Housing Authority of Fiji

NATIONAL BANK OF TUVALU

ANNUAL REPORT 2014

NBT Fun Walk Day 2014

Warm up before the Fun Walk.

NBT Staff on the walk.

National Bank of Tuvalu ANNUAL REPORT For the year ended 31 December 2014

Contents

Board of Director & Management 4 - 5

Vision & Mission Statements 6

Chairman’s report 7 - 8

General Manager’s report 9 - 10

Director’s report 11 - 12

Statement by directors 13

Statement of comprehensive income 14

Statement of changes in equity 15

Statement of financial position 16

Statement of cash flows 17

Notes to the financial statements 18 - 38

Report of the independent auditor 39

Five year progress summary 40

Profile of the Tuvalu economy 41

BOARD OF DIRECTORS as at 31st December 2014.

SOLOFA UOTA Chairman (Resigned 26th April 2015) Project Coordinator National Adaptation Plan of Action - NAPA

PUSINELLI LAAFAI Deputy Chairman

Rev. Dr. KITIONA TAUSI Director

ISALA TITO ISALA Director Secretary General TASNOC

VITOLI FAAOGA IOSEFA Director TVAIP Project Manager

MANAGEMENT as at 31st December 2014.

SIOSE PENITALA TEO General Manager

PETELI TAUATI FAKATOAFE Manager Finance & International Business

MAKATALA OPETA SAPAKUKA Manager Lending (Rlg.)

ADDRESS:

Postal : PO Box 13, Vaiaku, Funafuti, Tuvalu

Telephone : (688) 20803/ 20804

Email : [email protected] [email protected]

SWIFT : NABTTVTV

BRANCHES IN TUVALU

Nanumea, Nanumaga, Niutao, Nui, Nukufetau, Vaitupu & Nukulaelae.

National Bank of Tuvalu.

Our Vision: “To be the People’s leading Bank”

Our Mission: “To provide and promote affordable & profitable nation-wide quality banking services and a fair return to our stakeholder(s)”.

Chairman’s report It gives me great pleasure to report on the National Bank of Tuvalu’s overall performance for year ending 31st December 2014.

The year has yet been another successful one as we recorded an after tax accounting profit of $1,075,035 (2013:$2,645,151). Despite the decrease, profits before tax and credit impairments increased by 3.75%. Our recoveries of non- performing loans were not up to expectations as we experienced more delinquent loans.

It has always been the focus of the bank to be able to withstand the challenges that lie ahead and continue to sustain its banking services to the nation as a whole as well as contribute to the nation’s economic growth and financial stability.

We continue to focus on our priority areas as per the framework of our Corporate Plan in promoting good governance and continuous improvements; contribute to economic growth and financial stability; improve on bad debts collections; develop human resources and act socially responsible to the communities that we operate in.

The bank is undergoing an upgrade to its banking systems with hopes that we may be able to improve our lines of products. Over the years ahead, we view the need for infrastructure development, though invariably involves high capital costs, benefits shall accrue over the long run.

The bank’s Board and Management are committed to ensuring that the bank manages its capital and balance sheet well, as well as maintain quality assets and implement appropriate risk management techniques so as to ensure that we meet our stakeholder’s needs and expectations.

I would like to extend my appreciation to the bank’s Board of Directors, Management and Staff for their dedication and perseverance towards our strategic initiatives during the year. Our thanks to our valued customers for their continuous support and we look forward to serving them better.

Pusinelli Laafai Deputy Chairman.

General Manager’s report I am delighted to report that 2014 was yet another successful year for the National Bank of Tuvalu.

Overview of financial performance.

The National Bank of Tuvalu made a net profit after tax of $1,075,035 (2013:$2,645,151). This represents a 59.36% decrease as compared to profits of previous year as during that prior period, there were significant impairment credits recorded in relation to recovery of State supported corporate debts.

The major contributing factors to this result were; Net interest income – increase by 1.74%, Non-interest income – increase by 3.79%, Operating expenses – increase by 2.42%

Key Performance indicators; Return on Equity – 11.2%; Return on Assets – 2.4%

The bank’s balance sheet remains strong as liquid assets further increased by 21.3% to $35.8 million.

Board structure & Staff.

It is with pleasure that we invited four new Directors to the Board, the appointment of Mr. Isala T Isala (January 2014), Mr. Pisinelli Laafai (July 2014), Rev. Dr. Kitiona Tausi (July 2014), Mr. Vitoli Faaoga Iosefa (July 2014). Mr Solofa Uota (July 2014) was re-appointed as a Director and took the role as Chairman but unfortunately had resigned from the Board at the time of this report. Their support and contributions throughout the year has been invaluable and as testament of their commitment as Directors. Our special thanks and appreciation to outgoing Chairman Mr Solofa Uota for his contributions and guidance.

At the time of this report, four senior staffs have been deployed on long term trainings as we continue to focus on staff trainings and developments. Over the years, the bank had experienced high turnover of its staff and in order to continue skills development, job rotations exercise exposed new recruits to various departments of the bank. Offshore trainings and development programs at neighbouring banks are still being awaited for and we hope to benefit from them.

The Bank has a highly committed team that is proud of the bank’s heritage as we dedicate our service to our valued Customers and future prospects.

People & Community.

The bank continues to promote its social responsibilities as it continues its sporting sponsorships and development promotions. The introduction of a community Fun Walk event and weight-loss competition was a new look in the promotion of good health programs.

Our appreciation.

My special thanks to the bank Management and Staff for their dedication, commitment and loyalty that has brought us thus far, our thanks and appreciation to the Board of Directors for all the guidance and support throughout the many years and most of all to our valued customers that have maintained their level of trust in our efforts to serve their expectations.

I wish the bank another year’s success as we move on to meet the challenges that lie ahead.

