ECHMB ANNUAL REPORT 2013

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3 Our Mission To promote the development of the secondary mortgage market in Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, Saint Christopher and Nevis, Saint Lucia and St. Vincent and the Grenadines, collectively referred to as the Member States, and bring additional benefits by facilitating the development of the money and capital market, improving liquidity management in the financial system and promoting home ownership throughout the Member States 3

4 e Our Vision The Bank aspires to be the principal financial intermediary for providing affordable and sustainable sources of housing finance to Primary Lenders operating within the Member States and that its securities are investments of choice on the regional capital market. s Our Values/ Beliefs The Bank offers its Primary Lenders and Investors timeliness, consistency, value for money, recognising that Primary Lenders and Investors are the focus of its business. The Bank s shareholders are critical partners in shaping its success, and the Bank will operate a profitable business that maximises value to shareholders. The Bank recognises the need to develop strategic alliances with local, regional and international partners to ensure mutually beneficial returns in all its business endeavours The Bank s relationship will be professional, courteous, and responsive. The Bank will be seen as ethical in all its dealings. The Bank believes that employees are an important asset, critical to the development and execution of it Strategic Plan and it is the Bank s responsibility to nurture their professional growth. 4

5 Chairman s Statement Page 11 The Chairman presents a review of the year and key events which impacted the business Contents Annual Report Financial Highlights 8 Simplified Statement of Financial Position 18 Report of the Board of Directors 29 Managment s Overview of Operations Board of Directors Profiles Statement of Corporate Governance ECHMB Shares Senior Management Team Risk Management Looking Ahead The ECHMB Team Audited Financial Statements Independent Auditors Report Statement of Financial Position Statement of Comprehensive Income Statement of Changes in Equity Statement of Cashflow Notes to Financial Statement 5

6 Eastern Caribbean Home Mortgage Bank Five (5) Year Financial Trend 6

7 FINANCIAL HIGHLIGHTS 7

8 SIMPLIFIED STATEMENT OF FINANCIAL POSITION 8

9 EASTERN CARIBBEAN HOME MORTGAGE BANK NOTICE OF THE 18 th ANNUAL GENERAL MEETING NOTICE IS HEREBY GIVEN that the 18 th ANNUAL GENERAL MEETING of Shareholders of the Eastern Caribbean Home Mortgage Bank (ECHMB), will be held at the Bay Gardens Beach Resort, Saint Lucia on Thursday 01 August 2013 at 5:30p.m. to transact the following business: (1) To confirm the Minutes of the 17 th Annual General Meeting held on 27 July (2) To consider Matters Arising from the Minutes of the 17 th Annual General Meeting; (3) To receive, consider and if thought fit accept the Report of the Chairman, Board of Directors and Auditors and the Audited Financial Statements for the Year Ended 31 March 2013; (4) To approve dividends amounting to $10.00 per share for the year ended 31 March 2013, as recommended by the Board of Directors; (5) To pass a special resolution to appoint Grant Thornton International as Auditors for the ensuing year, in accordance with Section 162 of the Companies Act of Grenada. BY ORDER OF THE BOARD OF DIRECTORS Maria Barthelmy (Ms) Secretary Dated this 12 day of July 2013 PROXIES A shareholder entitled to attend and vote at the meeting is entitled to appoint a proxy to attend in his/her stead. A proxy need not be a shareholder. Proxy forms may be lodged at/or mailed to Eastern Caribbean Home Mortgage Bank, ECCB Complex, Bird Rock Road, P.O. Box 753, Basseterre, St Kitts, not less than forty-eight (48) hours before the time of the meeting. 9

10 CORPORATE INFORMATION Registered Office Postal Office Address Website Address ECCB Agency Office, Monckton Street, St. George's, Grenada ECCB Complex, Bird Rock Road, P.O. Box 753, Basseterre, St. Kitts Telephone Number (869) Fax Number (869) Chairman Corporate Secretary External Auditors Internal Auditors Bankers The Honourable Sir K Dwight Venner Maria Barthelmy PricewaterhouseCoopers Cnr. Bank Street & W. Independence Sq., Basseterre, St. Kitts, West Indies. Maloney & Associates Chartered Certified Accountants Basseterre, St.Kitts and Nevis St. Kitts Nevis Anguilla National Bank Limited Central Street, Basseterre, St. Kitts and Nevis The Bank of Nova Scotia Fort Street, Basseterre, St. Kitts and Nevis Affiliation Regulator Caribbean Association of Audit Committee Members Eastern Caribbean Securities Regulatory Commission Shareholders Name Percentage Holding Eastern Caribbean Central Bank 24.86% National Co-operative Credit Union Limited (Dominica) 7.63% CLICO Internation Life Insurance Company Limited (Barbados) 7.44% Dominica Social Security 5.58% Other Financial Insittutions 54.49% 10

