrying amounts, as categorised by the industry sectors of our counterparties.

2015

Financial institutions

$

Manu- facturing

$ Tourism

$

Government $

Professional and other

services $

Personal $

Other

industries $

Total $

Due from other banks 53,563,141 - - - - - - 53,563,141 Treasury bills - - - 30,248,281 - - - 30,248,281 Loans and advances to financial institutions 16,802,818 - - - - - - 16,802,818 Loans and advances to customers:

- Overdraft - 95,071 112,633 22,267 4,838,757 1,153,891 5,445,664 11,668,283

- Credit cards - - - - - 1,366,975 585,847 1,952,822

- Demand loans - 7,844,836 2,631,093 10,938,244 16,151,499 63,479,126 82,370,252 183,415,050

- Promissory notes - - - - 15,050 5,724,323 78,371 5,817,744

- Mortgages - - 1,988,824 - 6,323,580 102,645,624 60,224,420 171,182,448 Investment securities: - available-for-sale 2,114,733 - - 904,303 - - 5,179,344 8,198,380 - held-to-maturity 10,674,910 - - 13,626,072 - - 103,562 24,404,544 Other assets 5,248,883 - - - - - 806,326 6,055,209 As at December 31, 2015 88,404,484 7,939,908 4,732,550 55,739,167 27,328,886 174,369,939 154,793,787 513,308,720 Credit commitments 119,448 264,842 - 25,508,585 12,084,020 2,827,079 40,803,974

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

36

4 Financial risk management (Cont’d)

4.1 Credit risk (cont’d)

4.1.8 Concentration of risks of financial assets with credit risk exposure (Cont’d)

(b) Industry sectors (Cont’d)

2014

Financial institutions

$

Manu- facturing

$ Tourism

$

Government $

Professional and other

services $

Personal $

Other

industries $

Total $

Due from other banks 58,981,698 – – – – – – 58,981,698

Treasury bills – – – 7,211,052 – – – 7,211,052 Loans and advances to financial institutions 16,306,757 – – – – – –

16,306,757

Loans and advances to customers:

- Overdraft 184,528

127,596 204,560 1,913,246 5,569,510 1,338,612 7,180,968 16,519,020

- Credit cards – – – – – 1,260,837 540,359 1,801,196 - Demand loans – 10,164,848 2,130,700 4,426,149 16,111,954 57,810,786 95,754,895 186,399,332

- Promissory notes – 1,695 20,887 – 29,323 3,605,995 97,215 3,755,115

- Mortgages – 1,153,759 2,474,829 – 5,509,903 107,110,207 55,057,574 171,306,272 Investment securities: - available-for-sale 944,593 – – 4,859,905 – – 4,996,045 10,800,543 - held-to-maturity 8,299,299 – – 10,114,357 – – 103,562 18,517,218 Other assets 982,276 – – – – – 758,845 1,741,121 As at December 31, 2014 85,699,151 11,447,898 4,830,976 28,524,709 27,220,690 171,126,437 164,489,463 493,339,324 Credit commitments – 240,386 94,614 567,458 4,392,920 9,788,759 3,291,400 18,375,537

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

37

4 Financial risk management (Cont’d)

4.2 Market risk

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

4.2.1 Price risk

The Bank is exposed to equity securities price risk because of investments held by the Bank and classified on the balance sheet as available for sale. To manage its price risk arising from investments in equity securities, the Bank diversifies its portfolio. At December 31, 2015, if equity securities prices had been 5% higher/lower with all other variables held constant, comprehensive income for the year would have been $56,325 higher/lower (2014 - $61,785 higher/lower) as a result of the increase/decrease in fair value of available for sale equity securities.

4.2.2 Foreign exchange risk

The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total which are monitored daily. The Bank’s exposure to currency risk is minimal since most of its assets and liabilities in foreign currencies are held in United States dollars. The exchange rate of the Eastern Caribbean dollar (EC$) to the United States dollar (US$) has been formally pegged at EC$2.70 = US$1.00 since 1976. The following table summarises the Bank’s exposure to foreign currency exchange rate risk at December 31, 2015. Included in the table are the Bank’s financial instruments at carrying amount, categorised by currency.

USD BBD CAD EUR GBP

$ $ $ $ $

At December 31, 2015 2.7000 1.3500 1.9452 2.9493 4.0027

At December 31, 2014 2.7000 1.3500 2.3060 3.2060 4.1279

At December 31, 2013 2.7000 1.3500 2.5133 3.6419 4.4664

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

38

4 Financial risk management (Cont’d)

4.2 Market risk (Cont’d)

4.2.2 Foreign exchange risk (Cont’d) Concentration of currency risk – on and off balance sheet financial instruments ECD CAD EURO USD GBP TTD BD TOTAL As at December 31, 2015 Assets Cash and balances with Central

Bank 51,253,306

139,121 310,212 1,067,771 106,828 – 125,021 53,002,259

Due from other banks (1,112,629 ) 13,507 486,993 52,550,881 1,189,441 228,796 206,152 53,563,141 Treasury bills 30,248,281 – – – – - 30,248,281 Loans and advances to financial institutions 16,802,818

– – – – – 16,802,818

Loans and advances to customers 374,036,347 – – – – – 374,036,347 Investment securities - available-for-sale 4,283,502 – – 3,914,878 – – – 8,198,380 - held-to-maturity 24,404,544 – – – – – – 24,404,544

Other assets 6,055,209 – – – – – – 6,055,209 Total financial assets 505,971,378 152,628 797,205 57,533,530 1,296,269 228,796 331,173 566,310,979 Liabilities Due to customers 503,004,374 – 1,689 3,382,244 – – – 506,388,307 Other liabilities 5,217,292 – – – – – – 5,217,292 Total financial liabilities 508,221,666 _ 1,689 3,382,244 – – – 511,605,599 Net on-balance sheet positions (2,250,288 ) 152,628 795,516 54,151,286 1,296,269 228,796 331,173 54,705,380

Credit commitments 40,803,974 – – – – – – 40,803,974

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

39

4 Financial risk management (Cont’d)

4.2 Market risk (Cont’d)

4.2.2 Foreign exchange risk (Cont’d)

Concentration of currency risk – on and off balance sheet financial instruments (Cont’d)

ECD CAD EURO USD GBP TTD BBD TOTAL As at December 31, 2014 Assets Cash and balances with Central Bank 35,281,517 141,132 387,076 1,255,108 127,037 – 136,025 37,327,895 Due from other banks 13,339,256 1,188,741 1,497,016 40,452,182 2,179,560 35,278 289,665 58,981,698 Treasury bills 7,211,052 – – – – – – 7,211,052 Loans and advances to financial institutions 16,306,757 – – – – – – 16,306,757 Loans and advances to customers 379,780,935 – – – – – 379,780,935 Investment securities - available-for-sale 9,324,050 – – 4,256,782 – – – 13,580,832 - held-to-maturity 18,517,218 – – – – – – 18,517,218

Other assets 1,741,121 – – – – – – 1,741,121 Total financial assets 481,501,906 1,329,873 1,884,092 45,964,072 2,306,597 35,278 425,690 533,447,508 Liabilities Due to customers 468,655,704 1,641,234 2,174 – – – 470,299,112 Other liabilities 5,272,726 – – – – – – 5,272,726 Total financial liabilities 473,928,430 - 1,641,234 2,174 – – – 475,571,838 Net on-balance sheet positions 7,573,476 1,329,873 242,858 45,961,898 2,306,597 35,278 425,690 57,875,670 Credit commitments 18,375,537 – – – – – – 18,375,537

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

40

4 Financial risk management (Cont’d)

4.2 Market risk (Cont’d)

4.2.3 Interest rate risk

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but may impact profits in the event that unexpected movements arise.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

41

4 Financial risk management (Cont’d)

4.2 Market risk (Cont’d)

4.2.3 Interest rate risk

The table below summarizes the Bank’s exposure to interest rate risks. It includes the Bank’s financial instruments at carrying amounts, categorized by the earlier of contractual repricing or maturity dates.

Up to 1 month

$

1-3 months

$

3-12 months

$

1-5 years

$

Over 5 years

$

Non- interest bearing

$

Total

$

As at December 31, 2015 Assets Cash and balances with Central Bank - - - - - 53,002,259 53,002,259 Due from other banks 51,314,761 - - - - 2,248,380 53,563,141 Treasury bills 11,982,748 3,049,932 15,215,601 - - - 30,248,281 Loans and advances to financial institutions - 2,365,563 14,437,255 - - - 16,802,818 Loans and advances to customers 15,753,440 5,347,323 6,808,735 54,474,387 291,652,462 - 374,036,347 Investment securities: - available-for-sale 7,972,949 - - - 225,431 - 8,198,380 - held-to-maturity 807,003 - 11,574,651 12,022,890 - - 24,404,544

Other assets - - - - - 6,055,209 6,055,209 Total financial assets 87,830,901 10,762,818 48,036,243 66,497,277 291,877,893 61,305,848 566,310,979 Liabilities Due to customers 316,520,227 18,354,732 122,082,007 3,299,483 - 46,131,858 506,388,307

Other liabilities - - - - - 5,217,292 5,217,292 Total financial liabilities 316,520,227 18,354,732 122,082,007 3,299,483 - 51,349,150 511,605,599

Cumulative gap

(228,689,327) (7,591,914) (74,045,764) 63,197,794 291,877,893

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

42

4 Financial risk management (Cont’d)

4.2 Market risk (Cont’d)

4.2.3 Interest rate risk (Cont’d)

Up to 1 month

$

1-3 months

$

3-12 months

$

1-5 years

$

Over 5 years

$

Non- interest bearing

$

Total $

As at December 31, 2014 Assets Cash and balances with Central Bank – – – – 37,327,895 37,327,895 Due from other banks 43,159,757 – – – – 15,821,941 58,981,698 Treasury bills – – 7,211,052 – – – 7,211,052 Loans and advances to financial institutions 7,068,277 9,238,480 – – – 16,306,757 Loans and advances to customers 18,267,328 1,628,023 15,759,289 48,694,274 295,432,021 – 379,780,935 Investment securities: - available-for-sale 10,537,192 – – – 263,351 – 10,800,543 - held-to-maturity 52,000 – 11,066,945 7,398,273 – – 18,517,218

Other assets – – – – – 1,741,121 1,741,121 Total financial assets 72,016,277 8,696,300 43,275,766 56,092,547 295,695,372 54,890,957 530,667,219 Liabilities

Due to customers 288,811,924 16,231,865 130,152,572 2,941,978 – 32,160,773 470,299,112

Other liabilities – – – – – 5,272,726 5,272,726

Total financial liabilities 288,811,924 16,231,865 130,152,572 2,941,978 – 37,433,499 475,571,838 Cumulative gap (216,795,647) (7,535,565) (86,876,806) 53,150,569 295,695,372

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

43

4 Financial risk management (Cont’d)

4.2 Market risk (Cont’)

4.2.3 Interest rate risk (Cont’d)

The Bank’s fair value interest rate risk arises from debt securities classified as available for sale. At December 31, 2015 if market interest rates had been 100 basis points higher/lower with all variables held constant, comprehensive income for the year would have been $165,419 higher/ $338,859 lower (2014 - $608,486 higher/$88,313 lower) 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, 2015 if variable interest rates had been 100 basis points higher/lower with all other variables held constant, post-tax profit for the year would have been $2,290,016 higher/lower (2014 - $2,278,675 higher/lower), mainly as a result of higher/lower interest income on variable rate loans.

4.3 Liquidity risk

Liquidity risk is the risk that the Bank will be unable to meet its payment obligations associated with its financial liabilities when they fall due or upon demand.

4.3.1 Liquidity risk management process

The Board of Directors establish the strategy and policy for the management of liquidity risk. The Bank's liquidity is managed by its Finance Department. A significant proportion of the Bank’s liabilities fall within the current category; however, the Bank maintains approximately 33% of assets to manage any payment obligations as history has shown that the maintaining this level of liquid assets to manage these outflows is adequate. The key elements of the liquidity management process is as follows: • Daily and weekly monitoring to ensure that requirements are met. This includes the

replenishment of funds as they mature or as borrowed by customers. The Bank ensures that sufficient funds are held in the one to thirty day maturity bucket to satisfy liquidity requirements.

• Maintaining a portfolio of marketable assets that can easily be liquidated as protection against

any unforeseen liquidity problems. Additionally, the investment portfolio is fairly diversified by currency, geography, issuer, product and term.

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

requirements. • Managing the concentration and profile of debt maturities.

• Sources of liquidity are regularly reviewed to maintain a wide diversification by currency,

geography, provider, product and term.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

44

4 Financial risk management (Cont’d) 4.3 Liquidity risk (Cont’d)

4.3.3 Non-derivative cash flows

The table below presents the cash flows payable by the Bank under non-derivative financial liabilities and assets held for managing liquidity risk by remaining contractual maturities at the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows; the Bank manages the inherent liquidity risk based on expected undiscounted cash inflows.

Up to 1 month

$

1-3 months

$

3-12 months

$

1-5 years

$

Over 5 years

$

Total contractual

cash flows $

As at December 31, 2015 Liabilities

Due to customers 362,667,463 15,277,314 124,080,027 3,390,969 – 505,415,773

Other liabilities 5,217,292 – – – – 5,217,292

Total liabilities

(Contractual maturity dates) 367,884,755 15,277,314 124,080,027 3,390,969 – 510,633,065

Assets held for managing liquidity risk (Contractual maturity dates) 109,201,363 10,762,817 48,036,243 66,620,835 305,386,914 540,008,172

Up to 1 month

$

1-3 months

$

3-12 months

$

1-5 years

$

Over 5 years

$

Total contractual

cash flows $

As at December 31, 2014 Liabilities

Due to customers 323,180,620 16,231,865 130,152,572 2,941,978 – 472,507,035

Other liabilities 5,272,726 – – – – 5,272,726

Total liabilities (Contractual maturity dates) 328,453,346 16,231,865 130,152,572 2,941,978 – 477,779,761 Assets held for managing liquidity risk (Contractual maturity dates) 104,075,003 8,696,300 43,275,766 56,092,546 295,695,372 507,834,987

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

45

4 Financial risk management (Cont’d) 4.3 Liquidity risk (Cont’d)

4.3.4 Assets held for managing liquidity risk

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

4.3.5 Off-balance sheet items

(a) Loan commitments The dates of the contractual amounts of the Bank’s off-balance sheet financial instruments that commit it to extend credit to customers and other facilities (Note 34), are summarised in the table below.

(b) Financial guarantees and other financial facilities Financial guarantees (Note 34) are also included below based on the earliest contractual maturity date.

1 year

$ 1-5 years

$

Over 5 years

$ Total

$ As at December 31, 2015 Loan commitments 38,667,661 1,540,386 5,196 40,213,243 Guarantees, acceptances and other financial facilities 142,843 335,230 112,658 590,731 Total 38,810,504 1,875,616 117,854 40,803,974 As at December 31, 2014 Loan commitments 15,926,347 1,858,493 5,196 17,790,036 Guarantees, acceptances and other financial facilities – 472,843 112,658 585,501 Total 15,926,347 2,331,336 117,854 18,375,537

4.4 Fair values of financial instruments

(a) Financial instruments not measured at fair value ‘Fair value’ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk. The fair values of cash resources, other assets and liabilities, treasury bills, loans and advances to financial institutions and due to other banks are assumed to approximate their carrying values due to their short term nature.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

46

4 Financial risk management (Cont’d)

4.4 Fair values of financial assets and liabilities (Cont’d)

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

(ii) Investment securities Investment securities include only interest bearing assets held to maturity; assets classified as available-for-sale are measured at fair value except for unlisted available-for-sale equity securities which are carried at cost less impairment. The fair value of equity securities carried at cost less impairment is not disclosed as it cannot be reliably estimated (Note 12). The fair value for held-to-maturity assets is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit maturity and yield characteristics.

(iii) Due to customers

The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand. Deposits payable on a fixed date are at rates which reflect market conditions and are assumed to have fair values which approximate carrying values.

The table below summarises the carrying amounts and fair values of those financial assets and financial liabilities not presented on the Bank’s balance sheet at their fair value: Carrying value Fair value 2015

$ 2014

$ 2015

$ 2014

$ Financial assets Loans and advances to financial institutions 16,802,818 16,306,757 16,802,818 16,306,757 Due from other banks 53,563,141 58,981,698 53,563,141 58,981,698 Loans and advances to customers: − Overdraft 11,668,283 16,519,020 11,668,283 16,519,020 − Demand loans 183,415,050 186,399,332 202,608,128 190,034,011 − Promissory notes 5,817,744 3,755,115 6,744,625 4,070,833 − Mortgages 171,182,448 171,306,272 174,415,519 170,025,168 − Credit cards 1,952,822 1,801,196 1,952,822 1,801,196 Investment securities - Treasury bills 30,248,281 7,211,052 30,248,281 7,211,052 - Held to maturity 24,404,544 18,517,218 23,650,850 17,598,544 Financial liabilities Due to customers: − Time deposits 164,722,124 162,208,816 159,303,189 159,107,701 − Savings accounts 288,540,917 267,587,887 288,540,917 267,587,887 − Demand accounts 53,125,266 40,502,409 53,125,266 40,502,409

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

47

4 Financial risk management (Cont’d)

4.4 Fair values of financial assets and liabilities (Cont’d)

(b) Fair value hierarchy IFRS 13 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable 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 following fair value hierarchy:

• Level 1 – Inputs that are quoted market prices (unadjusted) in active markets for identical instruments.

• Level 2 – Inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data

• Level 3 – Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments

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

The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the statement of financial position.