Siose Penitala Teo General Manager

National Bank of Tuvalu Directors’ report

In accordance with a resolution of the Board of Directors, the Directors herewith submit the statement of financial position of National Bank of Tuvalu (the “Bank”) as at 31 December 2014 and the related statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date and report as follows:

Directors

The names of Directors in office at the date of this report and at any time during the financial year and up until the date the financial statements were authorised for issue are as follows:

Mr. Pusinelli Laafai (Acting Chairman) Mr. Isala Isala (appointed on 14 January 2014) Mr. Vitoli F Iosefa Mr. Kitiona Tausi Mr. Solofa Uota (resigned 26 April 2015)

State of affairs

There were no significant changes in the state of affairs of the Bank that occurred during the financial year under review not otherwise disclosed in this report or financial statements. The accompanying statement of financial position gives a true and fair view of the state of affairs of the Bank as at 31 December 2014 and the accompanying statement of comprehensive income, statement of changes in equity and statement of cash flows give a true and fair view of the results, changes in equity and cash flows of the Bank for the year then ended.

Operating results

The net profit for the year ended 31 December 2014 was $1,075,035 (2013: $2,645,151).

Dividends

A dividend of $1,322,575 (2013: $456,148) was declared and paid as dividends in respect of the financial year ended 31 December 2014.

Reserves

The Directors recommend that no amounts be transferred to reserves.

Principal activity

The principal activity of the Bank during the course of the financial year was providing commercial banking services including passbook and cheque accounts, call deposits, term deposits, provision of business and personal finance and international banking services. There were no significant changes in the nature of activities of the Bank during the year ended.

National Bank of Tuvalu

Directors’ report (continued)

Loans and advances to customers

The Directors took reasonable steps before the Bank’s financial statements were made out to ascertain that all known bad debts were written off and adequate allowance was made for impairment losses. At the date of this report, the Directors are not aware of any circumstances which would render the above assessment inadequate to any substantial extent. Related parties

All related party transactions have been adequately recorded in the financial statements.

Subsequent events

There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Bank, to affect significantly the operations of the Bank, the results of those operations, or the state of affairs of the Bank, in subsequent financial years.

Other circumstances

At the date of this report, the Directors are not aware of any circumstances not otherwise dealt with in this report or financial statements which would render any amounts stated in the accounts to be misleading.

Unusual circumstances

The results of the Bank’s operations during the financial year have not in the opinion of the Directors been substantially affected by any item, transaction or event of a material and unusual nature other than those disclosed in the financial statements.

Director’s interest

No director of the Bank has, since the end of the previous financial year, received or become entitled to receive a benefit other than a benefit included in the total amount of emoluments received or due and receivable by Directors shown in the Bank’s financial statements by reason of a contract made with the Bank or a related entity with the Director or with a firm of which he is a member, or in a entity in which he has a substantial financial interest.

National Bank of Tuvalu

Statement by Directors

In the opinion of the Directors of National Bank of Tuvalu:

(a) the accompanying statement of comprehensive income of the Bank is drawn up so as to give a true and fair view of the results of the Bank for the year ended 31 December 2014;

(b) the accompanying statement of changes in equity of the Bank is drawn up so as to give a true and fair view of the changes in equity of the Bank for the year ended 31 December 2014;

(c) the accompanying statement of financial position of the Bank is drawn up so as to give a true and fair view of the state of affairs of the Bank as at 31 December 2014;

(d) the accompanying statement of cash flows of the Bank is drawn up so as to give a true and fair view of the cash flows of the Bank for the year ended 31 December 2014;

(e) at the date of this statement there are reasonable grounds to believe the Bank will be able to pay its debts as and when they fall due; and

(f) all related party transactions have been adequately recorded in the books of the Bank.

National Bank of Tuvalu Statement of comprehensive income For the year ended 31 December 2014

Note 2014 2013 $ $

Interest income 4 1,495,177 1,450,389 Interest expense 5 (302,367) (277,954) Net interest income 1,192,810 1,172,435

Other operating income 6 2,362,102 2,276,042 Net operating income 3,554,912 3,448,477

Operating expenses Depreciation 13 (56,604) (52,452) Personnel expenses 7 (834,762) (754,625) Other operating expenses 8 (867,998) (910,861) Total operating expenses (1,759,364) (1,717,938)

Profit before tax and credit impairment 1,795,548 1,730,539

Impairment (loss) / credit 11 (329,228) 2,023,610 Profit before tax 1,466,320 3,754,149

Income tax expense 9(a) (391,285) (1,108,998)

Profit for the year 1,075,035 2,645,151

Other comprehensive income for the year - -

Total comprehensive income for the year 1,075,035 2,645,151

The notes on pages 18 to 38 are an integral part of these financial statements.

National Bank of Tuvalu Statement of changes in equity For the year ended 31 December 2014

Retained Share capital earnings Total $ $ $

Balance at 1 January 2013 471,000 7,231,843 7,702,843

Total comprehensive income for the year Profit - 2,645,151 2,645,151 Total comprehensive income for the year - 2,645,151 2,645,151

Transactions with owners of the Bank Distribution to owner of the Bank Dividends declared and paid - (456,148) (456,148) Total distribution to owner of the Bank - (456,148) (456,148)

Balance at 31 December 2013 471,000 9,420,846 9,891,846

Total comprehensive income for the year Profit - 1,075,035 1,075,035 Total comprehensive income for the year - 1,075,035 1,075,035

Transactions with owners of the Bank Distribution to owner of the Bank Dividends declared and paid - (1,322,575) (1,322,575) Total distribution to owner of the Bank - (1,322,575) (1,322,575)

Balance at 31 December 2014 471,000 9,173,306 9,644,306

The notes on pages 18 to 38 are an integral part of these financial statements.