11 CHAIRMAN S STATEMENT ECHMB ANNUAL REPORT 2013 The impact of the crisis has been exacerbated by its origins in the advanced countries, to which the economies of the ECCU countries are closely linked through trade, foreign investment and immigration channels. Although the risks of further contraction have eased slightly, threats of a possible downturn have not fully dissipated. The projections are for the international environment, to which ECCU member countries are linked, to remain depressed and uncertain in the near term. Growth in the Currency Union is expected to be marginal at 1.5 per cent in 2013 and 2.2 per cent in Honourable Sir K Dwight Venner Chairman On behalf of the Board of Directors of the Eastern Caribbean Home Mortgage Bank (ECHMB), I am pleased to present the Annual Report of the ECHMB with the audited financial statements for the year ended 31 March Over the period 2012/2013, the economies of the Eastern Caribbean Currency Union (ECCU) experienced their fourth consecutive year of economic contraction. Preliminary data indicate that economic activity in the ECCU contracted in 2012, for a fourth consecutive year. Real GDP is estimated to have declined by 0.2 per cent in 2012 compared with a 0.5 per cent contraction in Value added in the construction industry, a major contributor to economic output in the ECCU, contracted by 5.3 per cent in 2012, compared with a 7.1 per cent decline in the previous year. The member countries of the ECCU are now at a crossroads as the global crisis has exposed and exacerbated the structural deficiencies of our economies. The structural issues which characterise these economies are size, openness and vulnerability. The ECCU countries are micro states with very limited land space and populations. Openness is characterised by a very high ratio of trade (exports and imports) to gross domestic product. Vulnerability translates to the impact of external shocks such as global recessions, increases in commodity prices of imports, increased interest rates, and natural disasters on the economies of these countries. The responses to both the global crisis and the fundamental structural characteristics of these economies are concretely expressed in three instruments: 1. The Economic Union Treaty; 2. The ECCU Eight Point Stabilisation and Growth Programme; and 3. A Work Programme Coordination Initiative at the national, currency union, and internation al levels. The Economic Union has given the region the political, constitutional and economic framework and the theatre, the single space, for achieving its goals, namely. 11

12 1. Growth and Competitiveness; 2. Reduction of Unemployment; 3. Reduction of Poverty; 4. Maintenance of the United Nations Human Development Indices; and 5. Socioeconomic Transformation of the Countries The Eight Point Stabilisation and Growth Programme provides the technical approach to be used for resolving the problem. In addition the Work Programme Coordination initiative provides the critical ingredients of coordination, cooperation, and exchange of information within each country, between countries and with the regional and international communities to achieve these goals in a much more cost effective way than at present. The adverse impact of crisis on the ECCU has demonstrated the need for a more dynamic and resilient financial system. This system will provide the requisite support to the region s underdeveloped private sector to ignite the level of business activity needed to achieve the targeted growth identified by member governments. The continued development of the region s money and capital markets into a Finance, Investment and Development Architecture will facilitate more effective mobilisation of financial resources across the region, efficient allocation of liquidity within the financial system and to provide support for private sector activity for sustained growth and development across the region. As a key institution in this architecture, the Eastern Caribbean Home Mortgage Bank over the period , continued to weather the effects of the crisis and played a significant role in the money and capital market development programme. The ECHMB continued to raise funds through its bond issues. The institution has raised $646.04m in corporate bonds over its eighteen years of operations with total outstanding bonds amounting to $250.0m as at 31 March Table 1: Bonds issued by ECHMB Over seventy corporate and individual investors have benefited from the $118.51m bond interest payout. The ECHMB has also been able to obtain favourable rates on the market. The coupon rate on the ECHMB s instruments lowered from 6.0 per cent in 2009 to an average of 4.42 per cent by the second quarter To date the ECHMB has acquired in excess of $316.12m in mortgages from eleven primary lenders with a total value of $199.40m outstanding across six ECCU member states and has paid $14.73m to Primary Lenders for the administration of the mortgages. During the year the Caribbean Information and Credit Rating Services Limited (CariCRIS) re-affirmed the ratings of Cari AA-(Foreign Currency Rating) and Cari AA- (Local Currency Rating) on its Caribbean regional rating scale to the US$30m notional debt issue of ECHMB. We anticipate that the ECHMB s sound business model and the Cari AA- rating should enable the institution to continue to raise funds at preferential rates. 12