4.4.1 Assets measured at fair value

Level 1 $

Level 2 $

Level 3 $

Total $

December 31, 2015

Available-for-sale financial assets - Investment securities - debt 1,860,216 6,338,164 - 8,198,380 - Investment securities - equity - 1,126,500 - 1,126,500 Total assets 1,860,216 7,464,664 - 9,324,880

December 31, 2014

Available-for-sale financial assets - Investment securities - debt 1,936,566 8,863,977 - 10,800,543 - Investment securities - equity - 1,235,700 - 1,235,700 Total assets 1,936,566 10,099,677 - 12,036,243

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

48

4 Financial risk management (Cont’d)

4.4 Fair values of financial assets and liabilities (Cont’d)

4.4.2 Financial instruments not measured at fair value

The following table sets out the fair value of financial instruments not measured at fair value and analyses them by the level in fair value hierarchy into which each fair value measurement categorized.

December 31, 2015 Level 1 Level 2 Level 3 Total fair

values

Total Carrying amounts

$ $ $ $ $ Assets

Cash and balances with Central Bank - 53,002,259 - 53,002,259 53,002,259

Treasury bills - 30,248,281 - 30,248,281 30,248,281

Due from other banks - 53,563,141 - 53,563,141 53,563,141

Loans and advances to financial institutions - 16,802,818 - 16,802,818 16,802,818

Loans and advances to customers - 397,389,377 - 397,389,377 374,036,347

Held to maturity investments security - 23,650,850 - 23,650,850 24,404,544 Liabilities Deposits from customers - 500,969,372 - 500,969,372 506,388,307 Other liabilities - 5,217,292 - 5,217,292 5,217,292

December 31, 2014 Level 1 Level 2 Level 3 Total fair

values

Total Carrying amounts

$ $ $ $ $ Assets Cash and balances with Central Bank - 37,327,895 - 37,327,895 37,327,895 Treasury bills - 7,211,052 - 7,211,052 7,211,052 Due from other banks - 58,981,698 - 58,981,698 58,981,698 Loans and advances to financial institutions - 16,306,757 - 16,306,757 16,306,757 Loans and advances to customers - 382,450,228 - 382,450,228 379,780,935 Held to maturity investments security - 17,598,544 - 17,598,544 18,517,218

Liabilities Deposits from customers - 467,197,997 - 467,197,997 470,299,112 Other liabilities - 5,272,726 - 5,272,726 5,272,726

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

49

4 Financial risk management (Cont’d)

4.4 Fair values of financial assets and liabilities (Cont’d)

4.4.2 Financial instruments not measured at fair value

Where available, the fair value of loans and advances is based on observable market transactions. Where observable market transactions are not available fair value is estimated using valuation models, such as discounted cash flow techniques. Inputs into the valuation techniques include the expected lifetime credit losses, interest rates, prepayment rates and primary origination or secondary market spreads. For collateral-dependant impaired loans the fair value is measured based on the underlying collateral. Inputs into the models may include data from third party brokers and information obtained from other market participants, which includes observed primary and secondary transactions. To improve the accuracy of the valuation estimates, loans are grouped into portfolios with similar characteristics such as the quality of collateral, repayment and delinquency rates.

No fair value disclosures are provided for equity investment securities of $1,519,588 (2014 - $1,888,124) that are measured at cost because their fair value cannot be measured reliably. The investments are neither redeemable nor transferable and there is no market for them. The Bank does not intend to dispose of these investments.

4.5 Capital management

The Bank’s objectives when managing capital, which is a broader concept than the “equity” on the face of balance sheet is:

• to comply with the capital requirements set by the Eastern Caribbean Central Bank (“the ECCB”);

• to safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and

• to maintain a strong capital base to support the development of its business.

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

The ECCB requires each bank to: (a) hold the minimum level of paid up capital of $20,000,000 and (b) maintain a ratio of total regulatory capital to the risk-weighted asset (the “Basel ratio”) at or above the minimum indicated in the prudential guidelines. Banks are allowed a grace period of 450 days from the date of assent to obtain this new paid up capital requirement of $20,000,000. The Bank’s regulatory capital as managed by management is divided into two tiers:

• Tier 1 capital: share capital, retained earnings and reserves created by appropriations of retained earnings.

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

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

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

50

4 Financial risk management (Cont’d)

4.5 Capital management (Cont’d)

The table below summarises the composition of regulatory capital and the ratios of the Bank for the years ended December 31, 2015 and 2014. During those two years, the Bank complied with all of the externally imposed capital requirements.

2015 $

2014 $

Tier 1 capital Share capital 7,971,454 7,971,454 Statutory reserve 7,971,454 7,971,454 Retained earnings 55,965,120 54,772,165 Total qualifying Tier 1 capital 71,908,028 70,715,073 Tier 2 capital Revaluation reserve – available-for-sale investments 375,324 742,680 Revaluation reserve – property, plant and equipment 3,722,256 3,727,625 Total qualifying Tier 2 capital 4,097,580 4,470,305 Total regulatory capital 76,005,608 75,185,378 Risk-weighted assets: On-balance sheet 379,269,200 390,041,700 Off-balance sheet 8,101,700 3,616,600 Total risk-weighted assets 387,370,900 393,658,300 Capital adequacy ratio - required 8% 8% Capital adequacy ratio - actual 19% 18% Basel ratio – required 8% 8% Basel ratio – actual 20% 19%

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.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

51

5 Critical accounting estimates, and judgements in applying accounting policies

The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

(a) Impairment losses on loans and advances The Bank reviews its loan portfolio to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in profit or loss, the Bank makes judgement as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a Bank, or local economic conditions that correlate with defaults on assets in the Bank. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extent that the net present value of estimated cash flows differs by +/-5%, the portfolio provision would be estimated to be $1,496,625 (2014 – 998,536) lower/higher.

Assets accounted for at amortised cost are evaluated for impairment on a basis described in Note 3(e) (vii).

The specific component of the total allowances for impairment applies to financial assets evaluated individually for impairment (those that have been outstanding for more than 90 days and considered non-performing according to the guidelines of the regulators, the ECCB) and is based upon management’s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgements about a debtor’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merit, and the workout strategy and estimate of cash flows considered recoverable are independently approved by the credit risk function.

A collective component of the total allowance is established for:

• Groups of homogenous loans that are not considered individually significant; and

• Groups of assets that are individually significant but that were not found to be individually impaired (Incurred But Not Reported - IBNR).

Collective allowance for groups of homogenous loans is established using a formula approach based on historic loss rate experience.

Collective impairment for groups of assets that are individually significant but that were not found to be individually impaired (IBNR) cover credit losses inherent in portfolios of loans and advances, and held-to-maturity investment securities with similar credit risk characteristics when there is objective evidence to suggest that they contain impaired loans and advances, and held-to-maturity investment securities, but the individual impaired items cannot yet be identified.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

52

5 Critical accounting estimates, and judgements in applying accounting policies (Cont’d)

(a) Impairment losses on loans and advances (Cont’d)

In assessing the need for collective loss allowances, management considers factors such as credit quality, portfolio size, concentrations and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowances depends on the estimates of future cash flows for specific counterparty allowances and the model assumptions and parameters used in determining collective allowances.

(b) Impairment of available-for-sale equity investments The Bank determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgement. In making this judgment, the Bank evaluates among other factors, when there is evidence of deterioration in the financial health of the investee industry and sector performance, changes in technology and operational and financing cash flows. During the year, as in 2014, the Bank did not recognise impairment losses on available-for-sale.

(c) Held-to-maturity investments The Bank follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgement. In making this judgement, the Bank evaluates its intention and ability to hold such investments to maturity. If the Bank fails to keep these investments to maturity other than for the specific circumstances – for example, selling an insignificant amount close to maturity – it will reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value, not amortised cost. If the entire held-to-maturity investments are tainted, the carrying value would decrease by $797,658 (2014 - $918,674) with a corresponding entry in the fair value reserve in comprehensive income.

(d) Income taxes Significant judgment is required in determining the provision for income taxes including any liabilities for tax audit issues. There are some transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business.

(e) Fair value

The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described in Note 3(e)(vi). For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.

The Bank’s accounting policy on fair value measurements is discussed in Note 4.4(b).

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

53

6 Cash and balances with Central Bank

2015

$ 2014

$

Cash in hand 9,714,951 10,651,895 Balances with Central Bank other than Mandatory reserve deposits 14,651,528 - Included in cash and cash equivalents (Note 15) 24,366,479 10,651,895 Mandatory reserve deposits with Central Bank 28,635,780 26,676,000 53,002,259 37,327,895 The Bank is required to maintain in cash and deposits with the Central Bank, reserve balances in relation to the deposit liabilities of the institution. Mandatory reserve deposits are not available for use in the Bank’s day-to-day operations. The balances with the Central Bank are non-interest bearing.

7 Due from other banks

2015

$ 2014

$

Items in the course of collection from other banks (2,362,587) 3,186,222 Placements with other banks 55,925,728 55,795,476 Included in cash and cash equivalents (Note 15) 53,563,141 58,981,698 The weighted average effective interest rate in respect of interest bearing deposits at December 31, 2015 was 0.1% (2014- 0.05%).

8 Treasury bills

2015

$ 2014

$ Treasury bills 30,248,281 7,211,052 The Bank has invested in treasury bills issued by the Government of Saint Lucia. The weighted average effective interest rate of the treasury bills in 2015 was 4.82% (2014 – 5.07%). All treasury bills have fixed interest rates and they mature within one year of the end of the financial year.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

54

9 Loans and advances to financial institutions

2015

$ 2014

$

Reverse repos 16,802,818 16,306,757 Reverse repos are securities that have been purchased under agreements to resell. The weighted average effective interest rate of the reverse repos in 2015 was 2.89% (2014 - 3.26%). Reverse repos mature within one year.

Allowance account for losses on loans and advances to financial institutions as at December 31, 2015 and 2014 was nil.

10 Loans and advances to customers

2015

$

2014

$

Overdraft 11,825,694 16,685,093 Demand loans 200,286,291 206,972,718 Promissory notes 6,083,454 4,245,247 Mortgages 179,966,658 180,243,485 Credit cards 1,952,822 1,801,196 400,114,919 409,947,739 Less provision for impairment of loans and advances (Note 11) (26,078,572 ) (30,166,804 ) 374,036,347 379,780,935

Current 27,909,498 35,654,640 Non-current 346,126,849 344,126,295 374,036,347 379,780,935 The weighted average effective interest rate on productive loans stated at amortised cost at December 31, 2015 was 8.51% (2014 - 8.63%) and productive overdraft stated at amortised cost was 10.45% (2014 – 10.93%).

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

55

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

Overdraft

$

Demand loans

$

Promissory notes

$ Mortgage

$

Total

$

Balance at January 1, 2015 166,072 20,573,387 490,132 8,937,213 30,166,804

Provision for loan impairment (Note 29) (8,661) 7,454,263 82,592 1,739,298 9,267,492 Loans written off during the year - (11,156,408 ) (307,015 ) (1,892,301 ) (13,355,724 )

At December 31, 2015

157,411 16,871,242 265,709 8,784,210 26,078,572

Balance at January 1, 2014 81,510 19,862,606 648,452 5,754,997 26,347,565 Provision for loan impairment (Note 29) 84,562 6,323,511 20,323 3,400,879 9,829,275 Loans written off during the year - (5,612,730 ) (178,643 ) (218,663 ) (6,010,036 ) At December 31, 2014 166,072 20,573,387 490,132 8,937,213 30,166,804 The total impairment provision for loans and advances to customers is $26,078,572 (2014 - $30,166,804) of which $20,676,407 (2014 - $24,604,051) represents the individually impaired loans and the remaining amount of $5,402,165 (2014 - $5,562,753) represents the general portfolio provision.

12 Investment securities

2015

$ 2014

$

Available-for-sale Equity securities – at fair value - Listed 1,126,500 1,235,700 Equity securities – at cost - Unlisted 3,251,528 3,595,064 Allowance for impairment (1,706,940) (1,706,940 ) Debt securities – at fair value: - Listed 7,477,048 9,411,501 - Unlisted 915,096 1,239,271 Allowance for impairment (193,764) (193,764 ) Total securities: available-for-sale 10,869,468 13,580,832

Held-to-maturity Debt securities - at amortised cost: - Listed 15,957,188 10,417,275 - Unlisted 8,447,356 8,099,943 Total securities: held-to-maturity 24,404,544 18,517,218 Current 21,356,868 17,881,270 Non-current 13,917,144 14,216,780 35,274,012 32,098,050

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

56

12 Investment securities (Continued) Unlisted available-for-sale equity securities totalling $1,544,588 (2014 - $1,888,124) are carried at cost less impairment. The Bank is unable to reliably measure the fair value of the equity securities since the shares are not 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 at December 31, 2015 was 4.92% (2014 - 5.75%). The movements in available-for-sale and held-to-maturity financial assets during the year are as follows:

Available-for- sale

$

Held-to- maturity

$ At January 1, 2015 13,580,832 18,517,217 Additions 3,645,245 24,591,457 Disposals (sale and redemption) (5,989,253) (18,704,130) Gain from changes in fair value (367,356) - At December 31, 2015 10,869,468 24,404,544 At January 1, 2014 10,513,202 20,677,754 Additions 4,274,109 10,702,932 Disposals (sale and redemption) (878,269) (12,863,469) Gain from changes in fair value (328,210) - At December 31, 2014 13,580,832 18,517,217

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

57

13 Property, plant and equipment

Land and Building

$

Furniture and Fixtures

$ Equipment

$

Motor Vehicles

$

Work in progress

$ Total

$ Year ended December 31, 2014

Opening net book amount 9,155,529 764,227 3,462,869 47,985 470,843 13,901,453 Additions and transfers 1,388,729 170,787 663,198 175,000 66,238 2,463,952 Disposals and transfers – – – – (526,581) (526,581) Depreciation charge (Note 26) (445,923) (80,228) (711,298) (44,597) – (1,282,046) Closing net book amount 10,098,335 854,786 3,414,769 178,388 10,500 14,556,778 At December 31, 2014 Cost or valuation 11,926,028 2,096,178 13,611,780 261,000 10,500 27,905,486 Accumulated depreciation (1,827,693) (1,241,392) (10,197,011) (82,612) – (13,348,708) Net book amount 10,098,335 854,786 3,414,769 178,388 10,500 14,556,778 Year ended December 31, 2015

Opening net book amount 10,098,335 854,786 3,414,769 178,388 10,500 14,556,778

Additions and transfers 175,655 74,933 467,594 - 25,977 744,159

Depreciation charge (Note 26) (504,300) (92,016) (640,293) (35,678) - (1,272,287)

Closing net book amount 9,769,690 837,703 3,242,070 142,710 36,477 14,028,650 At December 31, 2015

Cost or valuation 12,101,683 2,171,111 14,079,374 261,000 36,477 28,649,645

Accumulated depreciation (2,331,993) (1,333,408) (10,837,304) (118,290) - (14,620,995)

Net book amount 9,769,690 837,703 3,242,070 142,710 36,477 14,028,650

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

58

13 Property, plant and equipment (Continued)

Land and buildings were revalued in 2012 on the basis of open market value by a qualified valuer. The decrease arising from this valuation was charged to revaluation reserve.

If land and buildings were stated on the historical cost basis, the net book value would be:

2015

$ 2014

$

Cost 6,512,455 6,387,571

Accumulated depreciation based on historical cost (3,254,562) (3,182,877 ) Depreciated historical cost 3,257,893 3,204,694

Valuation techniques Significant unobservable

inputs Inter-relationship between key unobservable inputs and fair value measurement

Market based approach: The approach is based on the principle of substitution whereby the purchaser with perfect knowledge of the property market pays no more for the subject property than the cost of acquiring an existing comparable assuming no cost delay in making the substitution.

The approach requires comparison of the subject property with others of similar design and utility, inter alia, which were sold in the recent past.

However, as no two properties are exactly alike, adjustment is made for the difference between the property subject to valuation and comparable properties.

• Details of the sales of comparable properties

• Conditions influencing

the sale of the comparable properties.

• Comparability

adjustment.

The estimated fair value would increase/(decrease) if:

• Sale value of comparable properties were higher/(lower).

• Comparability adjustment

were higher/(lower).

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

59

14 Intangible assets

Software $

December 31, 2014 Opening net book amount 999,244 Additions for the year 294,504 Amortization charge for the year (285,981 ) Closing net book amount 1,007,767

As at December 31, 2014 Cost 2,980,425 Accumulated depreciation (1,972,658 ) Net book amount 1,007,767 December 31, 2015 Opening book amount 1,007,767 Additions for the year 268,893 Amortization charge for the year (300,086 ) Closing net book amount 976,574 As at December 31, 2015 Cost 3,249,318 Accumulated depreciation (2,272,744 ) Net book amount 976,574

15 Cash and cash equivalents

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

2015

$ 2014

$

Cash and balances with Central Bank (Note 6) 24,366,479 10,651,895 Due from other banks (Note 7) 53,563,141 58,981,698 77,929,620 69,633,593

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

60

16 Other assets

2015

$ 2014

$

Accounts receivable 6,055,209 1,741,121 Inventories of stationery and supplies 213,487 199,013 Prepayments 1,030,365 864,473 7,299,061 2,804,607

17 Due to customers

2015

$ 2014

$ Time deposits 164,722,124 162,208,816 Savings accounts 288,540,917 267,587,887 Demand amounts 53,125,266 40,502,409

506,388,307 470,299,112 Current 502,987,317 467,357,134 Non-current 3,400,990 2,941,978 506,388,307 470,299,112 All deposits carry fixed interest rates. The weighted average effective interest rate of customers’ deposits at December 31, 2015 was 2.26% (2014 3.17%).