National Bank of Tuvalu Statement of financial position As at 31 December 2014

Note 2014 2013 $ $ Assets Liquid assets 10 35,844,625 29,552,545 Loans and advances to customers 11 6,235,410 9,558,666 Other assets 12 94,483 68,338 Premises and equipment 13 358,555 358,105 Deferred tax assets 9(b) 1,819,367 1,687,275

Total assets 44,352,440 41,224,929 Liabilities Creditors and accruals 15 125,388 211,896 Current tax liability 9(c) 575,323 601,782 Deposits from customers 14 33,903,636 30,419,019 Employee entitlements 16 103,787 100,386

Total liabilities 34,708,134 31,333,083 Net assets 9,644,306 9,891,846

Shareholders’ equity Share capital 17 471,000 471,000 Retained earnings 9,173,306 9,420,846

Total shareholders’ equity 9,644,306 9,891,846

Signed in accordance with the resolution of the Directors.

The notes on pages 18 to 38 are an integral part of these financial statements.

National Bank of Tuvalu Statement of cash flows For the year ended 31 December 2014

Note 2014 2013 $ $ Cash flows from operating activities Interest and commission received 3,820,443 3,737,900 Interest paid (294,463) (277,954) Payments to suppliers and employees (1,764,076) (1,584,538) Net decrease in loans and advances 2,994,028 222,202 Net increase in deposits from customers 3,484,616 7,918,611 Income tax paid 9(c) (549,836) (428,276) Net cash provided by operating activities 7,690,712 9,587,945 Net cash provided by operating activities 7,690,712 Cash flows from investing activity Purchase of premises and equipment 13 (76,057) (113,061)

Net cash used in investing activity (76,057) (113,061) Net cash used in investing activity (76,057)

Cash flows from financing activity Dividends paid (1,322,575) (456,148) Net cash used in financing activity (1,322,575) (456,148) Net cash used in financing activity (1,322,575) Net increase in cash and cash equivalents 6,292,080 9,018,736

Cash and cash equivalents at 1 January 29,552,545 20,533,809 Cash and cash equivalents at 31 December 19 35,844,625 29,552,545

The notes on pages 18 to 38 are an integral part of these financial statements.

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

1. Reporting entity National Bank of Tuvalu (the “Bank”) is an entity domiciled in Tuvalu. The Bank’s registered office is Funafuti, Tuvalu. The principal activity of the Bank during the course of the financial year was providing commercial banking services including passbook and cheque accounts, call deposits, term deposits, provision of business and personal finance and international banking services. There were no significant changes in the nature of activities of the Bank during the year ended. 2. Basis of preparation (a) Statement of compliance The financial statements of the Bank have been drawn up in accordance with International Financial Reporting Standards (“IFRS”) adopted by the International Accounting Standards Board (“IASB”) and the Public Enterprises (Performance and Accountability) Act. New standards, amendments and interpretations issued but not yet effective The following standards, amendments and interpretations to existing standards have been published and are mandatory for accounting periods beginning on or after 1 January 2014 or later periods, but the Bank has not early adopted them. Amendments to IFRS 9 - Financial Instruments: Classification and measurement (effective 1 January 2015). Management have not assessed the potential impact on the financial statements resulting from the application of IFRS 9. (b) Basis of measurement The financial statements have been prepared on a historical cost basis except where stated. These accounting policies have been consistently applied by the Bank. (c) Functional and presentation currency These financial statements are presented in Australian dollars (“AUD”), which is the Bank’s functional currency. Except as indicated, financial information presented in AUD has been rounded to the nearest dollar. (d) Use of estimates and judgements The preparation of the financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

2. Basis of preparation (continued) (d) Use of estimates and judgements (continued) In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements including the following notes: Note 3(f) – Financial assets and liabilities Note 3(f) (vi) – Identification and measurement of impairment 3. Significant accounting policies The principal accounting policies adopted by the Bank are stated to assist in a general understanding of the financial statements. (a) Foreign currency transactions Transactions in foreign currencies are translated to AUD at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to AUD at the exchange rate at that date. The foreign currency gain or losses on translation are recognised in profit or loss. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the spot exchange rate at the date that the fair value was determined. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on translation are recognised in profit or loss. (b) Interest Interest income and expense are recognised in profit or loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Bank estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses. Interest income and expense presented in the statement of comprehensive income include interest on financial assets and financial liabilities measured at amortised cost calculated on an effective interest basis. (c) Fees and commission Fees and commission income, including banking fees and income and foreign exchange commission are recognised as the related services are performed. (d) Foreign exchange income Foreign exchange income comprises gains less losses related to trading assets and liabilities, and includes all realised and unrealised fair value foreign exchange differences.

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

3. Significant accounting policies (continued) (e) Income tax Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided for 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 the following temporary differences: the initial recognition of goodwill, the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by reporting date. A deferred tax asset is recognised to the extent that it is probable that the future taxable profits will be available against which temporary differences can be utilised. 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. (f) Financial assets and liabilities (i) Recognition The Bank initially recognises loans and advances to customers and deposits from customers on the date at which they are originated. All other financial assets and liabilities are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. (ii) Classification Refer to accounting policies 3(g), (h), (i), (l) and (m). (iii) Derecognition The Bank derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. 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 in the statement of financial position. 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 recognised in other comprehensive income is recognised in profit or loss.