13 For the financial year ended 31 March 2013 the Bank generated a net income of $5.76m in 2013 and this represented an increase of $0.16m when compared to the 2012 outturn of $5.60m and was higher than the net income achieved since inception. a) b) c) d) e) To discuss key issues for developing the housing sector and the economic impact of the sector on economies of the ECCU. To assess the profile and to make comparisons of the housing sector in the Currency Union to determine best practices. To identify efficiencies and inefficiencies in the housing sector and to make recommendations for improvement. To guide the establishment of a comprehensive data base on the ECCU housing sector. To assess the housing stock, production and inputs of the subsector, key actors in the in dustry and to determine the value mortgages and loan portfolios. The ECHMB continues to declare dividends every year since 2001 resulting in a total payout of $16.73m to date. As a result, Shareholders Equity increased from $16.97m in 2006 to $55.18m in As at 31 March 2013, the ECHMB s cash reserves stood at $55.62m and therefore the Bank has sufficient resources to finance future projects. During the year two Home Ownership Day Events were successfully mounted in Antigua and Barbuda in June 2012 and in Grenada in November 2012 respectively. Both Events were overwhelmingly supported by Primary Lenders and other key stakeholders in the Mortgage and Housing Construction Industry in both countries. During the year the Bank, in collaboration with the Eastern Caribbean Central Bank, advanced its efforts at conducting an in depth analysis of the housing sector in the ECCU. In this regard, the team continues to undertake the following: To date, the team has interviewed several stakeholders in St Kitts and Nevis and prepared a Report based on its findings. Going forward, the team is expected to conduct similar fact finding missions on the housing sector in other OECS countries. This initiative would enable the ECHMB to play a more wide-ranging role in structuring appropriate products and services to meet the needs of our target market. Looking ahead the ECHMB will continue to contribute to the development of the region s money and capital market development programme by pursuing its mandate as articulated in Article 4 of the ECHMB Agreement namely: a) To develop and maintain a secondary market for residential mortgages in the member territories; b) To contribute to the mobilisation and allocation of long term savings for investment in housing; c) To support the development of a system of housing finance and provide leadership in the housing and home finance industry; d) To promote the growth and development of the money and capital market; 13

14 e) To improve underwriting practices and efficiency in processing mortgages and to promote services and benefits related to such mortgages. The ECHMB will seek to execute this mandate while employing mechanisms to achieve increased efficiencies in its operations. As we move into another year of operations, I would like to thank the shareholders for your continued support over the years which enabled the ECHMB to achieve its success to date. I also thank the Board of Directors, management and staff for their efforts during the course of the year of the 2013 financial year. The Honourable Sir K Dwight Venner Chairman 14

15 BOARD OF DIRECTORS PROFILES ECHMB ANNUAL REPORT 2013 the areas of Monetary and International Economics, Central Banking, Public Finance, Economic Development, Political Economy and International Economic Relations. Currently, he is a member of the Board of Directors of the Eastern Caribbean Securities Exchange Limited, the Caribbean Knowledge and Learning Network, and a member of the Commission for Growth and Development, World Bank. He is also Chairman the UWI Open Campus Council and was Chairman of the OECS Economic Union Task Force. The Honourable Sir K Dwight Venner Chairman The Honourable Sir K Dwight Venner is Governor of the Eastern Caribbean Central Bank (ECCB), a position he has held since December He was appointed to the Board of Directors of the ECHMB in 1996, representing the ECCB, the Class A shareholder. Prior to that he served in the position of Director of Finance and Planning in the Saint Lucian Government between November 1981 and November The Hon. Sir Dwight is an Economist by training and was educated at the University of the West Indies, Mona, Jamaica where he obtained both a Bachelor of Science (BSc) and a Master of Science (MSc) Degree in Economics. He served as a Junior Research Fellow at the Institute of Social and Economic Research at the University of the West Indies and then as a Lecturer in Economics from 1974 to The Hon Sir Dwight received the award of Commander of the British Empire (CBE) in 1996 in Saint Lucia and was recognised as a Distinguished Graduate of the University of the West Indies on its 50th Anniversary in July In June 2001 he was awarded Knight Commander of the Most Excellent Order of the British Empire (KBE) in St Vincent and the Grenadines for services to the financial sector. In October 2003, the Hon Sir Dwight was recipient of an honorary degree, the Doctor of Laws from the University of the West Indies. In December 2011, he was awarded the Saint Lucia Cross for distinguished and outstanding service of national importance to Saint Lucia. The Honourable Sir K Dwight Venner has written and published extensively in 15

16 Mr. Dexter Ducreay Deputy Chairman Mr. Dexter Ducreay is the General Manager of A.C. Shillingford & Company Limited, Dominica. He holds a B Sc. (Hons) in Accounting from St. John s University-New York. He was appointed to the Board of Directors in July 2008, representing Class D shareholders. He is a former General Manager of Dominica Water and Sewage Company and is credited with leading the amalgamation of five (5) credit Unions in Dominica which is currently referred to as the National Co-operative Credit Union. He is the Vice President of the National Cooperative Credit Union Limited, Dominica and has sixteen (16) years of senior level management experience. Mr. Gordon Derrick Director Mr. Gordon Derrick is the Managing Director of G.D.E.C. Limited, Antigua. Mr. Derrick holds a BSc./ Mechanical Engineering from the Florida Institute of Technology and a MBA/Social Science from UWI Cave Hill Campus, Barbados. He was appointed to the Board of Directors in July 2008, representing Class C shareholders. Mr. Derrick is the General Secretary of the Antigua and Barbuda Football Association and has been elected the new President of the Caribbean Football Union. He is a Director of Antigua Commercial Bank, ACB Mortgage &Trust, Antigua and SCS Promotions Limited, Antigua. 16