18 Other liabilities

2015

$ 2014

$

Manager’s cheques outstanding 1,501,617 2,190,597 Accounts payable and accrued expenses 3,062,961 2,428,680 Dividends payable on ordinary shares 652,714 653,449 5,217,292 5,272,726

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

61

19 Defined benefit asset Net Asset in Balance Sheet The amount recognised in the balance sheet at December 31, 2015 is determined as follows:

2015

$ 2014

$

Present value of funded obligations 4,013,000 3,817,000 Fair value of plan assets (5,686,000 ) (5,199,000 ) Net defined benefit asset (1,673,000 ) (1,382,000 ) Movement in defined benefit obligations

2015

$ 2014

$

Defined benefit obligation at start of year 3,817,000 3,745,000 Current service cost 123,000 150,000 Interest cost 266,000 257,000 Members’ contributions 59,000 59,000 Experience adjustments 154,000 - Actuarial gains from changes in financial

assumptions (230,000 ) (398,000 ) Benefits paid (22,000 ) (150,000 ) Defined benefit obligation at end of year 4,013,000 3,817,000

The defined benefit obligation is allocated between the Plan’s members as follows:

2015 2014 - Active members 86% 85% - Deferred members 10% 10% - Pensioners 4% 5%

The weighted average duration of the defined benefit obligation at the year end was 11.8 years. 99% of the benefits for active members are vested. 22% of the defined benefit obligation for active members is conditional on future salary increases.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

62

19 Defined benefit asset (Continued) Movement in fair value of plan assets

2015

$ 2014

$

Fair value of Plan Assets at start of year 5,199,000 4,819,000 Interest income 370,000 340,000 Return on Plan Assets, excluding interest income (70,000 ) (50,000 ) Bank’s contributions 150,000 181,000 Members’ contributions 59,000 59,000 Benefits paid (22,000 ) (150,000 ) Fair value of Plan assets at end of year 5,686,000 5,199,000

Actual return on Plan Assets 300,000 290,000 Allocation of plan assets

2015

$ 2014

$

Government issued nominal bonds 5,555,000 4,814,000 Cash and cash equivalents 131,000 385,000 Fair value of Plan assets at end of year 5,686,000 5,199,000 All asset values as at December 31, 2015 were provided by the Bank. The fair value of the Government bonds has been calculated on an amortised cost basis. The Plan’s assets are invested in accordance with a strategy agreed with the Plan’s trustees which is largely driven by the statutory constraints and asset availability. There are no asset-liability matching strategies used by the Plan. Expense Recognised in Profit or Loss

2015

$ 2014

$

Current service cost 123,000 150,000 Net interest on net defined benefit asset (104,000 ) (83,000 ) Net pension cost (Note 28) 19,000 67,000

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

63

19 Defined benefit asset (Continued)

Re-measurements recognised in Other Comprehensive Income

2015

$ 2014

$

Experience gains (160,000) (194,000 ) Total amount recognised in Other Comprehensive Income (160,000) (194,000 ) Reconciliation of opening and closing balance sheet entries

2015

$ 2014

$

Net defined benefit asset at January 1 (1,382,000) (1,074,000 ) Net Pension cost 19,000 67,000 Re-measurements recognised in Other Comprehensive Income (160,000) (194,000 ) Bank contributions paid (150,000) (181,000 ) Net defined benefit asset at December 31 (1,673,000) (1,382,000 ) Summary of principal assumptions as at December 31

2015

% 2014

%

Discount rate 7 7 NIC earnings increases 2 2 Pension increases 0 0 Future salary increases 4 4 Assumptions regarding future mortality are based on published mortality tables. The life expectancies underlying the value of the defined benefit obligation as at December 31, 2014 and 2015 are as follows:

Life expectancy at age 60 for current pensioner years - Male 21 21 - Female 25 25 Life expectancy at age 60 for current members age 40 in years Future salary increases

- Male 21 21 - Female 25 25

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

64

19 Defined benefit asset (Continued)

Sensitivity analysis

The calculation of the defined benefit obligation is sensitive to the assumptions used. The following table summarises how the defined benefit obligation as at December 31, 2015 would have changed as a result of a change in assumptions.

1% pa

increase 1% p.a.

decrease

%

%

- Discount rate 402,000 491,000 - Future salary increases 310,000 (257,000) An increase in 1 year in the assumed life expectancies shown above would increase the defined benefit obligation at December 2015 by $41,000.

These sensitivities were calculated by re-calculating the defined benefit obligations using the revised assumptions. Although the analysis does not take account of the full distribution of cash flows expected under the plan, it does provide an approximation of the sensitivity of the assumptions shown. Funding The Bank meets the balance of the cost of funding the defined benefit pension plan and the Bank must pay contributions at least equal to those paid by members, which are fixed. The funding requirements are based on regular (at least every 4 years) actuarial valuations of the Plan and the assumptions used to determine the funding required may differ from those set out above. The Bank expects to pay $184,000 to the Pension Plan during 2016.

20 Deferred income tax liability Deferred income tax is recognised in respect of temporary differences using a principal tax rate of 30%.

2015

$ 2014

$ At beginning of year (669,884 ) (540,345 )

Charge for the year (Note 30) (85,644 ) (129,539 ) Deferred income tax liability at end of year (755,528 ) (669,884 ) The deferred income tax liability comprises the following temporary differences:

2015

$ 2014

$ Accelerated capital allowances (845,428 ) (850,945)

Defined benefit asset (1,673,000 ) (1,382,000) (2,518,428 ) (2,232,945) Deferred tax liability at income tax rate of 30% (755,528 ) (669,884)

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

65

21 Share capital

No. of

Shares 2015

$ No. of

Shares 2014

$

Authorized: 5,000,000 ordinary shares of no par value At beginning and end of year 4,999,966 7,971,454 4,999,966 7,971,454

The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Bank.

22 Reserves

2015

$ 2014

$

Statutory reserve 7,971,454 7,971,454 Revaluation reserve – Property, plant and equipment 3,722,256 3,727,625 Revaluation reserve – Available for sale securities 375,324 742,680 12,069,034 12,441,759 Statutory reserve Pursuant to Section 14(1) of the Banking Act of St. Lucia No. 34 of 2006, the Bank shall, out of its net profits of each year, transfer to that reserve a sum equal to not less than twenty percent of such profits whenever the amount of the fund is less than one hundred percent of the paid-up capital of the Bank.

Section 45(1) of the revised Banking Act No. 3 of 2015 (enacted in November 2015) requires Banks to maintain a reserve fund. Every licensed financial institution shall maintain a reserve fund and shall, out of its net profits of each year transfer to that fund a sum equal to not less than twenty per cent of profits whenever the amount of the reserve fund is less than a hundred per cent of the paid-up or, or as the case may be, assigned capital of the licensed financial institution. The share capital of the Bank is unchanged and a transfer is not required at this time. This section will become relevant to the Bank during the financial year ending December 31, 2016. Revaluation reserve – Property, plant and equipment The revaluation reserve relates to the revaluation of property, plant and equipment above its previous carrying amount. The Bank transfers a portion of the reserve to retained earnings annually as the asset is used by the Bank. The value of the transfer is the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

66

22 Reserves (Continued)

Revaluation reserve – Available for sale securities The reserve comprises the cumulative net change in the fair value of available for sale financial assets until the assets are derecognised or impaired.

23 Net interest income

2015

$ 2014

$

Interest and similar income Loans and advances 27,853,000 32,037,732 Deposits with banks 5,935 4,993 Investment securities 3,116,578 2,753,607 30,975,513 34,796,332

Interest expense and similar charges Time deposits 5,222,423 5,696,843 Savings deposits 7,115,219 8,321,224 Demand deposits 35,901 36,461 12,373,543 14,054,528 Net interest income 18,601,970 20,741,804

24 Other operating income

2015

$ 2014

$

Commission and other income 5,145,708 3,791,217 Foreign exchange 2,889,200 2,792,960 Fee income 961,564 638,936 Dividend income 82,815 145,747 9,079,287 7,368,860

25 Other operating expenses

2015

$ 2014

$

Administrative expenses (Note 26) 7,923,476 7,120,553 Staff costs (Note 27) 6,680,953 6,958,985 Depreciation and amortisation (Note 13 and 14) 1,572,373 1,568,027 Operating lease rental 1,097,544 1,193,569 17,274,346 16,841,134

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

67

26 Administrative expenses

2015

$ 2014

$

Other operating expenses 746,398 785,662 Card services expense 1,151,000 846,290 Bank charges 260,550 174,969 Advertising 705,045 712,526 Computer expense 928,526 985,137 Postage, telephone and telexes 772,099 720,790 Utilities 631,689 671,855 Security expenses 622,442 592,105 Repairs and maintenance 426,239 385,582 Directors’ fees and expenses 297,200 278,421 Professional fees 603,937 236,391 Audit fees 199,625 194,000 Insurance 183,098 183,705 Stationery 238,585 194,167 Bank licence 128,000 128,000 Rates and taxes 29,043 30,953 Total administrative expenses (note 25) 7,923,476 7,120,553

27 Staff costs

2015

$ 2014

$

Salaries and wages 5,491,334 5,508,762 Other employee benefits 948,461 1,165,262 Profit sharing - - Social security costs 222,158 217,961 Pension costs (Note 19) 19,000 67,000 6,680,953 6,958,985 The average number of employees during the year was 126 (2014 -125).

28 Impairment losses

2015

$ 2014

$

Impairment losses from loans and advances (Note 11) 9,267,492 9,829,275

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

68

29 Income tax expense

2015

$ 2014

$

Current tax 26,189 829,237 Deferred tax (Note 20) 85,644 129,539 111,833 958,776 Tax on the Bank’s income before income tax differs from the theoretical amount that would arise using the statutory tax rate of 30% as follows:

2015

$ 2014

$

Profit before income tax 1,139,419 1,440,255 Tax calculated at the statutory tax rate of 30% 341,826 432,077 Tax effect of exempt income (1,606,666) (1,488,597) Non-deductible expenses 1,687,849 2,367,552 Tax incentives (311,176) (352,256) Tax at effective rate of 9.8% (2014 – 66.6%) 111,833 958,776 There was no income tax effect relating to components of other comprehensive income.

30 Earnings per share

2015

$ 2014

$

Per financials 0.21 0.10

Weighted average no. of shares 4,999,966 4,999,966

Net income for the year 1,027,586 481,479

Basic earnings per share

The calculation of basic earnings per share is based on the net profit/(loss) attributable to shareholders of $1,027,586 (2014 - $481,479) divided by the weighted average number of shares in issue ranking for dividend during the year of 4,999,966 (2014- 4,999,966).

31 Dividends

No dividends were appropriated from retained earnings for the year ended December 31, 2015 and December 31, 2014.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

69

32 Related party transactions

A related party is a person or entity that is related to the entity that is preparing its financial statements (referred to in IAS 24 Related Party Disclosures as the “reporting entity”). A party is related to the company, if: (a) A person or a close member of that person’s family is related to a reporting entity if that person:

(i) has control or joint control over the reporting entity; (ii) has significant influence over the reporting entity; or (iii) is a member of the key management personnel of the reporting entity or of a parent of the

reporting entity. (b) An entity is related to a reporting entity if any of the following conditions applies:

(i) The entity and the reporting entity are members of the same Bank (which means that each parent, subsidiary and fellow subsidiary is related to the others).

(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a Bank of which the other entity is a member).

(iii) Both entities are joint ventures of the same third party. (iv) One entity is a joint venture of a third entity and the other entity is an associate of the third

entity. (v) The entity is a post-employment benefit plan for the benefit of employees of either the

reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.

(vi) The entity is controlled, or jointly controlled by a person identified in (a). (vii) A person identified in (a)(i) has significant influence over the entity or is a member of the

key management personnel of the entity (or of a parent of the entity). (viii) The entity, or any member of a group of which it is a part, provides key management

personnel services to the reporting entity or to the parent of the reporting entity.

A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.

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

Loan and advances to Directors and related entities

2015

$ 2014

$

Loans outstanding at beginning of year 7,879,407 5,604,197 Net loans issued for the year 869,161 2,275,210 Loans outstanding at end of year 8,748,568 7,879,407 Interest income earned 611,141 575,209

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

70

32 Related party transactions (Cont’d)

Loan and advances to key management personnel

2015

$ 2014

$

Loans outstanding at beginning of year 3,994,277 3,542,565 Net loans issued for the year (151,282) 451,712 Loans outstanding at end of year 3,842,995 3,994,277 Interest income earned 217,907 225,837 Loans and advances to Directors and other key management personnel are secured over property of the respective borrowers.

No impairment losses have been recorded against balances outstanding during the period with directors or key management personnel, and no specific allowance has been made for impairment losses on balances with directors or key management personnel and their immediate relatives at the reporting date. Deposits from Directors and related entities

2015

$ 2014

$

Deposits at beginning of year 3,892,192 5,810,539 Net deposits (repaid)/received during the year 2,986,200 (1,918,347 ) Deposits outstanding at end of year 6,878,392 3,892,192 Interest expense on deposits 130,872 116,335

Deposits from key management personnel

2015

$ 2014

$

Deposits at beginning of year 691,916 662,499 Net deposits received during the year 82,784 29,418 Deposits outstanding at end of year 774,700 691,917 Interest expense on deposits 20,326 22,044

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2015 (Expressed in Eastern Caribbean dollars)

71

32 Related party transactions (Cont’d)

Key management personnel compensation

2015

$ 2014

$

Salaries and other short-term benefits 1,223,623 1,292,371 Post and other employment benefits 404,278 371,441 1,627,901 1,663,812

At the end of the financial year, directors’ holding of shares totalled 63,715 shares or 1.27% of shares outstanding, (2014 - 63,715 or 1.27%).

33 Contingent liabilities and commitments

(a) Loans commitment, guarantee and other financial facilities

At December 31, 2014, the Bank had contractual off-balance sheet financial instruments that commit it to extend credit to customers, guarantee and other facilities as follows:

2015

$ 2014

$

Loan commitments 40,213,243 17,790,036 Guarantees and standby letters of credit 590,731 585,501 40,803,974 18,375,537

34 Operating leases

The Bank leases a number of branch and other office facilities under operating leases. Lease payments are renegotiated when the previous lease term has expired and typically run for a period of 5 years. Some leases provide for additional rent payments that are based on changes in local price indices. At the year end, several operating lease agreements were under negotiation. At December 31, 2015 the future minimum lease payments under non-cancellable leases were as follows:-

2015

2014

$ $

Within one year 1,078,074 1,070,262

Within two to five years 2,722,810 3,627,859 3,800,884 4,698,121

1st NATIONAL BANK ST. LUCIA LIMITED

Financial Statements

December 31, 2014

(Expressed in Eastern Caribbean dollars)

1st NATIONAL BANK ST. LUCIA LIMITED

Table of Contents Page

Independent Auditors’ Report 1

Balance Sheet 2

Statement of Changes in Equity 3

Statement of Profit or Loss 4

Statement of Other Comprehensive Income 5

Statement of Cash Flows 6

Notes to Financial Statements 7 – 69

KPMG Eastern Caribbean

Morgan Building Telephone (758) 453-1471

L’Anse Road (758) 453-0625

P.O. Box 1101 Fax (758) 453-6507

Castries, St. Lucia e-Mail kpmg@kpmg.lc

KPMG Eastern Caribbean, a partnership registered in Antigua &, Barbuda,

St. Lucia and St. Vincent and the Grenadines, and a member firm of the

KPMG network of independent member firms affiliated with Frank V. Myers Brian A. Glasgow

KPMG International Cooperative (“KPMG International”), a Swiss entity Cleveland S. Seaforth Reuben M. John

INDEPENDENT AUDITORS’ REPORT

The Shareholders

1st National Bank St. Lucia Limited

Report on the Financial Statements

We have audited the accompanying financial statements of 1st National Bank St. Lucia Limited (the

Bank), which comprise the balance sheet as at December 31, 2014, and the statements of changes in

equity, profit or loss, other comprehensive income and cash flows for the year then ended, and a

summary of significant accounting policies and other explanatory information.

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.

Auditors’ Responsibility

Our responsibility is to express an opinion on the 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 our 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, we consider internal control relevant to the entity's preparation and fair

presentation of the financial statements in order to design audit procedures that are appropriate in the

circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's

internal control. An audit also includes evaluating the appropriateness of accounting policies used and

the reasonableness of accounting estimates made by management, as well as evaluating the overall

presentation of the financial statements.

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

our audit opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of

the Bank as at December 31, 2014 and its financial performance and its cash flows for the year then

ended in accordance with International Financial Reporting Standards.

KPMG Eastern Caribbean

April 15, 2015

Castries, Saint Lucia

1st National Bank St. Lucia Limited

Statement of Profit or loss

For the year ended December 31, 2014

(Expressed in Eastern Caribbean dollars)

The notes on pages 7 to 69 are an integral part of these financial statements.

3

Note

2014

$

2013

$

Interest and similar income 23 34,796,332 32,759,136

Interest expense and similar charges 23 (14,054,528 ) (13,736,717 )

Net interest income 20,741,804 19,022,419

Other operating income 24 7,368,860 7,409,515

Operating income 28,110,664 26,431,934

Other operating expenses 25 (16,841,134 ) (16,606,219 )

Impairment losses 28 (9,829,275 ) (9,460,185 )

Profit before income tax 1,440,255 365,530

Income tax expense 29 (958,776 ) (583,962 )

Net profit/(loss) for the year 481,479 (218,432 )

Earnings per share

(expressed in EC$ per share)

- basic and diluted 30 0.10 (0.04 )

1st National Bank St. Lucia Limited

Statement of Other Comprehensive Income

For the year ended December 31, 2014

(Expressed in Eastern Caribbean dollars)

The notes on pages 7 to 69 are an integral part of these financial statements.

4

2014

$ 2013

$

Profit/(loss) for the year 481,479 (218,432 ) Other comprehensive income Items that will never be reclassified to profit or loss Re-measurement of defined benefit asset (Note 19) 194,000 30,000 Items that may be reclassified to profit or loss Net fair value losses on available-for-sale financial assets (328,210 ) (72,220 ) Other comprehensive loss for the year (134,210 ) (42,220 ) Total comprehensive income/(loss) for the year 347,269 (260,652 )

1st National Bank St. Lucia Limited

Statement of Changes in Equity

For the year ended December 31, 2014

(Expressed in Eastern Caribbean dollars)

The notes on pages 7 to 69 are an integral part of these financial statements.