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

3. Significant accounting policies (continued) (f) Financial assets and liabilities (continued) (iii) Derecognition (continued) In transactions in which the Bank neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Bank continues to recognise 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. In certain transactions the Bank retains the obligation to service the transferred financial asset for a fee. The transferred asset is derecognised if it meets the derecognition criteria. An asset or liability is recognised for the servicing contract, depending on whether the servicing fee is more than adequate (asset) or is less than adequate (liability) for performing the servicing. The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. (iv) Offsetting Financial assets and liabilities are offset and the net amount is presented in the statement of financial position when, and only when, the Bank has a legal right to set off the recognised amounts and it intends either to settle on a net basis or to realise 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 group of similar transactions such as in the Bank's trading activity. (v) Amortised cost measurement The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principle repayments, plus or minus cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. (vi) 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 group of financial assets is (are) 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 asset(s) that can be estimated reliably. Objective evidence that financial assets are impaired can include significant financial difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. The Bank considers evidence of impairment for loans and advances at both a specific asset and collective level. All individually significant loans and advances are assessed for specific impairment. All individually significant loans and advances found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances that are not individually significant are collectively assessed for impairment by grouping together loans and advances with similar risk characteristics.

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

3. Significant accounting policies (continued) (f) Financial assets and liabilities (continued) (vi) Identification and measurement of impairment (continued) Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset's original effective interest rate. Impairment losses are recognised in profit or loss and reflected in an allowance account against loans and advances. Interest on impaired assets continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. (g) Cash and cash equivalents Cash and cash equivalents include currency notes and coins which are highly liquid financial assets with original maturity of less than three months are subject to insignificant risk of changes in their fair value and are held by the Bank in the management of its short term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position. (h) Balances with other banks Receivables due from other financial institutions include bank balances on current and Nostro accounts and deposits with other banks. Nostro accounts are NBT’s bank accounts held with a foreign country bank, in the currency of the foreign country and/or AUD. These are brought to account at the gross value of the outstanding balance. Interest income, if any, is recognised in the profit or loss using the effective interest method. (i) Loans and advances to customers Loans and advances include direct finance provided to customers such as bank overdrafts, commercial loans, home loans and other personal lending. Loans and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. Interest on amounts outstanding is recognised on an accrual basis using the effective interest method. (j) Other assets Other assets include the accrual of interest income and sundry debtors. (k) Premises and equipment Recognition and measurement Items of premises and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. 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, and the cost of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

3. Significant accounting policies (continued) (k) Premises and equipment (continued) Recognition and measurement (continued) When parts of an item of property, plant or equipment have different useful lives, they are accounted for as separate items (major components) of premises and equipment. Subsequent costs The cost of replacing part of an item of property, plant or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The costs of the day-to-day servicing of premises and equipment are recognised in profit or loss as incurred. Depreciation Items of Premises and equipment are depreciated using the diminishing value method at rates specified under the Tuvalu Income Tax Act 1992. (Amendment of Income Tax Rates as per 29 May 1996). The annual depreciation rates used for each class of asset are as follows: Bank premises 3.6% Office equipment 20% Furniture and fittings 5% - 20% Motor vehicles 20% Disposal of assets The gain or loss on disposal of fixed assets is calculated as the difference between the carrying amount of the asset at the time of disposal and the proceeds on disposal and is included in the profit or loss in the year of disposal. (l) Deposits from customers Deposits from customers, comprising of current accounts, saving accounts and term deposits are the Bank's sources of debt funding. Deposits are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their cost using the effective interest method. (m) Trade creditors, accruals and provisions Trade creditors and accruals are stated at amortised cost. A provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

3. Significant accounting policies (continued)

(n) Employee entitlements Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. The Bank’s net obligation in respect of long-term employee benefits other than pension plans is the amount of future benefit that employee have earned in return for their service in current and prior periods; that benefit is discounted to determine its present value, and fair value of any related assets deducted. The discount rate is the yield at the reporting date on government bonds that have maturity dates approximating the terms of the Bank’s obligations. Any actuarial gains and losses are recognised in profit and loss in the period in which they arise. (o) Impairment of non-financial assets The carrying amounts of the Bank's non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset's recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are 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. For the purpose of impairment testing, assets that cannot be tested individually 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 groups of assets (the" cash-generating unit" or "CGU"). The Bank's corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs. An impairment loss is recognised if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. (p) Contingent liabilities and capital commitments The Bank is involved in a range of transactions that give rise to contingent liabilities. The Bank discloses a contingent liability when it has a possible obligation arising from past events, that will be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the Bank's control. A contingent liability is disclosed when a present obligation is not recognised because it is not probable that an outflow of resources will be required to settle an obligation, or the amount of the obligation cannot be measured with sufficient reliability. (q) Comparative figures Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year.

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

2014 2013 $ $ 4. Interest income Loans and advances to customers 884,356 935,461 Deposit with overseas banks 610,821 515,928 1,495,177 1,450,389

5. Interest expense Term deposits 151,079 159,098 Savings accounts 112,144 94,015 Call accounts 39,145 24,841 302,367 277,954

6. Other operating income Fees and commission 299,442 278,111 Foreign exchange income 1,844,629 1,938,814 Bad debts recoveries 600 1,627 Other 217,431 57,490 2,362,102 2,276,042

7. Personnel expenses Salaries and wages 741,015 682,290 TNPF 76,226 65,329 Long service leave 3,401 (5,444) Board fees 14,120 12,450 834,762 754,625

8. Other operating expenses Advertising expense 48,287 24,763 Audit fee 17,103 11,800 Business expenses 34,959 26,145 Electricity 71,128 95,133 Non lending losses – write offs 10,692 147 Purchased services 67,389 72,457 Rent 212,817 213,417 Repairs and maintenance 9,847 22,819 Stationery 58,291 64,106 Telecommunications 90,268 130,734 Training 29,834 40,232 Travel 147,316 130,107 Other 70,067 79,001 867,998 910,861

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

2014 2013 $ $ 9. Taxation (a) Income tax expense Current tax expense 523,377 507,347 Deferred tax expense (132,092) 601,651 391,285 1,108,998