17 Mr. Louis Williams Director Mr. Louis Williams is the Finance Manager of the National Insurance Scheme, Grenada and holds a Licentiate in Accounting from the University of Camaguey, Cuba. Mr. Williams is pursuing a MSc. in Finance with the University of Leister. He was appointed to the Board of Directors in July 2010, representing Class B shareholders. He is the Chairman of the Board of Directors of the Presentation Brothers College Secondary School, in Grenada. Mr. Henry Hazel Director Mr. Henry Hazel is currently the Chief Executive Officer of Eastern Caribbean Amalgamated Bank (ECAB). He is a seasoned financial services executive with a sterling track record of exemplary leadership and significant industry accomplishments. His impressive combination of leadership, technical skills and broad industry experience distinguishes him as a leading expert in the ECCU banking arena where for in excess of 20 years he was employed in financial sector regulation, banking supervision and as a Chief Executive Officer in retail banking. Mr. Hazel is a Certified Public Accountant (CPA) conferred by the Maryland State Board of Public Accountancy having undertaken studies at the University of Maryland, USA. He holds Bachelors of Arts (BA) Degrees in Accounting (summa cum laude) and Mathematics (summa cum laude) from the University of the US Virgin islands. He is currently enrolled in the Chartered Banker MBA program with the Chartered Bankers Institute of Learning and the University of Bangor, UK and is expected to be completed in March

18 REPORT OF THE BOARD OF DIRECTORS The Directors have the pleasure in submitting their Report for the year ended 31 st March Financial Results and Dividends $ 000 Net Income attributed to shareholders 5,759 Final dividends of $10.00 per share for 2012 (2,687) Transfer to reserves (1,228) Net Income after distribution 1,844 Retained Earnings at beginning of year 8,295 Retained Earnings at end of year 10,139 Dividends The Directors have recommended a Dividend of $10.00 per share for the year ended 31 st March, 2013, amounting to $2.68m Substantial interests in Share Capital as at 31 March 2013 There have been no changes in these interests occurring between the end of the ECHMB s financial year and the date of the Notice convening the Annual General Meeting. Statement of Affairs In the opinion of the Directors there were no significant changes in the state of the affairs of the Bank during the financial year. 18

19 Directors In accordance with Article 15(1) of the Eastern Caribbean Home Mortgage Bank Agreement, Directors are appointed for a term of two (2) years, but are eligible to offer themselves for re-election. The Director demitting office at the last Annual General Meeting was:- Mrs. P Bernadette Knight Roberts Class C and was replaced by Mr. Henry Hazel Class C At no time during or at the end of the financial year did any Director have any material interests in any contract or arrangement in relation to the business of the ECHMB. Events Subsequent to Statement of Financial Position Date The Directors are not aware of any transaction which has arisen since 31 st March 2013 that has a material effect on the operations of the Bank, and for which adequate disclosures have not been made in the financial statements. Auditors Article 23 of the Eastern Caribbean Home Mortgage Bank Agreement provides that shareholders shall at each Annual General Meeting appoint an auditor to hold office from the conclusion of the meeting until the conclusion of the next Annual General Meeting. The firm of PwC, Chartered Accountants, which served as auditors of the ECHMB for the period 2012/2013, retires at this Meeting and has indicated that it does not wish to be reappointed. The former PwC network members in Saint Lucia, Antigua and St Kitts and Nevis have changed affiliation to the Grant Thornton International Ltd., effective 1 July Grant Thornton has indicated its availability for, and interest in, providing audit services to the ECHMB. Based on an evaluation of this firm, the Directors propose the appointment of Grant Thornton International as auditors of the ECHMB for the financial year ending 31 March

20 STATEMENT ON CORPORATE GOVERVANCE Background In keeping with its principal responsibilities, the Board of Directors ( the Board ) of the ECHMB has continued to ensure that the highest standards in corporate governance are maintained, with the objectives of reinforcing the confidence and trust of the investing public, increasing customers satisfaction and building a strong and ethical regional institution. On an annual basis, the ECHMB adopts the latest developments in corporate governance as practiced by leading region and internationally banks in an effort to ensure that its procedures are in line with international best practice. The Board is committed to achieving the highest standards of business integrity, ethics and professionalism in undertaking its activities. The fundamental approach adopted is to ensure that the right executive leadership, corporate strategy, internal controls and risk management procedures are in place. Notwithstanding the aforesaid, the Board continuously reviews its governance model to ensure relevance and effectiveness as the Bank faces future challenges exacerbated by uncertain economic conditions. ECHMB corporate governance statement objective is presented so as to enable the Board to provide a comprehensive analysis into the Bank s corporate governance practices to stakeholders. 20