5

Share

Capital $

Statutory Reserve

$

Revaluation Reserve

$

Revaluation Reserve –

available – for-sale

$

Retained Earnings

$

Total Equity

$

Balance at January 1, 2013 7,971,454

7,971,454 3,737,951 1,143,110 56,274,778 77,098,747 Loss for the year - - - - (218,432 ) (218,432 ) Fair value loss on available-for- sale financial assets - - - (72,220 ) - (72,220 )

Re-measurement defined benefit asset 19 - - - - 30,000 30,000

Total other comprehensive income - - - (72,220 ) (188,432 ) (260,652 )

Dividends relating to 2012 31 - - - - (1,999,986 ) (1,999,986 )

Transfer to retained earnings - - (7,046 ) - 7,046 -

Balance at December 31, 2013 7,971,454 7,971,454 3,730,905 1,070,890 54,093,406 74,838,109

Balance at January 1, 2014 7,971,454 7,971,454 3,730,905 1,070,890 54,093,406 74,838,109 Comprehensive income - - - -

Profit for the year - - - - 481,479 481,479

Fair value loss on available-for- sale financial assets - - - (328,210 ) - (328,210 )

Re-measurement of defined benefit asset 19 - - - - 194,000 194,000

Total other comprehensive income - - - (328,210 ) 675,479 347,269

Transfer to retained earnings - - (3,280 ) - 3,280 -

Balance at December 31, 2014 7,971,454 7,971,454 3,727,625 742,680 54,772,165 75,185,378

1st National Bank St. Lucia Limited

Statement of Cash Flows

For the year ended December 31, 2014

(Expressed in Eastern Caribbean dollars)

The notes on pages 7 to 69 are an integral part of these financial statements.

6

Note

2014

$ 2013

$ Cash flows from operating activities Profit before income tax 1,440,255 365,530

Adjustments for: Depreciation and amortisation 13, 14 1,568,027 1,502,921 Loss on disposal of property, plant and equipment 24 - 20,078 Impairment losses on investments - 109,083 Impairment losses on loans and advances 28 9,829,275 9,351,102 Defined benefit costs 19 67,000 62,000 Dividend income 24 (145,747 ) (100,356 ) Interest and similar income 23 (34,796,332 ) (32,759,136 ) Interest expense and similar charges 23 14,054,528 13,736,717 Cash flow before changes in operating assets and liabilities (7,982,994 ) (7,712,061 ) Increase in mandatory reserve deposits with Central Bank (1,305,525 ) (1,565,430 ) Decrease in loans and advances to financial institutions 5,886,129 1,665,053 Increase in loans and advances to customers (29,734,641 ) (21,896,243 ) Decrease/(increase) in other assets 4,435,526 (1,565,215 ) Increase in due to customers 38,158,733 29,490,061 Increase/(decrease) in other liabilities 1,343,981 (1,132,669 )

Cash from/(used in) operations 10,801,209 (2,716,504 ) Interest and similar income received 32,998,513 33,916,776 Interest expense and similar charges paid (14,296,957 ) (13,171,974 ) Income taxes paid (443,336 ) (1,004,009 ) Net cash generated from operating activities 29,059,429 17,024,289 Cash flows from investing activities Proceeds from sale of treasury bills, net 8,054,370 3,661,000 Purchase of investment securities (14,977,041 ) (11,206,072 ) Proceeds from sale of investment securities 13,828,573 8,747,203 Dividends received 145,747 100,356 Purchase of property, plant and equipment 13 (1,937,371 ) (2,359,963 ) Acquisition of intangible assets 14 (294,504 ) (403,437 )

Net cash from/(used in) investing activities 4,819,774 (1,460,913 ) Cash flows from financing activities Dividends paid on ordinary shares (36,671 ) (1,908,129 ) Defined benefit contributions paid 19 (181,000 ) (185,000 )

Net cash used in financing activities (217,671 ) (2,093,129 ) Net increase in cash and cash equivalents 33,661,532 13,470,247 Cash and cash equivalents, beginning of year 35,972,061 22,501,814 Cash and cash equivalents, end of year 15 69,633,593 35,972,061

1st National Bank St. Lucia Limited

Notes to Financial Statements

December 31, 2013

(Expressed in Eastern Caribbean dollars)

7

1 Reporting entity

1st National Bank St. Lucia Limited, (the Bank) was incorporated in Saint Lucia in December 1937 and continued under the Companies Act of 1996. The Bank is subject to the provisions of the Banking Act of Saint Lucia No. 34 of 2006 and the Companies Act of 1996. It commenced trading in January 1938 and provides retail banking services including the acceptance of deposits, granting of loans, the provision of foreign exchange services, commercial banking services and electronic banking services.

The Bank has six branches and one Bureau De Change as at December 31, 2014. The registered office and principal place of business of the Bank is #21 Bridge Street, Castries, Saint Lucia.

2 Basis of preparation

(a) Statement of compliance The financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards (IFRS).

The financial statements were approved by the Board of Directors and authorized for issue on March 20, 2015.

(b) Basis of preparation

The financial statement have been prepared on the historical cost basis, except for the following

material items in the balance sheet that are measured at fair value:

• available-for-sale financial assets.

• land and buildings measured at revalued amounts

• Net defined benefit asset, which is measured at the fair value of plan assets less the

present value of the defined benefit obligation, as explained in Note 19.

(c) Functional and presentation currency These financial statements are presented in Eastern Caribbean dollars, which is the Bank’s functional currency. All financial information presented in Eastern Caribbean dollars has been rounded to the nearest dollar, except when otherwise indicated.

(d) Use of estimates and judgments The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Bank’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 5.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements are included in Note 5.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

8

2 Basis of preparation (Cont’d)

(e) Adoption of new accounting standards or amendments to standards

Except for changes below, the Bank has consistently applied the accounting policies to all periods

presented in these financial statements.

The Bank has adopted the following new standards and amendments to standards, including any

consequential amendments to other standards with a date of initial application of January 1, 2014.

(i) Offsetting Financial Assets and Financial Liabilities (Amendments to IAS32).

(ii) IFRIC 21 Levies

The changes above had no financial impact on the Bank’s financial statements.

f) New standards, and interpretations of and amendments to existing standards that are not

yet effective

Improvements to IFRS 2010-2012 and 2011-2013 cycles contain amendments to certain standards

and interpretations and are effective for accounting periods beginning on or after July 1, 2014. The

main amendments applicable to the Bank are as follows:

IFRS 13, Fair Value Measurement is amended to clarify that issuing of the standard,

and consequential amendments to IAS 39 and IFRS 9, did not intend to prevent entities

from measuring short-term receivables and payables that have no stated interest rate at

their invoiced amounts without discounting, if the effect of not discounting is

immaterial.

IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets. The standards

have been amended to clarify that, at the date of revaluation:

(i) the gross carrying amount is adjusted in a manner that is consistent with the

revaluation of the carrying amount of the asset and the accumulated depreciation

(amortization) is adjusted to equal the difference between the gross carrying

amount and the carrying amount of the asset after taking account of accumulated

impairment losses or

(ii) the accumulated depreciation (amortization) is eliminated against the gross

carrying amount of the asset.

IAS 24, Related Party Disclosures has been amended to extend the definition of

‘related party’ to include a management entity that provides key management personnel

services to the reporting entity, either directly or through a group entity. For related

party transactions that arise when key management personnel services are provided to a

reporting entity, the reporting entity is required to separately disclose the amounts that

it has recognized as an expense for those services that are provided by a management

entity; however, it is not required to ‘look through’ the management entity and disclose

compensation paid by the management entity to the individuals providing the key

management personnel services.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

9

2 Basis of preparation (Cont’d)

f) New standards, and interpretations of and amendments to existing standards that are not

yet effective (Cont’d)

IAS 40, Investment Property has been amended to clarify that an entity should assess

whether an acquired property is an investment property under IAS 40 and perform a

separate assessment under IFRS 3 to determine whether the acquisition of the

investment property constitutes a business combination.

The Bank has not yet assessed the impact that these standards will have on its 2016 financial statements.

IFRS 5, Non-current Assets Held for Sale and Discontinued Operations has been

amended to clarify that if an entity changes the method of disposal of an asset or

disposal group – i.e. reclassifies an asset or disposal group from held-for-distribution to

owners to held-for-sale or vice versa without any time lag, then the change in

classification is considered a continuation of the original plan of disposal and the entity

continues to apply held-for-distribution or held-for-sale accounting. At the time of the

change in method, the entity measures the carrying amount of the asset or disposal

group and recognizes any write-down (impairment loss) or subsequent increase in the

fair value less costs to sell/distribute of the asset or disposal group. If an entity

determines that an asset or disposal group no longer meets the criteria to be classified

as held-for-distribution, then it ceases held-for-distribution accounting in the same way

as it would cease held-for-sale accounting.

IFRS 7, Financial Instruments: Disclosures, has been amended to clarify when

servicing arrangements are in the scope of its disclosure requirements on continuing

involvement in transferred assets in cases when they are derecognized in their entirety.

A servicer is deemed to have continuing involvement if it has an interest in the future

performance of the transferred asset e.g. if the servicing fee is dependent on the amount

or timing of the cash flows collected from the transferred financial asset; however, the

collection and remittance of cash flows from the transferred asset to the transferee is

not, in itself, sufficient to be considered ‘continuing involvement’.

IFRS 7 has also been amended to clarify that the additional disclosures required by

Disclosures: Offsetting Financial Assets and Financial Liabilities (Amendments to

IFRS 7) are not specifically required for inclusion in condensed interim financial

statements for all interim periods; however, they are required if the general

requirements of IAS 34, Interim Financial Reporting, require their inclusion.

IAS 19, Employee Benefits, has been amended to clarify that high-quality corporate

bonds or government bonds used in determining the discount rate should be issued in

the same currency in which the benefits are to be paid. Consequently, the depth of the

market for high-quality corporate bonds should be assessed at the currency level and

not the country level.

The Bank will assess the impact that these amendments will have on its 2016 financial

statements.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

10

2. Basis of preparation (Cont’d)

f) New standards, and interpretations of and amendments to existing standards that are not

yet effective (Cont’d)

Amendments to IAS 16, Property, Plant and Equipment, and IAS 41, Biological

Assets, which are effective for annual reporting periods beginning on or after January 1,

2016, require a bearer plant, defined as a living plant, to be accounted for as property,

plant and equipment and included in the scope of IAS 16 instead of IAS 41. Therefore,

a company can elect to measure bearer plants at cost. However, the produce growing

on bearer plants will continue to be measured at fair value less costs to sell under IAS

41. The Bank will assess the impact that these amendments will have on its 2016

financial statements.

Amendments to IAS 19, Defined Benefits Plans: Employee Contributions, effective for

annual periods beginning on or after July 1, 2014, clarified the requirements that relate

to how contributions from employees or third parties that are linked to services should

be attributed to periods of services. In addition, it permits a practical expedient if the

amount of the contributions is independent of the number of years of services.

The Bank will assess the impact that the amendment will have on its 2015 financial

statements.

Amendments to IAS 16 and IAS 38, Clarification of Acceptable Methods of

Depreciation and Amortisation, are effective for accounting periods beginning on or

after January 1, 2016.

The amendment to IAS 16, Property, Plant and Equipment explicitly state that

revenue-based methods of depreciation cannot be used. This is because such

methods reflect factors other than the consumption of economic benefits embodied

in the assets.

The amendment to IAS 38, Intangible Assets introduce a rebuttable presumption

that the use of revenue-based amortisation methods is in appropriate for intangible

assets.

The Bank will assess the impact that these amendments will have on its 2016 financial

statements.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

11

2. Basis of preparation (Cont’d)

f) New standards, and interpretations of and amendments to existing standards that are not

yet effective (Cont’d)

IFRS 9, Financial Instruments, which is effective for annual reporting periods

beginning on or after January 1, 2018, replaces the existing guidance in IAS 39

Financial Instruments: Recognition and Measurement. IFRS 9 includes revised

guidance on the classification and measurement of financial assets and liabilities,

including a new expected credit loss model for calculating impairment of financial

assets and the new general hedge accounting requirements. It also carries forward the

guidance on recognition and derecognition of financial instruments from IAS 39.

Although the permissible measurement bases for financial assets – amortised cost, fair

value through other comprehensive income (FVOCI) and fair value though profit or

loss (FVTPL) - are similar to IAS 39, the criteria for classification into the appropriate

measurement category are significantly different. IFRS 9 replaces the ‘incurred loss’

model in IAS 39 with an ‘expected credit loss’ model, which means that a loss event

will no longer need to occur before an impairment allowance is recognized. The Bank

will assess the impact that the standard will have on its 2018 financial statements.

IFRS 15, Revenue from Contracts with Customers is effective for periods beginning on

or after January 1, 2017. It replaces IAS 11 Construction Contracts, IAS 18 Revenue,

IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction

of Real Estate, IFRIC 18 Transfer of Assets from Customers and SIC-31 Revenue –

Barter Transactions Involving Advertising Services. The new standard applies to

contracts with customers. However, it does not apply to insurance contracts, financial

instruments or lease contracts, which fall in the scope of other IFRSs. It also does not

apply if two companies in the same line of business exchange non-monetary assets to

facilitate sales to other parties. Furthermore, if a contract with a customer is partly in

the scope of another IFRS, then the guidance on separation and measurement contained

in the other IFRS takes precedence.

The Bank will assess the impact that the standards will have on its 2017 financial

statements.

g) Early adoption of standards

The Bank did not early-adopt any new or amended standards in 2014.

3 Significant accounting policies

The accounting policies set out below have been consistently applied to all periods presented in these financial statements, and have been applied consistently by the Bank, unless otherwise stated.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

12

3 Significant accounting policies (Cont’d)

(a) Functional and presentation currency Items in the financial statements are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The financial statements are presented in Eastern Caribbean dollars, which is the Bank’s functional and presentation currency.

(b) Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognized in the statement of comprehensive income. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the functional currency at foreign exchange rates ruling at the dates the values were determined.

(c) Cash and cash equivalents

For the purposes of the statement of cash flows, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and non-restricted balances with the Central Bank and deposits with other banks.

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

(e) Financial assets and financial liabilities

(i) Recognition

The Bank initially recognizes loans and advances, deposits and subordinated liabilities on the

date that they are originated. The 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 de-recognition are presented in the balance sheet as “Assets

pledged as collateral”, if the transferee has the right to sell or re-pledge them. All other

financial assets and liabilities are recognised initially on the trade date, which is the date that

the Bank becomes party to the contractual provisions of the instrument.

A financial asset or liability is measured initially at fair value plus, for an item not at fair

value through the profit or loss, transaction costs that are directly attributable to its

acquisition or issue.

(ii) Classification

Financial assets The Bank classifies its financial assets in one of the following categories:

• Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable

payments that are not quoted in an active market, other than: (a) those that the entity

intends to sell immediately or in the short term, which are classified as held for trading,

and those that the entity upon initial recognition designates as at fair value through

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

13

3 Significant accounting policies (Cont’d)

(e) Financial assets and financial liabilities (Cont’d)

(ii) Classification (Cont’d)

• Loans and receivables (Cont’d)

profit or loss; (b) those that the entity upon initial recognition designates as available for

sale; or (c) those for which the holder may not recover substantially all of its initial

investment, other than because of credit deterioration.

• Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or

determinable payments and fixed maturities that the Bank’s management has the positive

intention and ability to hold to maturity, other than: (a) those that the Bank upon initial

recognition designates as at fair value through profit or loss; (b) those that the Bank

designates as available for sale; and (c) those that meet the definition of loans and

receivables.

If the Bank were to sell other than an insignificant amount of held-to-maturity assets, the

entire category would be tainted and reclassified as available for sale.

• Available-for-sale

Available-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 prices or that are not classified as loans and

receivables, held to-maturity investments or financial assets at fair value through profit

or loss.

Financial liabilities

The Bank classifies its financial liabilities, other than financial guarantees and loan commitments,

as measured at amortised cost or fair value through profit or loss.

(iii)Derecognition

Financial assets

The Bank derecognizes a financial asset when the contractual rights to the cash flows from the

financial assets expire, or it transfers the rights to receive the contractual cash flows in a

transaction in which substantially all the risks and rewards of ownership of the financial assets

are transferred or in which the Bank neither transfers nor retains substantially all the risks and

rewards of ownership and it does not retain ownership of the financial asset. Any interest in

such transferred financial assets that qualify for derecognition that is created or retained by

the Bank is recognised as a separate asset or liability. On derecognition of a financial asset,

the difference between the carrying amount of the asset (or the carrying amount allocated to

the portion of the asset transferred), and the sum of (i) the consideration received (including

any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss

that had been recognized in other comprehensive is recognized in profit or loss.

The Bank enters into transactions whereby it transfers assets recognized on its balance sheet,

but retains either all or substantially all of the risks and rewards of the transferred assets or a

portion of them. If all or substantially all risks and rewards are retained, then the transferred

assets are not derecognised.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

14

3 Significant accounting policies (Cont’d)

(e) Financial assets and financial liabilities (Cont’d)

(iii)Derecognition (Cont’d)

Financial assets

Transfers of assets with retention of all or substantially all risks and rewards include, for

example, securities lending and repurchase transactions.

In transactions in which the Bank neither retains or transfers substantially all the risks and

rewards of ownership of a financial asset and it retains control over the asset, the Bank

continues to recognize the asset to the extent of its continuing involvement, determined by the

extent to which it is exposed to changes in the value of the transferred asset.

Financial liabilities

The Bank derecognizes a financial liability when its contractual obligations are discharged,

cancelled or expire.

(iv) Offsetting

Financial assets and liabilities are offset and the net amount presented in the balance sheet

when, and only when, the Bank has a legal right to set off the amounts and it intends either to

settle them on a net basis or to realize the asset and settle the liability simultaneously.

Income and expenses are presented on a net basis only when permitted under IFRS, or for

gains and losses arising from a Bank of similar transactions similar to the Bank’s trading

activities.