Reconciliation of effective tax rate

Profit before income tax 1,466,320 3,754,149 Prima facie income tax expense at a corporate tax rate of 30% (2013: 30%) 439,896 1,126,245 Timing differences brought to account (30,116) - Community service obligation grant (18,495) (17,247) 391,285 1,108,998

(b) Deferred tax assets

Recognised deferred tax assets Allowance for credit impairment 1,768,692 1,669,923 Allowance for non lending losses 20,559 17,352 Employee entitlements 30,116 - 1,819,367 1,687,275

(b) Recognised deferred tax assets 1 January Recognised in 31 December 2013 profit or loss 2013 $ $ $ Allowance for credit impairment 2,277,007 (607,084) 1,669,923 Allowance for non lending losses 11,919 5,433 17,352 2,288,926 (601,651) 1,687,275

1 January Recognised in 31 December 2014 profit or loss 2014 $ $ $ Allowance for credit impairment 1,669,923 98,769 1,768,692 Allowance for non lending losses 17,352 3,207 20,559 Employee entitlements - 30,116 30,116 1,687,275 132,092 1,819,367

Balance at the beginning of the year 601,782 522,711 Income tax paid (549,836) (428,276) Current tax expense 523,377 507,347 575,323 601,782

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

2014 2013 $ $ 10. Liquid assets Currency notes and coins 665,874 1,428,477 Deposits with overseas banks 22,763,482 19,457,552 Balances with other banks 12,415,269 8,656,516 35,844,625 29,552,545

11. Loans and advances to customers

Term loans - housing 3,704,602 3,535,478 Term loans - non housing 6,135,668 8,167,622 Overdrafts 2,288,382 3,420,965 Savings book unauthorized debts 2,400 1,015 12,131,052 15,125,080 Less: Allowance for credit impairment (5,895,642) (5,566,414) 6,235,410 9,558,666

Allowance for credit impairment is represented as follows:

Individually assessed credit allowance Balance at 1 January 5,063,327 7,196,655

Charge / (credit) to profit or loss 506,850 (2,133,328) Balance at 31 December 5,570,177 5,063,327

Collective credit allowance Balance at 1 January 503,087 393,369 Credit to profit or loss (177,622) (109,718) Balance at 31 December 325,465 503,087 Total allowance for credit impairment 5,895,642 5,566,414 Total charge / (credit) to profit or loss 329,228 (2,023,610)

12. Other assets Accrued interest 56,128 34,440 Others 106,886 91,738 163,014 126,178 Allowance for non lending losses (68,531) (57,840) 94,483 68,338

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014 13. Premises and equipment

Bank Office Motor Furniture Total premises equipment vehicles and fittings $ $ $ $ $ Cost

Balance at 1 January 2013 287,637 650,066 48,265 202,136 1,188,104 Acquisitions - 53,651 42,390 17,020 113,061 Disposals - - - (1,511) (1,511) Balance at 31 December 2013 287,637 703,717 90,655 217,645 1,299,654 Acquisitions - 56,120 15,900 4,037 76,057 Disposals (2,149) (149,404) (1,790) (46,177) (199,520)

Balance at 31 December 2014 285,488 610,433 104,765 175,505 1,176,191

Depreciation

Balance at 1 January 2013 196,041 494,653 31,730 167,692 890,116 Depreciation charge for the year 3,297 32,168 8,739 8,248 52,452 Disposals during the year - - - (1,019) (1,019) Balance at 31 December 2013 199,338 526,821 40,469 174,921 941,549 Depreciation charge for the year 3,142 35,060 11,015 7,387 56,604 Disposals during the year (1,116) (138,107) (1,380) (39,914) (180,517)

Balance at 31 December 2014 201,364 423,774 50,104 142,394 817,636 Carrying amounts At 1 January 2013 91,596 155,413 16,535 34,444 297,988

At 31 December 2013 88,299 176,896 50,186 42,724 358,105 At 31 December 2014 84,124 186,659 54,661 33,111 358,555

2014 2013 $ $ 14. Deposits from customers Current account - interest bearing 1,783,832 1,488,646 Term deposit - interest bearing 5,687,744 4,921,714 Savings account - interest bearing 13,670,834 7,222,382 Current account – non-interest bearing 12,761,226 16,786,277 33,903,636 30,419,019

15. Creditors and accruals Bank cheques payable 3,324 80,425 Other 122,064 131,471 125,388 211,896

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014 2014 2013 $ $

16. Employee Entitlement Balance at 1 January 100,386 105,830 Provisions (reversed) / during the year 3,401 (5,444) Balance at 31 December 103,787 100,386

17. Shareholders’ equity Authorised capital 1,000,000 (2013: 1,000,000) ordinary shares of $1 each 1,000,000 1,000,000

Issued capital 471,000 (2013: 471,000) ordinary shares of $1 each, fully paid 471,000 471,000

18. Dividend Balance at 1 January - - Dividend declared 1,322,575 456,148 Dividend payment (1,322,575) (456,148) Balance at 31 December - - 19. Cash and cash equivalents Cash and cash equivalents at the end of the financial year as shown in the statement of cash flows comprise the following statement of financial position amounts:

Liquid assets 35,844,625 29,552,545

20. Contingent liabilities and capital commitments

Capital expenditure commitments as at balance date was $nil (2013: $nil). At balance date the amount of undrawn facilities provided to bank's customers totalled $51,486 (2013: $28,799).

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014 21. Related party disclosures

Identity of related parties The names of the Directors of the Bank at the date of the report are:

Mr. Solofa Uota Pusinelli Laafai Isala Isala (appointed on 14 January 2014) Vitoli Faaoga Iosefa Kitiona Tausi

Transactions with related parties

The Bank has related party relationships with the Board of Directors, key management personnel and the Government of Tuvalu. Transactions with related entities are on an arm’s length basis and are transacted or recorded on normal commercial terms and conditions.