21 Board Charter The Board is guided by its Charter and the Eastern Caribbean Home Mortgage Bank Agreement which provide references for directors in relation to their roles, powers, duties and functions. Apart from reflecting current best practices and applicable rules and regulations, the Charter and the Eastern Caribbean Home Mortgage Bank Agreement outline processes and procedures to ensure the effectiveness and efficiency of Bank s Board and its Committees. The Charter is updated at regular intervals to reflect changes to the Bank s policies, procedures and processes as well as to incorporate amended relevant rules and regulations. Role & Responsibilities of the Board It is the responsibility of the Board to periodically review and approve the overall strategies, business, organisation and significant policies of the Bank. The Board also sets the Bank s core values and adopts proper standards to ensure that the Bank operates with integrity. The responsibilities of the Board include the following:- reviewing and approving the strategic business plans for the Bank; identifying and managing principal risks affecting the Bank; reviewing the adequacy and integrity of the Bank s internal control systems; approving the appointment and compensation of the Chief Executive Officer and Senior Management Staff; approving new policies pertaining to staff salaries and benefits; and approving changes to the corporate organisation structure. Quality & Supply of Information to the Board In order to effectively discharge its duties, the Board has full and unrestricted access to all information pertaining to the Bank s business and affairs as well as to advice and services of the senior management. In addition to formal Board meetings, the Chairman maintains regular contact with the Chief Executive Officer to discuss specific matters, and the latter assisted by the Corporate Secretary ensures that frequent and timely communication between the senior management and the Board is maintained at all times as appropriate. The Board is regularly kept up to date on and apprised of any regulations and guidelines. Corporate Secretary The Corporate Secretary, is responsible for advising the Board on issues relating to corporate compliance with the relevant laws, rules, procedures and regulations affecting the Board and the Bank, as well as best practices of governance. She is also responsible for advising the Directors of their obligations and duties to disclose their interest in securities, disclosure of any conflict of interest in a transaction involving the Bank, prohibition on dealing in securities and restrictions on disclosure of price-sensitive information. All Directors have access to the advice and services of the Bank s Corporate Secretary. 21

22 Director Independence and Independent Non-Executive Directors The Board consists entirely of Non-Executive Directors which help to provide strong and effective oversight over management. The Non-Executive Directors do not participate in the day-to-day management of the Bank and do not engage in any business dealings or other relationships with the Bank (other than in situations permitted by the applicable regulations) in order to ensure that they remain truly capable of exercising independent judgement and act in the best interests of the Bank and its shareholders. Further, the Board is satisfied and assured that no individual or group of Directors has unfettered powers of decision that could create a potential conflict of interest. Additionally, the Board ensures that all Independent Non-Executive Directors possess the following qualities:- ability to challenge the assumptions, beliefs or viewpoints of others with intelligent questioning, constructive and rigorous debating, and dispassionate decision making in the interest of the Bank; and willingness to stand up and defend his own views, beliefs and opinions for the ultimate good of the Bank; and a good understanding of the Bank s business activities in order to appropriately provide responses on the various strategic and technical issues confronted by the Board. In accordance with Article 27 of the Eastern Caribbean Home Mortgage Bank Agreement a Director who is in any way interested, whether directly or indirectly in a contract or proposed contract with the Bank or whose material interest in a company, partnership, undertaking or other business is likely to be affected by a decision of the Board shall disclose the nature of his interest at the first meeting of the Board at which he is present after the relevant facts came to his knowledge. Article 27 further provides that after the disclosure, the Director making it shall not vote on the matter and, unless the Board otherwise directs, shall not be present or take part in the proceedings of any Meeting at which the matter is being discussed or decided by the Board. Structured Training Programme for Directors Directors are expected to participate in the Directors Education Accreditation Programme (DEAP). This is an advanced director training course, aimed at preparing directors for the important role that they play in the governance of the Bank. 22

23 ECHMB Organisation Chart Executive Committee Article 22 of the Eastern Caribbean Home Mortgage Bank Agreement provides that the Board may appoint an Executive Committee of the Board, consisting of not less than three Directors drawn from three different classes of shareholders, the General Manager and the Financial Officer of the Bank, to supervise asset and liability management and examine and approve financial commitments in accordance with the regulations and policies established by the Board. The Committee is comprised of the following members:- The Honourable Sir K Dwight Venner Chairman Gordon Derrick Dexter Ducreay Henry Hazel Duleep Cheddie Randy Lewis Audit Committee The Audit Committee provides guidance on the Bank s systems of accounting and internal controls, thus ensuring the integrity of financial reporting. This Committee 23

24 also serves as an effective liaison between executive management and the external and internal auditors. The Committee is comprised of the following members:- Dexter Ducreay - Chairman Louis A Williams Mr. Henry Hazel The 2012/13 activities of the Committee included: reviewed the ECHMB s compliance with its financial covenants; reviewed and approved the external audit plan and timetable; evaluated the performance of the External Auditors and approved their audit fees; reviewed the External Auditors 2012/13 Management Letter and Report on the 2012/13 audit; approved the 2012/13 Audit Engagement Letter; reviewed monthly management accounts; examined the implications of changes to International Financial Reporting Standards; and approved the 2012/13 Internal Audit Plan, reviewed Internal Audit Report and monitored Management s action on Internal Audit recommendations; Strategy Committee The Strategy Committee considers and approves the ECHMB s Strategic Plan and is comprised of the following members:- Gordon Derrick - Chairman Dexter Ducreay Louis A Williams Henry Hazel The responsibilities of the Strategy Committee for the 2012/13 Financial year included the following: reviewed and recommended strategic actions to be taken by the Bank for the Board s approval; developed and fostered a risk awareness culture within the Bank; ensured infrastructure, resources and systems were in place for risk management, i.e. that the staff responsible for implementing risk management systems performed those duties independently of the Bank s risk taking activities; and reviewed and assessed the appropriate levels of capital for the Bank, vis-à-vis its risk profile; 24