(v) Amortised cost measurement

The amortised cost of a financial asset or liability is the amount at which the financial asset

or liability is measured at initial recognition, minus principal repayments, plus or minus the

cumulative amortization using the effective interest method of any difference between the

initial amount recognized and the maturity amount, minus any reduction for impairment.

(vi) Fair value measurement

Fair value is the amount for which an asset could be exchanged, or a liability settled between

knowledgeable, willing parties in an arm’s length transaction on the measurement date.

When available, the Bank measures the fair value of an instrument using quoted prices in an

active market for that instrument. A market is regarded as active if quoted prices are readily

and regularly available, and represent actual and regularly occurring market transactions on

an arm’s length basis.

If a market for a financial asset is not active, the Bank establishes fair value using a valuation

technique as disclosed in Note 5. Valuation techniques include using recent arm’s length

transactions between knowledgeable, willing parties (if available), reference to the current

fair value of other instruments that are substantially the same, discounted cash flow analyses,

and option pricing models.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

15

3 Significant accounting policies (Cont’d)

(e) Financial assets and financial liabilities (Cont’d)

(vii) Identification and measurement of impairment

At each reporting date, the Bank assesses whether there is objective evidence that financial

assets not carried at fair value through profit or loss are impaired. A financial asset or a bank

of financial assets is impaired when objective evidence demonstrates that a loss event has

occurred after the initial recognition of the asset(s), and that the loss event has an impact on

the future cash flows of the assets that can be reliably estimated.

Objective evidence that financial assets are impaired can include:

1. significant financial difficulty of the borrower or issuer;

2. default or delinquency by a borrower;

3. restructuring of a loan or advance by the Bank on terms that the Bank would not

otherwise consider;

3. indications that a borrower or issuer will enter bankruptcy;

4. the disappearance of an active market for a security; or

5. other observable data relating to a Bank of assets such as

-adverse changes in the payment status of borrowers or issuers in the Bank; or

-economic conditions that correlate with defaults on the assets in the Bank.

In addition, for an investment in an equity security, a significant or prolonged decline in its

fair value below its cost is objective evidence of impairment. In general, the Bank considers a

decline of 20% to be significant and a period of nine (9) months to be prolonged.

The Bank considers evidence of impairment for loans and advances and held-to-maturity

investment securities both at a specific assets and collective level. All individually significant

loans and advances and held-to-maturity investments are assessed for specific impairment.

Those not found to be specifically impaired are then collectively assessed for any impairment

that has been incurred but not yet identified. Loans and advances and held-to-maturity

investment securities that are not individually significant are collectively assessed for

impairment by grouping together loans and advances and held-to-maturity investment

securities with similar risk characteristics.

In assessing collective impairment, the Bank uses statistical modeling of historical trends of

the probability of default, the timing of recoveries, and the amount of loss incurred, adjusted

for management’s judgment as to whether current economic and credit conditions are such

that the actual losses are likely to be greater or less than suggested by historical trends.

Default rates, loss rates and the expected timing of future recoveries are regularly

benchmarked against actual outcomes to ensure that they remain appropriate.

Impairment losses on assets measured at amortised cost are calculated as the difference

between the carrying amount and the present value of estimated future cash flows discounted

at the asset’s original effective interest rate.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

16

3. Significant accounting policies (cont’d)

(e) Financial assets and financial liabilities (cont’d)

(vii) Identification and measurement of impairment (Cont’d)

If the terms of a financial asset are renegotiated or modified or an existing financial asset is

replaced with a new one due to financial difficulties of the borrower, then an assessment is

made whether the financial assets should be derecognized. If the cash flows of the

renegotiated assets are substantially different, then the contractual rights to cash flows from

the original financial asset are deemed to have expired. In this case, the original financial

asset is derecognized and the new financial asset is recognized at fair value. The impairment

loss is measured as follows:

• If the expected restructuring does not result in de-recognition of the existing asset, the

estimated cash flows arising from the modified financial asset are included in the

measurement of the existing asset based on their expected timing and the amounts are

discounted at the original effective interest rate of the existing financial asset.

• If the expected restructuring does results in de-recognition of the existing asset, then the

expected fair value of the new assets is treated as the final cash flow from the existing

financial asset at the time of its de-recognition. This amount is discounted from the

expected date of de-recognition to the reporting date using the original effective interest

rate of the existing financial asset.

Impairment losses are recognized in profit or loss and reflected in an allowance account

against loans and advances or held-to-maturity investment securities. Interest on the impaired

assets continues to be recognized through the unwinding of the discount. When an event

occurring after the impairment was recognized causes the amount of impairment loss to

decrease, the decrease in impairment loss is reversed through profit or loss.

Impairment losses on available-for-sale investment securities are recognized by reclassifying

the losses accumulated in the fair value reserve in equity to profit or loss. The cumulative

loss that is reclassified from equity to profit or loss is the difference between the acquisition

cost, net of any principal repayment and amortization, and the current fair value, less any

impairment loss recognized previously in profit or loss. However, any subsequent recovery

in the fair value of an impaired available-for-sale equity security is recognized in other

comprehensive income.

The Bank writes off certain loans and advances and investment securities when they are

determined to be uncollectible.

Loans that are either subject to collective impairment assessment or individually significant

and whose terms have been renegotiated are no longer considered to be past due but are

treated as new loans. In subsequent years, the asset is considered to be past due and disclosed

only if renegotiated.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

17

3. Significant accounting policies (Cont’d)

(f) Property, plant and equipment

(i) Recognition and measurement

Land and buildings comprise mainly branches and offices. Land and buildings are shown at

fair value, based on 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 amount is restated to the revalued amount

of the asset. All other assets are stated at historical cost less depreciation. Historical cost

includes expenditure that is directly attributable to the acquisition of the items. The cost of

self constructed assets includes:

• the cost of materials and direct labour;

• any other costs directly attributable to bringing the asset to a working condition for its

intended use;

• when the Bank has an obligation to remove the asset or restore the site, an estimate of the

costs of dismantling and removing the items and restoring the site on which they are

located; and

• capitalised borrowing costs.

When parts of an item of property and equipment have different useful lives, they are

accounted for as separate items (major components) of property and equipment.

Gains and losses on disposal of an item of property and equipment are determined by

comparing the proceeds from disposal with the carrying amount of property and equipment

and are recognized net within other income in profit or loss.

(ii) Subsequent costs Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as

appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.

(iii)Depreciation Land is not depreciated. Depreciation is calculated using the straight-line method for

buildings and the reducing balance method for all other property, plant and equipment to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows:

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

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

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

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

18

3. Significant accounting policies (cont’d)

(g) Intangible assets

Intangible assets comprise separately identifiable intangible items arising from computer software

licenses and other intangible assets. Intangible assets are recognized at cost less accumulated

amortisation and any accumulated impairment losses. Intangible assets with a definite useful life

are amortized using the straight-line method over their estimated useful economic life, generally

not exceeding 4 years. Intangible assets with an indefinite useful life are not amortized. Generally,

the identified intangible assets of the Bank have a definite useful life.

At each balance sheet date intangible assets are reviewed for indications of impairment or changes

in estimated future economic benefits. If such indications exist, the intangible assets are analyzed

to assess whether their carrying amount is fully recoverable. An impairment loss is recognized if

the carrying amount exceeds the recoverable amount. The Bank chooses to use the cost model for

the measurement after recognition. Intangible assets with indefinite useful life are annually tested

for impairment and whenever there is an indication that the asset may be impaired, the intangible

asset is analyzed to assess whether their carrying amount is fully recoverable.

Computer software licenses

Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire

and bring the specific software to use. These costs are amortized on the basis of the expected

useful lives. Software has a maximum expected useful life between 4 years (25%).

(h) Guarantees and letters of credit

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

Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee was given. The fair value of a financial guarantee at the time of signature is zero because all guarantees are agreed on arm’s length terms and the value of the premium agreed corresponds to the value of the guarantee obligation. No receivable for the future premiums is recognised. Subsequent to initial recognition, the bank’s liabilities under such guarantees are measured at the higher of the initial amount, less amortisation of fees recognised 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 basis over the life of the guarantee. Any increase in the liability relating to guarantees is reported in profit or loss within other operating expenses.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

19

3. Significant accounting policies (cont’d)

(h) Provisions

Provisions are recognised when:

the Bank has a present legal or constructive obligation as a result of past events;

it is more likely than not that an outflow of resources will be required to settle the obligation;

and the amount has been reliably estimated.

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

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

(i) Employee benefits

(i) Pension obligation The Bank operates a defined benefit plan for all employees. The assets of the plan are held separately. The pension plan is funded through payments from employees and the Bank, taking account of the recommendations of independent qualified actuaries. The Bank’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets.

The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the Bank, the recognised asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. The Bank determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in personnel expenses in profit or loss.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The Bank recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

20

3. Significant accounting policies (cont’d)

(i) Employee benefits (Cont’d)

(ii) Profit-sharing and bonus plans

The Bank recognises a liability and an expense for bonuses and profit-sharing, based on a formula that takes into consideration the profit attributable to the Bank’s shareholders after certain adjustments. The Bank recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

(j) Income tax

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. The principal temporary differences arise from depreciation of property, plant and equipment. If the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting 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 against which the temporary differences can be utilised.

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

(k) Share capital

(i) Share issue costs

Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds.

(ii) Dividends on ordinary shares

Dividends on ordinary shares are recognised in equity in the period in which they are approved by the shareholders. Dividends for the year declared after the balance sheet date are disclosed in the notes to the financial statements.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

21

3. Significant accounting policies (cont’d)

(l) Interest income and expense

Interest income and expense for all interest bearing financial instruments are recognised within “interest income” and “interest expense” in profit or loss using the effective interest method.

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

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

(m) Fee and commission income

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

(n) Dividend income

Dividends are recognised in profit or loss when the Bank’s right to receive payment is established.

(n) Leases (i) The Bank is the lessee

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease.

(ii) The Bank is the lessor

When assets are leased out under an operating lease, the assets are included in the balance sheet based on the nature of the assets. Lease income is recognised over the term of the lease on a straight line basis.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

22

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

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

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

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

4.1 Credit risk

The Bank is exposed to credit risk, which is the risk that a counterparty will cause a financial loss

for the Bank by failing to discharge their contractual obligation to the Bank. Significant changes

in the economy, or in the health of a particular industry segment that represents a concentration in

the Bank’s portfolio, could result in losses that are different from those provided for at the balance

sheet date. Credit exposures arise principally in lending activities that lead to loans and advances,

and investment activities that bring debt securities and other bills into the Bank’s asset portfolio.

There is also credit risk in off-balance sheet financial instruments such as loan commitments.

Credit risk is managed and controlled by management who reports to the Board of Directors.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

23

4 Financial risk management (Cont’d)

4.1.1 Credit risk measurement

(a) Loans and advances

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

The Bank assesses the probability of default of individual counterparties using the Eastern Caribbean Central Bank prudential guidelines. Clients of the Bank are segmented into five rating classes. The Bank’s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class.

Bank’s rating Description of the grade 1 Pass 2 Special Mention 3 Substandard 4 Doubtful 5 Loss

This means that, in principle, exposures migrate between classes as the assessment of their probability of default changes. The Bank regularly validates the performance of the rating and their predictive power with regard to default events.

(b) Debt securities and other bills

For debt securities and other bills, external ratings such as Caricris or their equivalents are used by management for management of the credit risk exposures.

4.1.2 Risk limit control and mitigation policies

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

The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to the industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review by the Board of Directors.

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

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

Some other specific control and mitigation measures are outlined below.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

24

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.2 Risk limit control and mitigation policies (Cont’d)

(a) Collateral The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advanced, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are:

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

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

Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured.

(b) Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit (which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions) are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan.

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

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

25

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.3 Impairment and provisioning policies

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

2014 2013

Loans and advances

(%)

Impairment provision

(%)

Loans and advances

(%)

Impairment provision

(%) Bank’s rating 1. Pass 76.7% 12.4% 77.7% 5.6% 2. Special mention 3.1% 2.7% 2.3% 2.0% 3. Sub-standard 13.8% 39.4% 12.1% 30.4% 4. Doubtful 4.7% 28.9% 6.0% 42.7% 5. Loss 1.7% 16.7% 1.9% 19.3%

The internal rating tool assists management to determine whether objective evidence of impairment exists, 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 least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of the incurred loss at balance-sheet date on a case-by-case basis, and are applied to all individually significant accounts. The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

26

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.4 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 exposure

2014 $

2013 $

Due from other banks 58,981,698 28,343,891

Treasury bills 7,211,052 15,628,748

Loans and advances to financial institutions 16,306,757 22,401,929

Loans and advances to customers:

− Overdraft 16,519,020 19,371,393

− Demand loans 186,399,332 171,853,985

− Promissory notes 3,755,115 3,736,567

− Mortgages 171,306,272 161,349,501

− Credit cards 1,801,196 1,280,771

Investments securities:

− available for sale – debt securities 10,800,543 7,591,262

− held to maturity 18,517,218 20,677,754

Other assets 1,741,121 6,057,246

493,339,324 458,293,047

Credit risk exposures relating to off-balance sheet items are as follows:

Financial guarantees 585,501 500,481

Loan commitments and other credit related facilities 17,790,035 28,905,897

18,375,536 29,406,378

At December 31 511,714,860 487,699,425

The above table represents a worst case scenario of credit risk exposure to the Bank at December 31, 2014 and 2013, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the balance sheet. Loans and advances to customers and financial institutions comprise 80% of the total maximum exposure (2013 - 83%); 6% represents investments in debt securities (2013 - 7%). Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loan and advances portfolio based on the following:

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

27

4 Financial risk management (Cont’d)

4.1 Credit risk (cont’d)

4.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements

(Cont’d)

76% of the loans and advances portfolio is categorised in the top two grades of the internal

rating system (2013 - 80%);

Demand loans which represent the largest percentage of the portfolio, followed by mortgage

loans, are backed by collateral;

61% of the net loans and advances portfolio are considered to be neither past due nor

impaired (2013 - 63%);

The Bank continues to grant loans and advances in accordance with its lending policies and

guidelines; and

3% of investments are rated above A- (2013 - 5%) and 56% are rated above BBB (2013 –

60%). Many issuers are not graded and consequently 41% of investments are not rated,

compared to 36% in the previous year.

4.1.5 Loans and advances

Loans and advances are summarised as follows:

2014

$ 2013

$

Loans and advances to customers Neither past due nor impaired 230,506,639 223,639,856 Past due but not impaired 81,601,348 83,525,093 Impaired 97,839,752 76,774,833 Gross 409,947,739 383,939,782 Less: allowance for impairment (Notes 10 and 11) (30,166,804 ) (26,347,565 ) Net 379,780,935 357,592,217

Loans and advances to financial institutions Neither past due nor impaired (Note 9) 16,306,757 22,401,929

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

28

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.5 Loans and advances (Cont’d)

(a) Loans and advances neither past due or impaired

The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the Bank.

December 31, 2014 Overdrafts

$

Credit

card $

Demand loans

$

Promissory

notes $

Mortgages $

Total Loans and advances to customers

$ Loans and advances to customers

Grades 1. Pass 16,309,516 1,567,571 108,038,676 3,006,734 99,364,579 228,287,076 2. Special mention 165,844 – 468,819 – 1,375,167 2,009,830 3. Sub-standard 209,733 – – – – 209,733 4. Doubtful – – – – – – 5. Loss – – – – – – Total 16,685,093 1,567,571 108,507,495 3,006,734 100,739,746 230,506,639

Overdrafts

$

Credit

card $

Demand loans

$

Promissory

notes $

Mortgages $

Total Loans and advances

to customers $

December 31, 2013 Loans and advances to customers

Grades 1. Pass 18,734,938 633,352 104,290,832 2,658,875 95,491,478 221,809,475 2. Special mention 218,200 – 477,648 – 634,768 1,330,616 3. Sub-standard 499,765 – – – – 499,765 4. Doubtful – – – – – – 5. Loss – – – – – – Total 19,452,903 633,352 104,768,480 2,658,875 96,126,246 223,639,856

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

29

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.5Loans and advances (Cont’d) Loans and advances to financial institutions

Loans and advances to financial institutions were graded 1 (Pass) as at December 31, 2014 and December 31, 2013.

(b) Loans and advances past due but not impaired

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

Credit cards

$

Demand loans

$

Promissory

notes $

Mortgages $

Total Loans and advances to customers

$

December 31, 2014

Past due up to 30 days 39,137,600 407,129 24,649,490 64,194,219

Past due 30-60 days 171,264 3,757,195 92,632 4,773,530 8,794,621

Past due 60-90 days 10,197 2,191,557 26,364 6,332,227 8,560,345

Past due over 90 days 52,163 – – – 52,163

Total 233,624 45,086,352 526,125 35,755,247 81,601,348

Fair value of collateral – 101,987,264 4,747,016 91,839,251 198,573,531

Credit cards

$

Demand loans

$

Promissory

notes $

Mortgages $

Total Loans and advances to customers

$

December 31, 2013

Past due up to 30 days 414,742 17,546,289 773,621 33,849,804 52,584,456

Past due 30-60 days 133,390 11,630,714 68,275 1,659,039 13,491,418

Past due 60-90 days 43,822 5,652,519 19,396 3,114,913 8,830,650

Past due over 90 days 55,465 5,851,410 22,778 2,688,916 8,618,569

Total 647,419 40,680,932 884,070 41,312,672 83,525,093

Fair value of collateral – 120,181,824 2,990,736 93,045,837 216,218,397

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

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

30

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.5Loans and advances (Cont’d) Loans and advances to financial institutions (Cont’d)

(c) Loans and advances individually impaired

The table below shows the gross amount of individually impaired loans and advances to customers by grades before taking into consideration the cash flows from collateral held.