2014 2013 $ $ Balances with related party The following related party balances were noted with the Government:

Deposits from customers 14,416,747 12,562,422 Transactions with Directors Advances and loan balances outstanding 6,999 11,952 Directors fees 14,120 12,450 Key management personnel During the year the following persons were the key management personnel identified as personnel with the greatest authority and responsibility for planning, directing and controlling the activities of the Bank:

Name Position Mr Siose Teo General Manager Mrs Peteli Tauati Manager Finance and International Mr Fakatoafe Teikauea Chief Operating Supervisor Mrs Makatala Sapakuka Manager Lending Mr Tekafa Niko Recoveries Supervisor

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014 21. Related party disclosures (continued)

The aggregate compensation of the key management personnel comprises of loans and advances and short and long term benefits and is set out below: 2014 2013 $ $ Loans and advances 162,918 251,263 Short term benefits 222,780 169,989 Long term benefits 35,989 32,672

22. Financial risk management disclosures Introduction The Bank is committed to the management of risk to achieve sustainability of service to its customers, employment of its staff and profits to its shareholders and, therefore, takes on controlled amounts of risk when considered appropriate. The primary risks are those of credit, market (liquidity, price, interest rate, foreign exchange) and operational risk. This note presents information about the Bank’s exposure to each of the above risks, the Bank’s objectives, policies and process for measuring and managing risks. Implementation of risk management strategy and the day to day management of risk is the responsibility of the General Manager, supported by the executives of the Bank. The Bank's external auditors, may also review parts of the Bank's risk management framework that impact on significant aspects of the financial systems, but only to the extent necessary to form their audit opinion on the Bank's annual results. The following sections describe the risk management framework components: Credit risk The Bank is subject to credit risk through its lending and investing activities and in cases where it acts as an intermediary on behalf of customers or other third parties or issues guarantees. The Bank’s primary exposure to credit risk arises through its loans and advances. The amount of credit exposure in this regard is represented by the carrying amounts of the assets on the balance sheet. In addition, the Bank is exposed to off balance sheet credit risk through commitments to extend credit and guarantees issued – refer note 20. The major concentrations of credit risk arise by the type of customer in relation to the Bank’s loans and advances, commitments to extend credit. Credit risk is the potential risk for loss arising from failure of a customer or counterparty to meet their contractual obligations. Credit risk principally arises within the Bank from its core business in providing lending facilities. Credit risk also arises from the Bank assuming contingent liabilities and participating in financial market transactions. The Bank is selective in targeting credit risk exposures and avoids exposures to any high risk area. The Bank relies primarily on the integrity of the customer or counterparty and their ability to meet the obligations to the Bank.

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

22. Financial risk management disclosures (continued) Credit risk (continued) The Bank has a defined credit policy for the approval and management of all credit risk counterparties. Lending standards and criteria are clearly defined for all Bank products. The Bank relies primarily on the integrity of the customer or counterparty and their ability to meet the obligations to the Bank. Collateral Management Collateral is used to mitigate credit risk, as the secondary source of repayment in case the counterparty cannot meet its contractual repayment obligations. The bank’s credit principles specify to only lend when the counterparty has the capacity and ability to repay and the bank sets limits on the acceptable level of credit risk. Acceptance of credit risk is firstly based on the counterparty’s assessed capacity to meet contractual obligations, (i.e. interest and capital repayments). Obtaining collateral is only used to mitigate credit risk. Procedures are designed to ensure collateral is managed, legally enforceable, conservatively valued and adequately insured where appropriate. The most common types of collateral includes:  charges over cash deposits and Tuvalu National Provident Fund (TNPF) contribution;  charges over residential, commercial and industrial buildings;  fixed/ floating charges over business assets, e.g. premises, stock and debtors; and  financial guarantees and pledges. In the event of customer default, any loan security is usually held as mortgagee in possession while the bank is actively seeking to realise it. Therefore the bank does not usually hold any real estate or other assets acquired through the enforcement of security. Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities within the same geographic region, or when they have similar risk characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The bank monitors its portfolios, to identify and assess risk concentrations. The bank’s strategy is to maintain well-diversified low risk credit portfolios focused on achieving the best risk-return balance. Total on balance sheet economic sector credit risk concentrations are presented in the table below: 2014 2014 2013 2013 $ % $ % Retail customers 1,491,156 12% 3,400,748 22% Corporate customers 2,079,309 17% 2,775,343 18% Public sector 8,560,587 71% 8,948,989 60%

12,131,052 100% 15,125,080 100% Impaired assets 2014 2013 $ $ Neither past due nor impaired 6,174,148 7,956,728 Past due but not impaired 335,151 744,103 Impaired 5,621,753 6,424,249 12,131,052 15,125,080

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

22. Financial risk management disclosures (continued) Credit risk (continued) Aging of past due but not impaired:

1 - 29 30 - 59 60 - 89 90 - 179 180 days - More than days days days days 1 year 1 year Total 31 December 2014 $ $ $ $ $ $ $

Loans and advances 166,884 14,818 46,308 57,555 24,988 24,598 335,151

1 - 29 30 - 59 60 - 89 90 - 179 180 days More than days days days days - 1 year 1 year Total 31 December 2013 $ $ $ $ $ $ $