25 Human Resource Committee ECHMB ANNUAL REPORT 2013 The Human Resources Committee is responsible for staff compensation and the approval of amendments to staff policies. The Committee is comprised of the following members:- Gordon Derrick- Chairman Dexter Ducreay Louis A Williams The ECHMB Best Practice Since incorporation, the ECHMB s Board of Directors has been chaired by a non-executive Chairman to ensure independent leadership. Shareholders appoint directors every two (2) years in accordance with Article 14 of the Eastern Caribbean Home Mortgage Bank Agreement. The five (5) directors are non-executive and are required to declare their interests in any transaction that the ECHMB undertakes. Board Committees have the authority to retain independent advisors, as determined necessary by each Committee. The Internal Audit function is undertaken by an independent contractor. The Audit Committee meets separately with the Internal Auditor. 25

26 ECHMB SHARES ECHMB has sixty five (65) shareholders on register as at 31 March 2013, divided in four (4) shareholder classes. At 31 March 2013, shares totaling 268,749 and equivalent to 67% of the Authorized Share Capital of the Bank have been issued. The largest shareholder group is Class C with total holdings of 80,181 shares ($11.06m) or 29.8% of total issued shares. The Eastern Caribbean Central Bank is the largest individual shareholder with holdings of 66,812 shares ($9.19) or 24.9% of total issued shares. Non-bank financial institutions hold 70,578 ($9.19m) or 26.3% of issued shares. Since 1997, the book value of ECHMB s shares has exceeded the cost of the shares. The shares recorded a return of 10.0% of purchase price from 2001 to 2009 and 6.25% on the appreciated value from For the last eleven (11) years the Bank paid a dividend of $10.0 per share. 26

27 ECHMB DIVIDEND AND REINVESTMENT PLAN The Bank will continue to reward shareholders via a high dividend payout ratio while being prudent in preserving capital through the use of a Dividend Reinvestment Plan (DRP). The DRP will continue to be an integral part of ECHMB s strategy to preserve equity capital whilst providing healthy dividend income to shareholders ECHMB Credit Rating Caribbean Information and Credit Rating Services Limited (CariCRIS), the Caribbean s regional credit rating agency, reaffirmed the assigned ratings for ECHMB of CariAA- (Foreign Currency Rating) and CariAA- (Local Currency Rating) on the regional rating scale to the debt issue of the size of US $30 million. These ratings indicate that the level of creditworthiness of this obligation, adjudged in relation to other obligations in the Caribbean, is high. The ECHMB remains committed to maintaining an investment grade rating. 27

28 SENIOR MANAGEMENT TEAM Duleep Cheddie FCCA; AccDir Chief Executive Officer Randy Lewis, ACA; FCCA; MBA; AccDir Manager, Corporate Finance Cynthia Joseph, MBA, Dip; CRU Manager, Mortgage Underwriting Dennis Cornwall, MSc (Econ); CRU Manager, Research & Marketing 28

29 MANAGEMENT S OVERVIEW OF OPERATIONS Management s overview of operations should be read in conjunction with the audited financial statements included in this Annual Report. The financial statements have been prepared in accordance with International Financial Reporting Standards and are expressed in Eastern Caribbean dollars. Certain comparative amounts have been reclassified to conform with the presentation adopted in the current year. The Bank s results for the 2013 financial year demonstrate our steadfast commitment to creating wealth for our shareholders notwithstanding the fragile economic conditions. The Bank generated a record Total Comprehensive Income of $5.76m, largely as a result of savings on Interest Expense, effective control of Non-interest Expenses and prudent investment which precludes the need for increased Provision for Impairment. As a result of the excellent financial outturn, Return on Total Assets increased from 1.70% in 2012 to 1.75% in 2013, with Shareholders Equity increasing from $52.11m in 2012 to $55.18m in FINANCIAL HIGHLIGHTS ECHMB delivered a record Total Comprehensive Income of $5.76m with excellent shareholders value being created with a Return on Equity of 10.44%. The 2013 financial year represents the third (3) consecutive year of growth in Total Comprehensive Income, which was driven by cost savings on Interest Expenses and improvements in operating efficiency. The Mortgage Portfolio continued to decline from the pinnacle of $226.32m in 2011 to $200.46m in 2013, as Primary Lenders continued to repurchase their mortgage pools citing excess liquidity in the banking system which also precludes the need for them to sell mortgages to the ECHMB. The Bank Statement of Financial Position continued to strengthen with Debt-to- Equity improving from 5.30:1 in 2012 to 4.95:1 in 2013 The Bank s cash position remained strong with Cash and Cash Equivalents totaling $55.62m, supplemented by Short-term Marketable Securities and Resale Agreements totaling to $70.28m. Shareholders Equity increased from $52.11m in 2012 to $55.18m in