2014

$ 2013

$ Individually impaired loans Grades: 1. Pass 4,612,116 732,179 2. Special mention 10,770,258 280,619 3. Sub-standard 56,345,692 46,058,645 4. Doubtful 19,359,584 23,005,553 5. Loss 6,752,102 6,697,837 Total 97,839,752 76,774,833 Fair value of collateral 157,946,994 121,185,833

(d) Loans and advances renegotiated

Restructuring activities include extended payment arrangements, approved external management plans, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgment of local management, indicate that payment will most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans, in particular customer finance loans. Renegotiated loans that would otherwise be past due or impaired as at December 31, 2014 amounted to $44,936,282 (2013-$23,009,388).

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

31

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.6 Debt securities, treasury bills and other eligible bills

The table below presents an analysis of debt securities, treasury bills and other eligible bills by rating agency designation at December 31, 2014 and 2013, based on Caricris or their equivalent:

At December 31, 2014 Investment securities

Treasury

bills

$

Held-to-

maturity

$

Available-

for-sale

$

Total

$

AA- to AA+ – – 679,767 679,767

BBB- to BBB+ –

– 3,233,478 3,233,478

CariA –

302,919 – 302,919

CariBBB 7,211,052 10,114,356 – 17,325,408

Unrated – 8,099,943 6,887,298 14,987,241

Total 7,211,052 18,517,218 10,800,543 36,528,813

At December 31, 2013 Investment securities

Treasury

bills

$

Held-to-

maturity

$

Available-

for-sale

$

Total

$

AA- to AA+ – 2,032,220 – 2,032,220

CariBBB+ 15,628,748 10,643,926 – 26,272,674

Unrated – 8,001,608 7,591,262 15,592,870

Total 15,628,748 20,677,754 7,591,262 43,897,764

4.1.7 Repossessed collateral

During 2014, the Bank obtained assets by taking possession of collateral held as security, as follows: Nature of assets Carrying

amount $

Vehicles 457,000

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

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

32

4 Financial risk management (Cont’d)

4.1 Credit risk (Cont’d)

4.1.8 Concentration of risks of financial assets with credit risk exposure

(a) Geographical sectors

The Bank operates primarily in Saint Lucia and the exposure to credit risk is concentrated in this area.

(b) Industry sectors

The following table breaks down the Bank’s main credit exposure at their carrying amounts, as categorised by the industry sectors of our counterparties.

Financial

institutions

$

Manu-

facturing

$

Tourism

$

Government

$

Professional

and other

services

$

Personal

$

Other

industries

$

Total

$

Due from other banks 58,981,698 – – – – – – 58,981,698

Treasury bills – – – 7,211,052 – – – 7,211,052

Loans and advances to

financial institutions 16,306,757 – – – – – –

16,306,757

Loans and advances to customers:

- Overdraft 184,528

Error! Not a

valid link.

127,596 204,560 1,913,246 5,569,510 1,338,612 7,180,968 16,519,020

- Credit cards – – – – – 1,260,837 540,359 1,801,196

- Demand loans – 10,164,848 2,130,700 4,426,149 16,111,954 57,810,786 95,754,895 186,399,332

- Promissory notes – 1,695 20,887 – 29,323 3,605,995 97,215 3,755,115

- Mortgages – 1,153,759 2,474,829 – 5,509,903 107,110,207 55,057,574 171,306,272

Investment securities:

- available-for-sale 944,593 – – 4,859,905 – – 4,996,045 10,800,543

- held-to-maturity 8,299,299 – – 10,114,357 – – 103,562 18,517,218

Other assets 982,276 – – – – – 758,845 1,741,121

As at December 31, 2014 85,699,151 11,447,898 4,830,976 28,524,709 27,220,690 171,126,437 164,489,463 493,339,324

Credit commitments – 240,386 94,614 567,458 4,392,920 9,788,759 3,291,400 18,375,537

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

33

4 Financial risk management (Cont’d)

4.1 Credit risk (cont’d)

4.1.8 Concentration of risks of financial assets with credit risk exposure (Cont’d)

(b) Industry sectors (Cont’d)

Financial

institutions

$

Manu-

facturing

$

Tourism

$

Government

$

Professional

and other

services

$

Personal

$

Other

industries

$

Total

$

Due from other banks 28,343,891 – – – – – – 28,343,891

Treasury bills – – – 15,628,748 – – – 15,628,748

Loans and advances to financial institutions 22,401,929 – –

– – – –

22,401,929

Loans and advances to customers: - Overdraft – 254,886 303,280 1,454,106 5,842,544 2,405,255 9,111,322 19,371,393 - Credit cards – – – – – 896,540 384,231 1,280,771 - Demand loans – 5,540,616 1,522,281 1,211,398 54,478,465 58,446,957 50,654,268 171,853,985 - Promissory notes – - 32,598 – 59,536 3,474,327 170,106 3,736,567 - Mortgages – 1,121,548 2,773,885 – 4,153,199 116,509,914 36,794,955 161,349,501 Investment securities: - available-for-sale 252,458 – – 4,027,627 – – 3,311,177 7,591,262 - held-to-maturity 9,930,266 – – 10,643,926 – – 103,562 20,677,754 Other assets 5,494,156 – – – – – 563,090 6,057,246 As at December 31, 2013 66,422,700 6,917,050 4,632,044 32,965,805 64,533,744 181,732,993 101,092,711 458,293,047

Credit commitments – 307,322 521,594 - 1,810,287 14,957,224 11,809,951 29,406,378

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

34

4 Financial risk management (Cont’d)

4.2 Market risk

The Bank takes on exposure to market risks, which is the risk that the fair value or future cash

flows of a financial instrument will fluctuate because of changes in market prices. Market risks

arise from open positions in interest rate and equity products, all of which are exposed to general

and specific market movements and changes in the level of volatility of market rates or prices

such as interest rates, credit spreads, foreign exchange rates and equity prices. The Bank’s

exposures to market risks primarily arise from the interest rate management of the Bank’s retail

and commercial banking assets and liabilities and equity risks arising from the Bank’s available-

for-sale investments.

4.2.1 Price risk

The Bank is exposed to equity securities price risk because of investments held by the Bank and classified on the balance sheet as available for sale. To manage its price risk arising from investments in equity securities, the Bank diversifies its portfolio. At December 31, 2014, if equity securities prices had been 5% higher/lower with all variable held constant comprehensive income for the year would have been $61,785 higher/lower (2013 - $70,964 higher/lower) as a result of the increase/decrease in fair value of available for sale equity securities.

4.2.2 Foreign exchange risk

The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total which are monitored daily. The Bank’s exposure to currency risk is minimal since most of its assets and liabilities in foreign currencies are held in United States dollars. The exchange rate of the Eastern Caribbean dollar (EC$) to the United States dollar (US$) has been formally pegged at EC$2.70 = US$1.00 since 1976. The following table summarises the Bank’s exposure to foreign currency exchange rate risk at December 31, 2014. Included in the table are the Bank’s financial instruments at carrying amount, categorised by currency.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

35

4 Financial risk management (Cont’d)

4.2 Market risk (Cont’d)

4.2.2 Foreign exchange risk (Cont’d) Concentration of currency risk – on and off balance sheet financial instruments ECD CAD EURO USD GBP TTD BD TOTAL As at December 31, 2014 Assets Cash and balances with Central Bank 35,281,517 141,132 387,076 1,255,108 127,037 – 136,025 37,327,895

Due from other banks 13,339,256 1,188,741 1,497,016 40,452,182 2,179,560 35,278 289,665 58,981,698

Treasury bills 7,211,052 – – – – – – 7,211,052 Loans and advances to financial institutions 16,306,757 – – – – – – 16,306,757 Loans and advances to customers 379,780,935 – – – – – – 379,780,935 Investment securities - available-for-sale 9,324,050 – – 4,256,782 – – – 13,580,832 - held-to-maturity 18,517,218 – – – – – – 18,517,218

Other assets 1,741,121 – – – – – – 1,741,121 Total financial assets 481,501,906 1,329,873 1,884,092 45,964,072 2,306,597 35,278 425,690 533,447,508 Liabilities

Due to customers 468,655,704 – 1,641,234 2,174 – – – 470,299,112 Other liabilities 5,272,726 – – – – – – 5,272,726 Total financial liabilities 473,928,430 _ 1,641,234 2,174_ – – – 475,571,838 Net on-balance sheet positions 7,573,476 1,329,873 242,858 45,961,898 2,306,597 35,278 425,690 57,875,670

Credit commitments 18,375,536 – – – – – – 18,375,537

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

36

4 Financial risk management (Cont’d)

4.2 Market risk (Cont’d)

4.2.2 Foreign exchange risk (Cont’d)

Concentration of currency risk – on and off balance sheet financial instruments (Cont’d)

ECD CAD EURO USD GBP TTD BD TOTAL As at December 31, 2013 Assets Cash and balances with Central Bank 30,734,684 124,778 604,646 1,209,903 180,659 – 143,975 32,998,645 Due from other banks 3,503,829 146,267 2,036,671 20,673,288 1,710,974 158,870 113,992 28,343,891 Treasury bills 5,244,638 – – 10,384,110 – – – 15,628,748 Loans and advances to financial institutions 22,401,929 – – – – – – 22,401,929 Loans and advances to customers 357,592,217 – – – – 357,592,217 Investment securities - available-for-sale 9,209,935 – – 1,303,267 – – – 10,513,202 - held-to-maturity 20,677,754 – – – – – – 20,677,754

Other assets 6,057,246 – – – – – – 6,057,246 Total financial assets 455,422,232 271,045 2,641,317 33,570,568 1,891,633 158,870 257,967 494,213,632

Liabilities Due to customers 431,223,142 – 2,463 1,157,197 – – – 432,382,802 Other liabilities 3,965,420 – – – – – – 3,965,420 Total financial liabilities 435,188,562 – 2,463 1,157,197 – – – 436,348,222 Net on-balance sheet positions 20,233,670 271,045 2,638,854 32,413,371 1,891,633 158,870 257,967 57,865,410

Credit commitments 29,406,379 – – – – – – 29,406,379

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

37

4 Financial risk management (Cont’d)

4.2 Market risk (Cont’d)

4.2.3 Interest rate risk

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will

fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that

the value of a financial instrument will fluctuate because of changes in market interest rates. The

Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest

rates on both its fair value and cash flow risks. Interest margins may increase as a result of such

changes but may reduce losses in the event that unexpected movements arise.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

38

4 Financial risk management (Cont’d)

4.2 Market risk (Cont’d)

4.2.3 Interest rate risk

The table below summarizes the Bank’s exposure to interest rate risks. It includes the Bank’s financial instruments at carrying amounts, categorized by the earlier of contractual repricing or maturity dates.

Up to 1 month

$

1-3 months

$

3-12 months

$

1-5 years

$

Over 5 years

$

Non- interest bearing

$

Total

$

As at December 31, 2014

Assets

Cash and balances with Central Bank – – – – 37,327,895 37,327,895 Due from other banks 43,159,757 – – – – 15,821,941 58,981,698 Treasury bills – – 7,211,052 – – – 7,211,052 Loans and advances to financial institutions 7,068,277 9,238,480 – – – 16,306,757 Loans and advances to customers 18,267,328 1,628,023 15,759,289 48,694,274 295,432,021 – 379,780,935 Investment securities: - available-for-sale 10,537,192 – – – 263,351 – 10,800,543 - held-to-maturity 52,000 – 11,066,945 7,398,273 – – 18,517,218

Other assets – – – – – 1,741,121 1,741,121 Total financial assets 72,016,277 8,696,300 43,275,766 56,092,547 295,695,372 54,890,957 530,667,219 Liabilities

Due to customers 288,811,924 16,231,865 130,152,572 2,941,978 – 32,160,773 470,299,112

Other liabilities – – – – – 5,272,726 5,272,726

Total financial liabilities 288,811,924 16,231,865 130,152,572 2,941,978 – 37,433,499 475,571,838

Total interest repricing gap (216,795,647) (7,535,565) (86,876,806) 53,150,569 295,695,372

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

39

4 Financial risk management (Cont’d)

4.2 Market risk (Cont’d)

4.2.3 Interest rate risk (Cont’d)

Up to 1 month

$

1-3 months

$

3-12 months

$

1-5 years

$

Over 5 years

$

Non- interest bearing

$

Total

$

As at December 31, 2013

Assets

Cash and balances with Central Bank – – – – – 32,998,645 32,998,645 Due from other banks 20,920,353 – – – – 7,423,538 28,343,891 Treasury bills – 10,426,029 5,202,719 – – – 15,628,748 Loans and advances to financial institutions 9,619,656 4,607,184 8,175,088 – – – 22,401,928 Loans and advances to customers 16,925,739 4,527,258 12,311,729 38,669,856 285,157,635 – 357,592,217 Investment securities: - available-for-sale 7,291,922 – – – 299,340 – 7,591,262 - held-to-maturity 52,000 2,032,220 11,026,416 5,675,071 1,892,047 – 20,677,754

Other assets – – – – – 6,057,246 6,057,246 Total financial assets 54,809,670 21,592,691 36,715,952 44,344,927 287,349,022 46,479,429 491,291,691 Liabilities

Due to customers 266,071,376 24,275,307 108,243,408 732,386 – 33,060,325 432,382,802 Other liabilities – – – – – 3,965,420 3,965,420 Total financial liabilities 266,071,376 24,275,307 108,243,408 732,386 – 37,025,745 436,348,222 Total interest repricing gap (211,261,706) (2,682,619) (71,527,456) 43,612,541 287,349,022

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

40

4 Financial risk management (Cont’d)

4.2 Market risk (Cont’)

4.2.3 Interest rate risk (Cont’d)

The Bank’s fair value interest rate risk arises from debt securities classified as available for sale. At December 31, 2014 if market interest rates had been 100 basis points higher/lower with all variables held constant, comprehensive income for the year would have been $608,486 higher/ $88,313 lower (2013 - $118,894 lower/$115,241 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, 2014 if variable interest rates had been 100 basis points higher/lower with all other variables held constant, post-tax profit for the year would have been $2,278,675 higher/lower (2013 - $2,313,188 higher/lower), mainly as a result of higher/lower interest income on variable rate loans.

4.3 Liquidity risk

Liquidity risk is the risk that the Bank will be unable to meet its payment obligations associated with its financial liabilities when they fall due or upon demand

4.3.1 Liquidity risk management process

The Board of Directors establish the strategy and policy for the management of liquidity risk. The Bank's liquidity is managed by the Finance Department. A significant proportion of the Bank’s liabilities fall within the current category; however, the Bank maintains approximately 33% of assets to manage any payment obligations as history has shown that the assets maintained to manage these outflows is adequate. The key elements of the liquidity management process is as follows: Daily and weekly monitoring to ensure that requirements are met. This includes the

replenishment of funds as they mature or as borrowed by customers. The Bank ensures that sufficient funds are held in the one to thirty day maturity bucket to satisfy liquidity requirements.

Maintaining a portfolio of marketable assets that can easily be liquidated as protection against

any unforeseen liquidity problems. Additionally, the investment portfolio is fairly 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.

Sources of liquidity are regularly reviewed to maintain a wide diversification by currency,

geography, provider, product and term.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

41

4 Financial risk management (Cont’d)

4.3 Liquidity risk (Cont’d)

4.3.3 Non-derivative cash flows

The table below presents the cash flows payable by the Bank under non-derivative financial liabilities and assets held for managing liquidity risk by remaining contractual maturities at the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows; the Bank manages the inherent liquidity risk based on expected undiscounted cash inflows.

Up to

1 month

$

1-3

months

$

3-12

months

$

1-5

years

$

Over

5 years

$

Total

contractual

cash flows

$

As at December 31, 2014

Liabilities

Due to customers 323,180,620 16,231,865 130,152,572 2,941,978 – 472,507,035

Other liabilities 5,272,726 – – – – 5,272,726

Total liabilities

(Contractual maturity dates) 328,453,346 16,231,865 130,152,572 2,941,978 – 477,779,761

Assets held for managing

liquidity risk

(Contractual maturity dates) 104,075,003 8,696,300 43,275,766 56,092,546 295,695,372 507,834,987

As at December 31, 2013

Liabilities

Due to customers 299,118,108 24,471,138 110,880,241 804,756 – 435,274,243

Other liabilities 3,965,416 – – – – 3,965,416

–

Total liabilities

(Contractual maturity dates) 303,083,524 24,471,138 110,880,241 804,756 – 439,239,659

Assets held for managing

liquidity risk

(Contractual maturity dates) 79,494,810 31,119,206 62,259,045 44,344,928 287,367,892 504,585,881

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

42

4 Financial risk management (Cont’d)

4.3 Liquidity risk (Cont’d)

4.3.4 Assets held for managing liquidity risk

Assets available to meet all of the liabilities and to cover outstanding loan commitments include

cash, central bank balances, items in the course of collection and treasury and other eligible bills;

loans and advances to financial institutions; and loans and advances to customers. In the normal

course of business, a proportion of customer loans contractually repayable within one year will be

extended. The Bank would also be able to meet unexpected net cash outflows by selling securities

and accessing additional funding sources.

4.3.5 Off-balance sheet items

(a) Loan commitments

The dates of the contractual amounts of the Bank’s off-balance sheet financial instruments that commit it to extend credit to customers and other facilities (Note 34), are summarised in the table below.

(b) Financial guarantees and other financial facilities

Financial guarantees (Note 34) are also included below based on the earliest contractual maturity date.

1 year

$ 1-5 years

$

Over 5 years

$ Total

$ As at December 31, 2014 Loan commitments 15,926,347 1,858,493 5,196 17,790,036 Guarantees, acceptances and other financial facilities – 472,843 112,658 585,501

Total 15,926,347 2,331,336 117,854 18,375,537

As at December 31, 2013 Loan commitments 25,461,719 3,438,983 5,195 28,905,897 Guarantees, acceptances and other financial facilities – 387,823 112,658 500,481

Total 25,461,719 3,826,806 117,853 29,406,378

4.4 Fair values of financial assets and liabilities

(a) Financial instruments not measured at fair value

Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable willing parties who are under no compulsion to act and is best evidenced by a quoted market value, if one exists. The following methods and assumptions were used to estimate the fair value of financial instruments. The fair values of cash resources, other assets and liabilities, cheques and other items in transit and due to other banks are assumed to approximate their carrying values due to their short term nature.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

43

4 Financial risk management (Cont’d)

4.4 Fair values of financial assets and liabilities (Cont’d)

(i) Loans and advances to customers

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

(ii) Investment securities

Investment securities include only interest bearing assets held to maturity; assets classified as available-for-sale are measured at fair value except for unlisted available-for-sale equity securities which are carried at cost less impairment. The fair value of equity securities carried at cost less impairment is not disclosed as it cannot be reliably estimated (Note 12). The fair value for held-to-maturity assets is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit maturity and yield characteristics.