Loans and advances - 386,325 357,778 - - - 744,103

Maximum exposure to credit risk For financial assets recognised on the statement of financial position, the maximum exposure to credit risk is the carrying amount. Maximum exposure to Reported Excluded* credit risk 2014 2013 2014 2013 2014 2013 $’000 $’000 $’000 $’000 $’000 $’000 Liquid assets 35,845 29,553 666 1,428 35,179 28,125 Net loans and advances and acceptances 6,235 9,559 - - 6,235 9,559 42,080 39,112 666 1,428 41,414 37,684 Undrawn Facilities 51 29 - - 51 29 Total 42,131 39,141 666 1,428 41,465 37,713 * Notes and coins held by the bank branches. Market risk Market risk is the potential for change in the value of on and off balance sheet positions caused by a change in the value, volatility or relationship between market rates and prices. Market risk arises from the mismatch between assets and liabilities, both on and off balance sheet, and from controlled trading undertaken in pursuit of profit. Specific limits are set for treasury and financial market trading activities and for the Bank's balance sheet management. Market risk includes liquidity, currency, interest rate and foreign exchange risk, which are explained as follows:

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

22. Financial risk management disclosures (continued) Market risk (continued) i. Currency risk The Bank is exposed to currency risk through transactions in foreign currencies. These currencies include the NZ Dollar, Fijian Dollar, Euro, Pound Sterling, US Dollar and the Japanese Yen. As the currency in which the Bank presents its financial statements is the Australian dollar, the Bank’s financial statements are affected by movements in the exchange rates between these currencies and the Australian dollar. The Bank's transactional exposures give rise to foreign currency gains and losses that are recognised in profit or loss. These exposures comprise the monetary assets and monetary liabilities of the Bank that are not denominated in the measurement currency of the Bank enterprise involved. These exposures are as follows:

Total Australian United Fijian Other 31 December 2014 exposure Dollar States Dollar Dollar currencies AUD AUD AUD AUD AUD Financial assets

Liquid assets 35,844,625 35,053,616 384,100 200,886 206,023 Total Australian United Fijian Other 31 December 2013 exposure Dollar States Dollar Dollar currencies AUD AUD AUD AUD AUD Financial assets

Liquid assets 29,552,545 28,814,096 436,776 157,309 144,364 The following significant exchange rates applied during the year: Reporting date spot rate 2014 2013 USD 0.8183 0.8875 FJD 1.6284 1.6805 Sensitivity analysis: A 10 percent strengthening of the Fiji Dollar and US Dollar against the Australian Dollar at 31 December would have increased (decreased) profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2013. Profit or loss Effect in AUD 31-Dec-14 FJD (20,089) USD (38,410)

31-Dec-13 FJD (15,701) USD (43,900)

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

22. Financial risk management disclosures (continued) Market risk (continued) ii. Liquidity risk Liquidity risk arises in the general funding of the Bank’s activities and in the management of positions. It includes both the risk of being unable to fund assets at appropriate maturities and rates and the risk of being unable to liquidate an asset at a reasonable price and in an appropriate time frame. The Bank strives to maintain a balance between continuity of funding and flexibility through the use of liabilities with a range of maturities. The Bank continually assesses liquidity risk by identifying and monitoring changes in funding required to meet business goals and targets set in terms of the overall Bank strategy. The Bank assesses liquidity risk by identifying and monitoring changes in funding required to meet business goals and targets set in terms of the overall Bank strategy. The Bank monitors this risk primarily by forecasting future daily cash requirements. The Bank manages this risk by holding a pool of liquid assets and deposits on call with high credit quality counterparties to provide for any unexpected patterns in cash movements and by seeking a diverse and stable funding base. Details of the reported Bank ratio of net liquid assets to deposits from customers at the reporting date is as follows: Note 2014 2013 $ $

Liquid assets 19 35,844,625 29,552,545 Less Creditors and accruals 15 125,388 211,896 Current tax liability 9(c) 575,323 601,782 Net liquid assets 35,143,914 28,738,867

Deposits from customers 14 33,903,636 30,419,019

Ratio of net liquid assets to deposits from customers 104% 94%

The Government of Tuvalu has guaranteed the repayment of all customer deposits held by the Bank including interest due thereon if at any time the assets of the Bank are insufficient to pay or meet the lawful claims of every depositor as legislated in the National Bank of Tuvalu Ordinance. The maturity analysis of financial liabilities is based on the remaining contractual term to maturity as follows:

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

22. Financial risk management disclosures (continued) Market risk (continued) ii. Liquidity risk (continued)

As at 31 December 2014 Over 3 1 day to 3 months to 1 Contractual Carrying At call months year outflows amount $ $ $ $ $ Liabilities Creditors and accruals (89,883) (35,582) (3,324) (128,789) (128,789) Deposits from customers (28,215,892) (5,414,380) (297,769) (33,928,041) (33,903,636) Total liabilities (28,305,775) (5,449,962) (301,093) (34,056,830) (34,032,425)

As at 31 December 2013 Over 3 1 day to 3 months to 1 Contractual Carrying At call months year outflows amount $ $ $ $ $ Liabilities Creditors and accruals (64,659) (66,812) (80,425) (211,896) (211,896) Deposits from customers (25,485,415) (4,658,967) (289,837) (30,434,219) (30,419,019) Total liabilities (25,550,074) (4,725,779) (370,262) (30,646,115) (30,630,915)

iii. Price risk Price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual instrument or its issuer or factors affecting all instruments of a specific type traded in the market. iv. Interest rate risk The Bank’s operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets (including investments) and interest-bearing liabilities mature or reprice at different times or in differing amounts. Risk management activities are aimed at optimising net interest income, given market interest rate levels consistent with the Bank’s business strategies. In general, the Bank is liability sensitive because its interest-earning assets have a longer duration and reprice less frequently than interest-bearing liabilities. This means that in rising interest rate environments, margins earned will narrow as liabilities reprice. However the actual effect will depend on a number of factors, including the extent to which repayments are made earlier or later than the contracted dates and variations in interest rate sensitivity within repricing periods and among currencies. Cash flow interest rate risk is the potential for a change in interest rates to change net interest earnings, in the current reporting period and in future years. Fair value interest rate risk arises from the potential for a change in interest rates to cause a fluctuation in the fair value of financial

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

22. Financial risk management disclosures (continued) Market risk (continued) iv. Interest rate risk (continued) instruments. Interest rate risk arises from the structure and characteristics of the Bank's assets, liabilities and equity, and in the mismatch in repricing dates of its assets and liabilities. The objective is to manage the interest rate risk to achieve stable and sustainable net interest earnings in the long term. Overall strategic direction is provided by the senior executives who meet each month. On a day- to-day basis, interest rate risk is monitored and managed within the Bank's Treasury Department.