30 Financial Results In 2013, ECHMB reported Total Comprehensive Income for the Year amounting to $5.76m, representing an increase of $0.16m (2.86%) when compared with the outturn of 2012, which totaled $5.60m. Assets Under Management increased marginally from $328.65m in 2012 to $329.70m in Management submits that significant growth in ECHMB s Statement of Financial Position is tempered by the strong liquid position of indigenous banks; and as a result, the limited opportunities to acquire mortgages have resulted in the accumulation of free cash totaling $125.90m (38.19%). The Bank s strong liquidity position has ruled out the need to raise external capital. Notwithstanding the accumulation of free cash, Return on Total Assets recorded its third consecutive year of growth, exceeding the 2012 outturn of 1.70% by 0.05% to reach 1.75%. Shareholders Equity increased by $3.07m to $55.18m for the 2013 financial year, with Earnings per Share (EPS) reported at $ As a result of the excellent outturn, ECHMB s Book Value per Share increased from $ in 2012 to $ in

31 Interest Income was recorded at $24.44m, representing a decline of $1.11m (4.34%) when compared to the $25.55m generated in Mortgage Income contributed $16.23m (66.41%) to Interest Income for the 2013 financial year, compared to $17.52m (68.57%) reported in The decline in Interest Income is two (2) fold. In the first instance, the yield on the Mortgage Portfolio declined from 8.68% in 2012 to 8.16% in Secondly, the Mortgage Portfolio declined from $202.31m in 2012 to $200.46m in In analyzing the reasons for the lower Mortgage Portfolio, Management notes that some Primary Lenders continued to experience difficulties in finding suitable mortgages as replacement for defaulting loans, and as a result, opted to repurchase mortgages in default totaling $10.44m compared to $2.48m in Further, the Mortgage Portfolio was also reduced by the repurchase of pools of mortgages by Primary Lenders amounting to $11.83m with proceeds from principal repayment on mortgages totaling $9.11m. However, the decline in the Mortgage Portfolio was offset by acquisitions of $29.35m from two (2) Primary Lenders domiciled in Grenada. ECHMB continues to experience low growth in its main markets apart from Grenada. This is largely due to excess liquidity in the banking system which precludes the need for Primary Lenders to raise liquidity from the sale of mortgages. In addition, Management notes that some Primary Lenders continued the practice of originating mortgages with debt servicing ratios in excess of the prudential benchmark of 40.0%, and as a result, these mortgages were not purchased by ECHMB on account of failure to comply with the Bank s underwriting criteria. The market of Dominica continues to present significant barriers to entry, largely related to excess liquidity in the market and unfeasible interest rates. 31

32 The ECHMB held $125.90m (38.19%) of its Total Assets in Cash and Cash Equivalents at 31 March As a result of the increases liquid in the Eastern Caribbean Currency Union (ECCU), it is becoming more challenging for the Bank to invest its free cash money market instruments which offer a suitable mix of security, liquidity and yield. Income from Term Deposits, Repurchase Agreements and Money at Call contributed $8.21m (33.59%) to Interest Income during the 2013 financial year. This is higher than the $8.03m (31.43%) achieved in

33 Interest Expenses To finance the Bank s assets, the ECHMB rolled over its 14 th Bond in the amount of $18.77m at a coupon rate of 6.0% to the 23 rd Bond Tranche 2 at 4.0%. In addition, the 11 th Bond (Series 3) and the 17 th Bonds at coupon rates of 5.50% and 6.0% respectively were rolled over to the 24 th Bond - Tranche 1 totaling $21.51m at a coupon rate of 3.75%. As a result, the weighted average coupon rate on Bonds declined from 4.99% in 2012 to 4.88% in In addition, the coupon rate on the CDB Long-Term Loan decreased from 3.84% to 3.61% for the six (6) months ended 31 st December The success of the ECHMB s capital market activity has translated to lower finance cost, as a result of which Total Interest Expense amounted to $13.82m, representing a decrease of $1.12m (7.50%) when compared with of $14.94m paid in Net Interest Income Net Interest Income, the difference between Interest Income ($24.44m) and Interest Expense ($13.82m), amounted to $10.61m, equivalent to 43.41%, compared to the 41.53% of

34 Non-Interest Expenses Mortgages were acquired during the latter part of the 2013 financial year, and in line with the monthly decline in the Mortgage Portfolio during the year, Mortgage Administration Fees fell from $1.88m in 2012 to $1.77m in General and Administrative Expenses decreased year on year by $5k (0.23%), mainly due to $100k savings in Consultancy Expense Credit & Investment Quality The ECHMB continues to maintain a high standard in mortgage underwriting; this was largely achieved through onsite reviews. Further, Primary Lenders continued to remit on a timely basis and this reduced the Bank s investment in working capital. As a result, impairment loss was restricted to Investment Securities in the amount of $0.11m for the 2013 financial year, down from the $0.13m reported in