(iii) Due to customers

The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand. Deposits payable on a fixed date are at rates which reflect market conditions and are assumed to have fair values which approximate carrying values.

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

2014 $

2013 $

2014 $

2013 $

Financial assets Loans and advances to financial institutions 16,306,757 22,401,929 16,306,757 22,401,929 Due from other banks 58,981,698 28,343,891 58,981,698 28,343,891 Loans and advances to customers: − Overdraft 16,519,020 19,371,393 16,519,020 19,371,393

− Demand loans 186,399,332 171,853,985 190,034,011 173,019,005 − Promissory notes 3,755,115 3,736,567 4,070,833 4,051,604 − Mortgages 171,306,272 161,349,501 170,025,168 163,334,414 − Credit cards 1,801,196 1,280,771 1,801,196 1,280,771 Investment securities - Treasury bills 7,211,052 15,628,748 7,211,052 15,628,748 - Held to maturity 18,517,218 20,677,754 17,598,544 19,838,380

Financial liabilities Due to customers: − Time deposits 162,208,816 151,936,870 159,107,701 149,165,989 − Savings accounts 267,587,887 238,855,651 267,587,887 238,855,651 − Demand accounts 40,502,409 41,590,287 40,502,409 41,590,287

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

44

4 Financial risk management (Cont’d)

4.4 Fair values of financial assets and liabilities (Cont’d)

(b) Fair value hierarchy

IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable 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 following fair value hierarchy: Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. This

level includes listed 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 and observable market prices in its valuations where possible.

4.4.1 Assets measured at fair value

December 31, 2014 Level 1 $

Level 2 $

Level 3 $

Total $

Available-for-sale financial assets - Investment securities - debt 1,936,566 8,863,977 - 10,800,543 - Investment securities - equity - 1,235,700 - 1,235,700

Total assets 1,936,566 10,099,677 - 12,036,243

December 31, 2013 Available-for-sale financial assets - Investment securities - debt - 7,591,262 - 7,591,262 - Investment securities - equity - 1,419,280 - 1,419,280

Total assets - 9,010,542 - 9,010,542

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

45

4 Financial risk management (Cont’d)

4.4 Fair values of financial assets and liabilities (Cont’d)

4.4.2 Financial instruments not measured at fair value

The following table sets out the fair value instruments not measured at fair value and analyses

them by the level in fair value hierarchy into which each fair value measurement categorized.

December 31, 2014

Level 1 Level 2 Level 3

Total fair

values

Total

Carrying

amounts

$ $ $ $ $

Assets

Cash and balances with Central Bank 37,327,895

37,327,895 37,327,895

Treasury bills 7,211,052 7,211,052 7,211,052

Due from other banks

58,981,698

58,981,698 58,981,698

Loans and advances to financial institutions 16,306,757

16,306,757 16,306,757

Loans and advances to customers 379,780,935 382,450,228 379,780,935

Held to maturity investments security 18,517,218

17,598,544 18,517,218

Liabilities

Deposits from customers 470,299,112 - 467,197,997 470,299,112

Other liabilities 5,272,726 - 5,272,726 5,272,726

December 31, 2013

Level 1 Level 2 Level 3

Total fair

values

Total

Carrying

amounts

$ $ $ $ $

Assets

Cash and balances with Central Bank 32,998,615

32,998,615 32,998,615

Treasury bills 15,628,748 15,628,748 15,628,748

Due from other banks

28,343,891

28,343,891 28,343,891

Loans and advances to financial institutions 22,401,929

22,401,929 22,401,929

Loans and advances to customers 357,592,217 361,057,187 357,592,217

Held to maturity investments security 20,677,754

19,838,380 20,677,754

-

Liabilities

Deposits from customers 432,382,808 - 429,611,927 432,382,808

Other liabilities 3,965,416 3,965,416 3,965,416

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

46

4 Financial risk management (Cont’d)

4.4 Fair values of financial assets and liabilities (Cont’d)

4.4.2 Financial instruments not measured at fair value

Where available, the fair value of loans and advances is based on observable market transactions. Where observable market transactions are not available fair value is estimated using valuation models, such as discounted cash flow techniques. Input into the valuation techniques includes the expected lifetime credit losses, interest rates, prepayment rates and primary origination or secondary market spreads. For collateral-dependant impaired loans the fair value is measured based on the underlying collateral. Input into the models may include data from third party brokers and information obtained from other market participants, which includes observed primary and secondary transactions. To improve the accuracy of the valuation estimates, loans are grouped into portfolios with similar characteristics such as the quality of collateral, repayment and delinquency rates.

4.5 Capital management

The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of balance sheets, are: To comply with the capital requirements set by the Eastern Caribbean Central Bank; to safeguard the Bank’s ability to continue as a going concern so that it can continue to provide

returns for shareholders and benefits for other stakeholders; and to maintain a strong capital base to support the development of its business. Capital adequacy and the use of regulatory capital are monitored daily by the Bank’s management, employing techniques based on the guidelines developed by the East Caribbean Central Bank (‘the Authority’) for supervisory purposes. The required information is filed with the Authority on a quarterly basis. The Authority requires each bank or banking Bank to: (a) hold the minimum level of the regulatory

capital of $5,000,000 and (b) maintain a ratio of total regulatory capital to the risk-weighted asset

(the ‘Basel ratio’) at or above the minimum indicated in the prudential guidelines 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 gains arising on the fair valuation of equity instruments held as available for sale.

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

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

47

4 Financial risk management (Cont’d)

4.5 Capital management (Cont’d)

The table below summarises the composition of regulatory capital and the ratios of the Bank for the years ended December 31, 2014 and 2013. During those two years, the Bank complied with all of the externally imposed capital requirements. 2014

$ 2013

$ Tier 1 capital Share capital 7,971,454 7,971,454 Statutory reserve 7,971,454 7,971,454 Retained earnings 54,772,165 54,093,406 Total qualifying Tier 1 capital 70,715,073 70,036,314 Tier 2 capital Revaluation reserve – available-for-sale investments 742,680 1,070,890 Revaluation reserve – property, plant and equipment 3,727,625 3,730,905 Total qualifying Tier 2 capital 4,470,305 4,801,795 Total regulatory capital 75,185,378 74,838,109 Risk-weighted assets: On-balance sheet 390,041,700 356,617,754 Off-balance sheet 3,616,600 5,831,227 Total risk-weighted assets 393,658,300 362,448,981 Capital adequacy ratio 18% 19%

Basel ratio 19% 21%

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.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

48

5 Critical accounting estimates, and judgements in applying accounting policies

The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

(a) Impairment losses on loans and advances

The Bank reviews its loan portfolio to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in profit or loss, the Bank makes judgement as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a Bank, or local economic conditions that correlate with defaults on assets in the Bank. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extent that the net present value of estimated cash flows differs by +/-5%, the portfolio provision would be estimated to be $998,536 (2013 – 1,075,066) lower/higher.

Assets accounted for at amortised cost are evaluated for impairment on a basis described in Note

3(e) (vii).

The specific component of the total allowances for impairment applies to financial assets

evaluated individually for impairment (those that have been outstanding for more than 90 days

and considered non-performing according to the guidelines of the regulators, the Eastern

Caribbean Central Bank (ECCB) and is based upon management’s best estimate of the present

value of the cash flows that are expected to be received. In estimating these cash flows,

management makes judgements about a debtor’s financial situation and the net realisable value of

any underlying collateral. Each impaired asset is assessed on its merit, and the workout strategy

and estimate of cash flows considered recoverable are independently approved by the credit risk

function.

A collective component of the total allowance is established for:

Groups of homogenous loans that are not considered individually significant; and

Groups of assets that are individually significant but that were not found to be individually

impaired (Incurred but not reported - IBNR).

Collective allowance for groups of homogenous loans is established using a formula approach

based on historic loss rate experience.

Collective impairment for groups of assets that are individually significant but that were not found

to be individually impaired (IBNR) cover credit losses inherent in portfolios of loans and

advances, and held-to-maturity investment securities with similar credit risk characteristics when

there is objective evidence to suggest that they contain impaired loans and advances, and held-to-

maturity investment securities, but the individual impaired items cannot yet be identified.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

49

5 Critical accounting estimates, and judgements in applying accounting policies (Cont’d)

(a) Impairment losses on loans and advances (Cont’d)

In assessing the need for collective loss allowances, management considers factors such as credit

quality, portfolio size, concentrations and economic factors. In order to estimate the required

allowance, assumptions are made to define the way inherent losses are modelled and to determine

the required input parameters, based on historical experience and current economic conditions.

The accuracy of the allowances depends on the estimates of future cash flows for specific

counterparty allowances and the model assumptions and parameters used in determining

collective allowances.

(b) Impairment of available-for-sale equity investments

The Bank determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgement. In making this judgment, the Bank evaluates among other factors, when there is evidence of deterioration in the financial health of the investee industry and sector performance, changes in technology and operational and financing cash flows. During the year the Bank did not recognise impairment losses on available-for-sale equity investments, (2013 -$ 109,083).

(c) Held-to-maturity investments

The Bank follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgement. In making this judgement, the Bank evaluates its intention and ability to hold such investments to maturity. If the Bank fails to keep these investments to maturity other than for the specific circumstances – for example, selling an insignificant amount close to maturity – it will reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value not amortised cost. If the entire held-to-maturity investments are tainted, the carrying value would decrease by $918,674 (2013 - $839,373) with a corresponding entry in the fair value reserve in comprehensive income.

(d) Income taxes

Significant judgment is required in determining the provision for income taxes including any liabilities for tax audit issues. There are some transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business.

(e) Fair value

The determination of fair value for financial assets and liabilities for which there is no observable

market price requires the use of valuation techniques as described in Note 3(i)(vi). For financial

instruments that trade infrequently and have little price transparency, fair value is less objective,

and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of

market factors, pricing assumptions and other risks affecting the specific instrument.

The Bank’s accounting policy on fair value measurements is discussed in Note 4.4(b).

The Bank measures fair values using the following fair value hierarchy that reflects the

significance of the inputs used in making the measurements.

Level 1: Quoted market price (unadjusted) in an active market for an identical instrument.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

50

5 Critical accounting estimates, and judgements in applying accounting policies (Cont’d)

(e) Fair value (Cont’d)

Level 2: valuation techniques based on observable inputs, either directly (i.e. as prices) or

indirectly (i.e. derived from prices). This category includes instruments valued using: (a)

quoted market prices in active markets for similar instruments; (b) quoted prices for identical

or (c) similar instruments in markets that are considered less than active or other valuation

techniques where all significant inputs are directly or indirectly observable from market data.

Level 3: valuation techniques using significant unobservable inputs. This category includes

all instruments where the valuation technique includes inputs not based on observable data

and the unobservable inputs have a significant effect on the instrument’s valuation. This

category includes instruments that are valued based on quoted prices for similar instruments

where significant unobservable adjustments or assumptions are required to reflect differences

between instruments.

Fair values of financial assets and financial liabilities that are traded in active markets are

based on quoted market prices or dealer price quotations.

6 Cash and balances with Central Bank

2014

$ 2013

$

Cash in hand 10,651,895 7,628,170

Included in cash and cash equivalents (Note 14) 10,651,895 7,628,170 Mandatory reserve deposits with Central Bank 26,676,000 25,370,475 37,327,895 32,998,645

Pursuant to Section 17 of the Banking Act of St. Lucia No. 34 of 2006, the Bank is required to maintain in cash and deposits with the Central Bank, reserve balances in relation to the deposit liabilities of the institution. Mandatory reserve deposits are not available for use in the Bank’s day-to-day operations. The balances with the Central Bank are non-interest bearing.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

51

7 Due from other banks

2014

$ 2013

$ Items in the course of collection from other banks 3,186,222 2,879,210 Placements with other banks 55,795,476 25,464,681 Included in cash and cash equivalents (Note 15) 58,981,698 28,343,891

The weighted average effective interest rate in respect of interest bearing deposits at December 31, 2014 was 0.12% (2013- 0.05%).

8 Treasury bills

2014

$ 2013

$ Treasury bills 7,211,052 15,628,748

The Bank has invested in treasury bills issued by the Government of Saint Lucia. The weighted average effective interest rate of the treasury bills in 2014 was 5.07% (2013 - 4.93%). All treasury bills have fixed interest rates and they mature within one year of the end of the financial year.

9 Loans and advances to financial institutions

2014

$ 2013

$

Reverse repos 16,306,757 22,401,929

Reverse repos are securities that have been purchased under agreements to resell. The weighted average effective interest rate of the reverse repos in 2014 was 3.26% (2013 - 3.92%). Reverse repos mature within one year.

Allowance account for losses on loans and advances to financial institutions as at December 31, 2014 and 2013 was nil.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

52

10 Loans and advances to customers

2014

$

2013

$

Overdraft 16,685,093 19,452,903 Demand loans 206,972,718 191,721,691 Promissory notes 4,245,247 4,385,081 Mortgages 180,243,485 167,099,336 Credit cards 1,801,196 1,280,771 409,947,739 383,939,782 Less provision for impairment of loans and advances (Note 11) (30,166,804 ) (26,347,565 )

379,780,935 357,592,217

Current 35,654,640 33,764,726 Non-current 344,126,295 323,827,491 379,780,935 357,592,217

The weighted average effective interest rate on productive loans stated at amortised cost at December 31, 2014 was 8.63% (2013 - 8.84%) and productive overdraft stated at amortised cost was 10.93% (2013 - 11.25%).

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

53

11 Provision for impairment of loans and advances

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

Overdraft

$

Demand

loans

$

Promissory

notes

$

Mortgage

$

Total

$

Balance at January 1, 2014 81,510 19,862,606 648,452 5,754,997 26,347,565 Provision for loan impairment (Note 28) 84,562 6,323,511 20,323 3,400,879 9,829,275 Loans written off during the year - (5,612,730 ) (178,643 ) (218,663 ) (6,010,036 ) At December 31, 2014 166,072 20,573,387 490,132 8,937,213 30,166,804

Balance at January 1, 2013 2,299 15,742,895 1,040,675 4,528,481 21,314,350 Provision for loan impairment (Note 28) 79,211 6,701,015 (1,338 ) 2,572,214 9,351,102 Loans written off during the year – (2,581,304 ) (390,885 ) (1,345,698 ) (4,317,887 ) At December 31, 2013 81,510 19,862,606 648,452 5,754,997 26,347,565

The total impairment provision for loans and advances to customers is $30,166,804 (2013 -

$26,347,565) of which $24,604,051 (2013 - $22,547,385) represents the individually impaired

loans and the remaining amount of $5,562,753 (2013 - $3,800,180) represents the general

portfolio provision.

12 Investment securities

2014

$ 2013

$ Available-for-sale Equity securities – at fair value - Listed 1,235,700 1,419,280 Equity securities – at cost - Unlisted 3,595,064 3,209,600 Allowance for impairment (1,706,940) (1,706,940) Debt securities – at fair value: - Listed 9,411,501 5,845,280 - Unlisted 1,239,271 1,939,746 Allowance for impairment (193,764) (193,764) Total securities: available-for-sale 13,580,832 10,513,202

Held-to-maturity Debt securities - at amortised cost: - Listed 10,417,275 12,676,146 - Unlisted 8,099,943 8,001,608 Total securities: held-to-maturity 18,517,218 20,677,754 Current 17,881,270 23,324,498 Non-current 14,216,780 7,866,458 32,098,050 31,190,956

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

54

12 Investment securities (Continued)

Unlisted available-for-sale equity securities totalling $1,888,124 (2013 - $1,502,660) are carried at

cost less impairment. The Bank is unable to reliably measure the fair value of the equity securities

since the shares are not 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 at December 31, 2014 was 5.75% (2013 - 5.97%). The movements in available-for-sale and held-to-maturity financial assets during the year are as follows:

Available-for- sale

$

Held-to- maturity

$ At January 1, 2014 10,513,202 20,677,754 Additions 4,274,109 10,702,932 Disposals (sale and redemption) (878,269) (12,863,469) Gain from changes in fair value (328,210) - Allowance for non-performance (Note 28) - -

At December 31, 2014 13,580,832 18,517,217

At January 1, 2013 9,090,011 19,972,054 Additions 3,860,461 7,345,611 Disposals (sale and redemption) (2,255,967) (6,639,911) Gain from changes in fair value (72,220) - Allowance for non-performance (Note 28) (109,083) -

At December 31, 2013 10,513,202 20,677,754

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

55

13 Property, plant and equipment

Land and Building

$

Furniture and Fixtures

$ Equipment

$

Motor Vehicles

$

Work in progress

$ Total

$

Year ended December 31, 2013

Opening net book amount 8,351,554 567,600 2,875,643 59,981 907,499 12,762,277 Additions and transfers 1,262,388 277,598 1,256,633 - 619,934 3,416,553 Disposals and transfers (3,525) (8,346) (40,996) - (1,056,590) (1,109,457) Depreciation on disposals 2,804 4,369 25,616 - – 32,789 Depreciation charge (Note 25) (457,692) (76,994) (654,027) (11,996) – (1,200,709)

Closing net book amount 9,155,529 764,227 3,462,869 47,985 470,843 13,901,453

At December 31, 2013 Cost or valuation 10,537,299 1,925,391 12,948,582 86,000 470,843 25,968,115 Accumulated depreciation (1,381,770) (1,161,164) (9,485,713) (38,015) – (12,066,662) Net book amount 9,155,529 764,227 3,462,869 47,985 470,843 13,901,453

Year ended December 31, 2014

Opening net book amount 9,155,529 764,227 3,462,869 47,985 470,843 13,901,453 Additions and transfers 1,388,729 170,787 663,198 175,000 66,238 2,463,952 Disposals and transfers – – – – (526,581) (526,581) Depreciation on disposals Depreciation charge (Note 25) (445,923) (80,228) (711,298) (44,597) – (1,282,046) Closing net book amount 10,098,335 854,786 3,414,769 178,388 10,500 14,556,778

At December 31, 2014 Cost or valuation 11,926,028 2,096,178 13,611,780 261,000 10,500 27,905,486 Accumulated depreciation (1,827,693) (1,241,392) (10,197,011) (82,612) – (13,348,708)

Net book amount 10,098,335 854,786 3,414,769 178,388 10,500 14,556,778

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

56

13 Property, plant and equipment (Continued)

The historical cost of land and buildings are:

2014

$ 2013

$

Cost 6,387,571 5,792,568

Accumulated depreciation based on historical cost (3,182,877) (3,170,977)

Depreciated historical cost 3,204,694 2,621,591

Valuation techniques Significant unobservable

inputs

Inter-relationship between

key unobservable inputs and

fair value measurement

Market based approach:

The approach is based on the

principle of substitution

whereby the purchaser with

perfect knowledge of the

property market pays no more

for the subject property than

the cost of acquiring an

existing comparable assuming

no cost delay in making the

substitution.