At the reporting date the interest rate profile of the Bank’s interest-bearing financial instruments were: Carrying amount 2014 2013 $ $ Fixed rate instruments Financial assets 29,105,719 27,333,747 Financial liabilities (21,142,409) (13,632,742) 7,963,310 13,701,005 Variable rate instruments Financial assets 2,079,813 2,243,478 2,079,813 2,243,478 Sensitivity analysis for fixed instruments The Bank does not account for any fixed rate financial assets and liabilities at fair value through statement of comprehensive income. Any change in fair value at the reporting date would affect the statement of comprehensive income. Cash flow sensitivity analysis for variable rate instruments A change of 100 basis points (bp) in interest rates at the reporting date would have increased (decreased) comprehensive income and other comprehensive income by amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2013. Profit or loss 100bp 100bp increase decrease 31 December 2014 20,798 (20,798) Variable rate instruments 31 December 2013 Variable rate instruments 22,435 (22,435)

National Bank of Tuvalu Notes to the financial statements For the year ended 31 December 2014

22. Financial risk management disclosures (continued) Market risk (continued) v. 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 such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all 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 to avoid control procedures that restrict initiative and creativity. The primary responsibility for the development and implementation of controls to address operational risk is assigned to the General Manager. The responsibility is supported by the development of overall Bank standard for the management of operational risks in the following areas:  requirements for appropriate segregation of duties, including the independent authorisation of transactions;  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;  development of contingency plans; and  training and professional development.

23. Events subsequent to statement of financial position

There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Bank, to affect significantly the operations of the Bank, the results of those operations, or the state of affairs of the Bank, in subsequent financial years.

Independent auditors’ report to the members of National Bank of Tuvalu Report on the Bank’s financial statements We have audited the accompanying financial statements of National Bank of Tuvalu, which comprise the statement of financial position as at 31 December 2014, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes as set out on pages 5 to 29. Directors’ and management’s responsibility for the financial statements Directors and management are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards and for such internal control as the directors and management determine 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 these financial statements based on our audit. We conducted our audit in accordance with International Standards of Supreme Audit Institutions. 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 judgement, 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 of financial statements that give a true and fair view 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 the 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 give a true and fair view of the financial position of National Bank of Tuvalu as at 31 December 2014 and of its financial performance, its changes in equity and its statement of cash flows for the year then ended in accordance with International Financial Reporting Standards. Report on other legal and regulatory requirements We have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit; In our opinion, (a) proper books of account have been kept by the Bank, so far as appears from our examination of those books; (b) the financial statements are in agreement with the books of account; and (c) to the best of our information and according to the explanations given to us the financial statements give the information required by the National Bank of Tuvalu Act, 1983 in the manner so required.

National Bank of Tuvalu Five Year Summary

Figures as at 31st December (000s) 2010 2011 2012 2013 2014

Savings Deposits $ 7,427 $ 6,629 $ 7,110 $ 7,222 $ 13,671

Term Deposits $ 4,623 $ 6,948 $ 5,203 $ 4,922 $ 5,688

Current Accounts $ 7,550 $ 7,630 $ 10,188 $ 18,265 $ 14,545

Total Deposits $ 19,600 $ 21,207 $ 22,501 $ 30,409 $ 33,904

Loans & Advances $ 8,635 $ 8,231 $ 7,757 $ 7,535 $ 6,235

Investments $ 14,433 $ 16,206 $ 17,288 $ 19,468 $ 22,763

Capital & Reserves $ 7,792 $ 7,377 $ 7,741 $ 9,892 $ 9,644

PROFILE OF THE TUVALU ECONOMY

Tuvalu was formerly known as the Ellice Islands within the British colony of the Gilbert and Ellice Islands. After a period of self-government, Tuvalu achieved Independence within the Commonwealth on October 1, 1978.

Although economic development has relied heavily on foreign aid, notable gains have been made towards attaining economic self-reliance. The establishment of the Tuvalu Trust Fund in 1987 with the generous contributions from the United Kingdom, New Zealand and Australia, was a major step in this direction. Nevertheless, Tuvalu remains heavily dependent on the external assistance.

The Trust Fund income is a key factor in determining Government fiscal policy. The value of the Fund is in vicinity of AUD $ 132.93 million. (2012)

Tuvalu is classified “Least Developed” country status by the United Nation. National GDP per capital is estimated to be approximately AUD $ 3,400 (2012).

It faces formidable constraints to long term economic development. Limited land resources, inter-island transport, telecommunications and isolation from markets are just a few of the most obvious barriers.

The country’s primary resource is its 900,000,km2 Exclusive Economic Zone (EEZ) which to date remains unexplored.

Whilst Tuvalu’s external position is characterized by rising trade deficits, this is largely offset by external assistance and remittances from Tuvaluans working abroad. Traditional exports such as stamps are sought to be surpassed by tourism and fishing.

The fledging private sector continues to suffer due to shortage of skilled labour and market constraints. The Development Bank of Tuvalu was established in mid-1993 to provide support to local entrepreneurs.

Tuvalu uses Australian dollars as its domestic currency and circulates its own coinage at par with Australian coins.