The approach requires

comparison of the subject

property with others of similar

design and utility, inter alia,

which were sold in the recent

past.

However as no two properties

are exactly alike, adjustment is

made for the difference

between the property subject to

valuation and comparable

properties.

Details of the sales of

comparable properties

Conditions influencing

the sale of the

comparable properties.

Comparability

adjustment.

The estimated fair value would

increase/(decrease) if:

Sale value of comparable

properties were

higher/(lower).

Comparability adjustment

were higher/(lower).

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

57

14 Intangible assets

Software $

Year ended December 31, 2013 Opening net book amount 898,019 Additions for the year 403,437 Amortization charge for the year (302,212 )

Closing net book amount 999,244

As at December 31, 2013 Cost 2,685,921 Accumulated depreciation (1,686,677 )

Net book amount 999,244

Year ended December 31, 2014 Opening book amount 999,244 Additions for the year 294,504 Amortization charge for the year (285,981 )

Closing net book amount 1,007,767

As at December 31, 2014 Cost 2,980,425 Accumulated depreciation (1,972,658 )

Net book amount 1,007,767

15 Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents comprise the

following balances with less than 3 months maturity:

2014

$ 2013

$

Cash and balances with Central Bank (Note 6) 10,651,895 7,628,170 Due from other banks (Note 7) 58,981,698 28,343,891 69,633,593 35,972,061

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

58

16 Other assets

2014

$ 2013

$

Accounts receivable 1,741,121 6,057,246 Inventories of stationery and supplies 199,013 216,886 Prepayments 864,473 966,001 2,804,607 7,240,133

17 Due to customers

2014

$ 2013

$ Time deposits 162,208,816 151,936,870 Savings accounts 267,587,887 238,855,651 Demand amounts 40,502,409 41,590,287 470,299,112 432,382,808 Current 467,357,134 431,650,422 Non-current 2,941,978 732,386 470,299,112 432,382,808

All deposits carry fixed interest rates. The weighted average effective interest rate of customers’ deposits at December 31, 2014 was 3.17% (2013 3.35%).

18 Other liabilities

2014

$ 2013

$

Manager’s cheques outstanding 2,190,597 1,991,606 Accounts payable and accrued expenses 2,428,680 1,283,690 Dividends payable on ordinary shares 653,449 690,120 5,272,726 3,965,416

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

59

19 Defined benefit asset

Net Asset in Balance Sheet

The amount recognised in the balance sheet at December 31, 2014 is determined as follows:

2014

$ 2013

$

Present value of funded obligations 3,817,000 3,745,000 Fair value of plan assets (5,199,000) (4,819,000) Net defined Benefit Asset (1,382,000) (1,074,000)

Movement in defined benefit obligations

2014

$ 2013

$

Defined benefit obligation at start of year 3,745,000 3,390,000 Current service cost 150,000 135,000 Interest cost 257,000 236,000 Members’ contributions 59,000 56,000 Experience adjustments 154,000 (53,000) - Actuarial gains from changes in financial

assumptions (398,000) Benefits paid (150,000) (19,000) Defined benefit obligation at end of year 3,817,000 3,745,000

The defined benefit obligation is allocated between the Plan’s members as follows:

- Active members 85% 84% - Deferred members 10% 11% - Pensioners 5% 5%

The weighted average duration of the defined benefit obligation at the year end was 12.5 years.

99% of the benefits for active members are vested. 26% of the defined benefit obligation for

active members is conditional on future salary increases.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

60

19 Defined benefit asset (Continued)

Movement in fair value of plan assets

2014

$ 2013

$

Fair value of Plan Assets at start of year 4,819,000 4,311,000 Interest income 340,000 309,000 Return on Plan Assets, excluding interest income (50,000) (23,000) Bank’s contributions 181,000 185,000 Members’ contributions 59,000 56,000 Benefits paid (150,000) (19,000) Fair value of Plan assets at end of year 5,199,000 4,819,000

Actual return on Plan Assets 290,000 286,000

Allocation of plan assets

2014

$ 2013

$

Government issued nominal bonds 4,814,000 4,242,000 Cash and cash equivalents 385,000 577,000 Fair value of Plan assets at end of year 5,199,000 4,819,000

All asset values as at December 31, 2014 were provided by the Bank. The fair value of the

government bonds has been calculated on an amortised cost basis.

The Plan’s assets are invested in accordance with a strategy agreed with the Plan’s trustees which

is largely driven by the statutory constraints and asset availability. There are no asset-liability

matching strategies used by the Plan.

Expense Recognised in Profit or Loss

2014

$ 2013

$ Current service cost 150,000 135,000

Net interest on net defined benefit asset (83,000) (73,000) Net pension cost (Note 27) 67,000 62,000

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

61

19 Defined benefit asset (Continued)

Re-measurements recognised in Other Comprehensive Income

2014

$ 2013

$ Experience (gains)/losses (194,000) (30,000)

Total amount recognised in Other Comprehensive

Income (194,000) (30,000)

Reconciliation of opening and closing balance sheet entries

2014

$ 2013

$

Net defined benefit (asset)/liability at January 1 (1,074,000) (921,000) Unrecognised gain charged to retained earnings - -

Opening defined benefit liability/(asset) (1,074,000) (921,000) Net Pension cost 67,000 62,000 Re-measurements recognised in Other Comprehensive

Income (194,000) (30,000) Bank contributions paid (181,000) (185,000) Net defined benefit asset at December 31 (1,382,000) (1,074,000)

Summary of principal assumptions as at December 31

2014

% 2013

%

Discount rate 7 7 NIC earnings increases 2 2 Pension increases 0 0 Future salary increases 4 5

Assumptions regarding future mortality are based on published mortality tables. The life

expectations underlying the value of the defined benefit obligation as at December 31, 2013 and

2014 are as follows:

Life expectancy at age 60 for current pensioner years - Male 21 21 - Female 25 25 Life expectancy at age 60 for current members age 40 in years Future salary increases

- Male 21 21 - Female 25 25

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

62

19 Defined benefit asset (Continued)

Sensitivity analysis

The calculation of the defined benefit obligation is sensitive to the assumptions used. The

following table summarises how the defined benefit obligation as at December 31, 2014 would

have changed as a result of a change in assumptions.

1% pa

decrease 1% p.a. increase

%

%

- Discount rate 491,000 516,000 - Future salary increases (335,000) (337,000) An increase in 1 year in the assumed life expectancies shown above would increase the defined benefit obligation at December 2014 by $39,000.

These sensitivities were calculated by re-calculating the defined benefit obligations using the revised assumptions. Although the analysis does not take account of the full distribution of cash flows expected under the plan, it does provide an approximation of the sensitivity of the assumptions shown. Funding The Bank meets the balance of the cost of funding the defined benefit pension plan and the Bank

must pay contributions at least equal to those paid by members, which are fixed. The funding

requirements are based on regular (at least every 4 years) actuarial valuations of the Plan and the

assumptions used to determine the funding required may differ from those set out above. The

Bank expects to pay $184,000 to the Pension Plan during 2015.

20 Deferred income tax liability

Deferred income taxes are calculated in full on temporary differences under the liability method

using a principal tax rate of 30%.

2014

$ 2013

$ At beginning of year (540,345) (399,719)

Charge for the year (Note 29) (129,539) (140,626) Deferred income tax liability at end of year (669,884) (540,345)

The deferred income tax liability comprises the following temporary differences:

2014

$ 2013

$ Accelerated capital allowances (850,945) (727,149)

Defined benefit asset (1,382,000) (1,074,000) (2,232,945) (1,801,149) Deferred tax liability at income tax rate of 30% (669,884) (540,345)

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

63

21 Share capital

No. of

Shares 2014

$ No. of

Shares 2013

$

Authorized: 5,000,000 ordinary shares of no par value At beginning and end of year 4,999,966 7,971,454 4,999,966 7,971,454

22 Reserves

Reserves comprise:

2014

$ 2013

$

Statutory reserve 7,971,454 7,971,454 Revaluation reserve – Property, plant and equipment 3,727,625 3,730,905 Revaluation reserve – Available for sale securities 742,680 1,070,890 12,441,759 12,773,249

Statutory reserve

Pursuant to Section 14(1) of the Banking Act of St. Lucia No. 34 of 2006, the Bank shall, out of its

net profits of each year transfer to that reserve a sum equal to not less than twenty percent of such

profits whenever the amount of the fund is less than one hundred percent of the paid-up capital of

the Bank.

Revaluation reserve – Property, plant and equipment

The revaluation reserve relates to the revaluation of property, plant and equipment above its

previous carrying amount. The Bank transfers a portion of the reserve to retained earnings annually

as the asset is used by the Bank. The value of the transfer is the difference between depreciation

based on the revalued carrying amount of the asset and depreciation based on the asset’s original

cost.

Revaluation reserve – Available for sale securities

The reserve comprises the cumulative net change in the fair value of available for sale financial

assets until the assets are derecognised or impaired.

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

64

23 Net interest income

2014

$ 2013

$

Interest and similar income Loans and advances 32,037,732 29,118,701 Deposits with banks 4,993 28,065 Investment securities 2,753,607 3,612,370 34,796,332 32,759,136

Interest expense and similar charges Time deposits 5,696,843 6,024,879 Savings deposits 8,321,224 7,680,341 Demand deposits 36,461 31,497 14,054,528 13,736,717 Net interest income 20,741,804 19,022,419

24 Other operating income

2014

$ 2013

$

Commission and other income 3,791,217 3,951,877 Foreign exchange 2,792,960 2,949,853 Loss on disposal of property, plant and equipment - (20,078) Fee income 638,936 427,507 Dividend income 145,747 100,356 7,368,860 7,409,515

25 Other operating expenses

2014

$ 2013

$

Administrative expenses (Note 26) 7,120,553 7,171,807 Staff costs (Note 27) 6,958,985 6,812,689 Depreciation (Note 13 and 15) 1,568,027 1,502,921 Operating lease rental 1,193,569 1,118,802 16,841,134 16,606,219

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

65

26 Administrative expenses

2014

$ 2013

$

Other operating expenses 785,662 840,614 Card services expense 846,290 676,814 Bank charges 174,969 290,586 Advertising 712,526 831,085 Computer expense 985,137 732,889 Postage, telephone and telexes 720,790 737,950 Utilities 671,855 705,362 Security expenses 592,105 590,959 Repairs and maintenance 385,582 520,825 Directors’ fees and expenses 278,421 332,356 Professional fees 236,391 135,301 Audit fees 194,000 194,000 Insurance 183,705 223,479 Stationery 194,167 186,220 Bank licence 128,000 136,000 Rates and taxes 30,953 37,367 Total administrative expenses 7,120,553 7,171,807

27 Staff costs

2014

$ 2013

$

Salaries and wages 5,508,762 5,201,647 Other employee benefits 1,165,262 1,134,004 Profit sharing - 208,789 Social security costs 217,961 206,249 Pension costs (Note 19) 67,000 62,000 6,958,985 6,812,689 The average number of employees during the year was 125 (2013 -122).

28 Impairment losses

2014

$ 2013

$

Impairment losses from loans and advances (Note 11) 9,829,275 9,351,102 Impairment losses on investments (Note 12) - 109,083 9,829,275 9,460,185

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

66

29 Income tax expense

2014

$ 2013

$

Current tax 829,237 443,336 Deferred tax (Note 20) 129,539 140,626 958,776 583,962

Tax on the Bank’s income before income tax differs from the theoretical amount that would arise

using the statutory tax rate of 30% as follows:

2014

$ 2013

$

Profit before income tax 1,440,255 365,530

Tax calculated at the statutory tax rate of 30% 432,076 109,659 Tax effect of exempt income (1,488,597) (1,886,110) Non-deductible expenses 2,367,552 2,768,827 Tax incentives (352,256) (408,414)

958,776 583,962

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

30 Earnings per share

2014

$ 2013

$

Per financials 0.10 (0.04)

Weighted average no. of shares 4,999,966 4,999,966

Net income/(loss) for the year 481,479 (218,432)

Basic and diluted

The calculation of basic and diluted earnings per share is based on the net profit/(loss) attributable to shareholders of $481,479 (2013 - $218,432) divided by the weighted average number of shares in issue ranking for dividend during the year of 4,999,966 (2013 - 4,999,966).

31 Dividends

No dividends were appropriated from retained earnings for the year ended December 31, 2014

(2013 - $0.40).

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

67

32 Related party transactions

A related party is a person or entity that is related to the entity that is preparing its financial

statements (referred to in IAS 24 Related Party Disclosures as the “reporting entity”).

A party is related to the company, if:

(a) A person or a close member of that person’s family is related to a reporting entity if that

person:

(i) has control or joint control over the reporting entity;

(ii) has significant influence over the reporting entity; or

(iii) is a member of the key management personnel of the reporting entity or of a parent of the

reporting entity.

(b) An entity is related to a reporting entity if any of the following conditions applies:

(i) The entity and the reporting entity are members of the same Bank (which means that each

parent, subsidiary and fellow subsidiary is related to the others).

(ii) One entity is an associate or joint venture of the other entity (or an associate or joint

venture of a member of a Bank of which the other entity is a member).

(iii) Both entities are joint ventures of the same third party.

(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third

entity.

(v) The entity is a post-employment benefit plan for the benefit of employees of either the

reporting entity or an entity related to the reporting entity. If the reporting entity is itself

such a plan, the sponsoring employers are also related to the reporting entity.

(vi) The entity is controlled, or jointly controlled by a person identified in (a).

(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the

key management personnel of the entity (or of a parent of the entity).

A related party transaction is a transfer of resources, services or obligations between related

parties, regardless of whether a price is charged.

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

Loan and advances to Directors and related entities

2014

$ 2013

$

Loans outstanding at beginning of year 5,604,197 5,318,070 Net loans issued for the year 2,275,210 286,127 Loans outstanding at end of year 7,879,407 5,604,197

Interest income earned 575,209 506,795

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

68

32 Related party transactions (Cont’d)

Loan and advances to key management personnel

2014

$ 2013

$

Loans outstanding at beginning of year 3,542,565 1,729,269 Net loans issued for the year 451,712 1,813,295 Loans outstanding at end of year 3,994,277 3,542,564

Interest income earned 225,837 163,940

The loan and advances to Directors and other key management personnel are secured over

property of the respective borrowers.

No impairment losses have been recorded against balances outstanding during the period with

directors or key management personnel, and no specific allowance has been made for impairment

losses on balances with directors or key management personnel and their immediate relatives at

the reporting date.

Deposits from Directors and related entities

2014

$ 2013

$

Deposits at beginning of year 5,810,539 3,805,327 Net deposits (repaid)/received during the year (1,918,347) 2,005,212 Deposits outstanding at end of year 3,892,192 5,810,539

Interest expense on deposits 116,335 137,728

Deposits from key management personnel

2014

$ 2013

$

Deposits at beginning of year 662,499 441,063 Net deposits received during the year 29,418 221,435 Deposits outstanding at end of year 691,917 662,498

Interest expense on deposits 22,044 25,000

1st National Bank St. Lucia Limited

Notes to Financial Statements (Continued)

December 31, 2014

(Expressed in Eastern Caribbean dollars)

69

32 Related party transactions (Cont’d)

Key management personnel compensation

2014

$ 2013

$

Salaries and other short-term benefits 1,292,371 1,160,037 Post and other employment benefits 371,441 264,988 1,663,812 1,425,025

At the end of the financial year, directors’ holding of shares totalled 63,715 shares or 1.27% of

shares outstanding, (2013 - 62,849 or 1.26%)

34 Contingent liabilities and commitments

(a) Loans commitment, guarantee and other financial facilities

At December 31, 2014, the Bank had contractual off-balance sheet financial instruments that

commit it to extend credit to customers, guarantee and other facilities as follows:

2014

$ 2013

$

Loan commitments 17,790,036 28,905,897 Guarantees and standby letters of credit 585,501 500,481 18,375,537 29,406,378

35 Operating leases

The Bank leases a number of branch and other office facilities under operating leases. Lease

payments are renegotiated when the previous lease term has expired and typically run for a period

of 5 years. Some leases provide for additional rent payments that are based on changes in local

price indices. At the year end, several operating lease agreements were under negotiation. At

December 31, 2014 the future minimum lease payments under non-cancellable leases were as

follows:-

2014

2013

$ $

Within one year 1,070,262

6 1,016,166

Within two to five years 3,627,859 2,552,343

4,698,121 3,568,509