35 Capital Structure During the 2013 financial year, the amount of $0.61m was transferred to the Portfolio Risk Reserves and as a result, the Bank has set aside the amount of $3.77m to cover unforseen risks in its Mortgage Portfolio. The Bank continues to employ a prudent dividend policy which ensures that adequate funds are retained for future investment. As a result, the Bank s Debt-to-Equity Ratio was recorded at 4.94:1 and lower than the 5.29:1 reported in Risk Management Management is actively reviewing the prevailing local and global economic climate in an effort to ensure that, on an aggregate basis, present actions do not have unacceptable future consequences on the Bank s operations. Management therefore makes it a priority to provide timely information to the Board of Directors for efficient management of the Bank s financial affairs, which includes budget thresholds, working capital limits, cash flow projections, mortgage portfolio analysis and quarterly liquidity statements. Signifcant Risks The ECHMB has a number of significant risks to which it is exposed; these risks have the potential to have a material impact on our financial results, reputation or the long-term viability of the Bank. 35

36 Counterparty Risk This risk arises from failure of a Primary Lender to honour their contractual obligations to the Bank. It arises primarily from acquisitions of mortgages and placement of term deposits. ECHMB employs a comprehensive due diligence assessment before business is undertaken with a Primary Lender. The objective of which is to not only ensure that Primary Lenders are financially stable, but also employ acceptable mortgage underwriting standards. Market Risk The Bank takes on exposure to market risk which is the risk that movements in certain market variables, such as interest rates, market liquidity and credit spreads will adversely impact our ability to raised bonds on the Eastern Caribbean Securities Exchange. Liquidity Risk Liquidity risk is the potential for loss of reputational and downgrade of credit rating if the Bank is unable to meet its obligations as they fall due. These obligations mainly include the requirement to meet liabilities to Bond Holders and suppliers when they fall due. Liquidity, which is managed within established policy guideline, is monitored against established limits and reported to the Executive and Audit committees on a monthly basis. Operational Risk Operational Risk is inherent in the Bank business and support activities and includes the risk of fraud by employees or others, unauthorized transactions by employees, and operational or human error. Due to complex nature of the Bank s transactions processing, we are also subject to risks of errors which may go unnoticed over an extended period of time despite our best efforts at efficiency and accuracy. Deficiencies or failures in our computerized systems, telecommunication systems, data processing systems, vendor supplied systems and in our internal processes could result in financial loss and/or reputational damage. Despite our contingency procedures, the aforementioned deficiencies in addition to business disruptions occasioned by natural disasters or other factors may still negatively impact our ability to conduct our business, thereby resulting in damage to the Bank s business. Credit Rating The Bank s risk management programmes continue to be adjudged as effective and during the 2013 financial year, the Caribbean Information and Credit Rating Services Limited (CariCRIS), the Caribbean regional credit rating agency, has reaffirmed the assigned ratings for the Bank of CariAA- (Foreign Currency Rating) and CariAA- (Local Currency Rating) on the regional rating scale to the debt issue of the size of US $30 million. These ratings indicate that the level of creditworthiness of this obligation, adjudged in relation to other obligations in the Caribbean is high. 36

37 ECHMB continues to recognise and support the invaluable contributions made by its Administrative Professionals. During the 2013 financial year, the Bank continued it monetary contribution to Administrative Professional Day and provided the time off for staff members to attend the various activities through the Federation of Saint Christopher and Nevis. In addition, the Bank Administrative Professionals continue to donate their time and expertise to promoting the objectives of non-profit organizations domiciled in the ECCU. During the 2013 financial year, ECHMB conducted joint Home Ownership Day events in Antigua and Grenada, in collaboration with Eastern Caribbean Amalgamated Bank and Grenada Co-operative Bank. In addition to the general public, the Events were patronized by insurance companies, suppliers of furnishing and building materials. The success of the Home Ownership Days is measured not only by the number of persons attending the one day seminar, but also by the impact the Events have on the wider community. ECHMB also published several articles in the Eastern Caribbean Central Bank s monthly newsletter. The principal objective of the publications is to present information on housing related matters to the general public. Other notable social undertaking included participation in the Annual Financial Information Month. Looking Ahead Management is of the view that the ECCU market is likely to remain liquid over fiscal This is likely to depress growth of the Bank s Mortgage Portfolio since surplus liquidity rules out the need for Primary Lenders to raise funding for new mortgages from the sale of assets; however, the Bank is likely to continue the positive trend of improving its Net Interest Income through the lowering of the costs of funding its operations through the issuance of its corporate bonds via competitive bid auction utilizing the platform of the Eastern Caribbean Securities Exchange. Coming out of the Bank s strategic plan sessions, the Bank intends to eliminate existing inefficiencies in its operations by utilizing synergies in staffing, information technologies 37

38 and outsourcing in areas of skill shortages. Further, being mindful of the prevailing economic conditions, efforts will be devoted to updating operating policies, including the system of accounting and internal control and enterprise risk management. In order to effectively undertake these initiatives, Management recognizes the importance of improving the skill set of the Bank s human capital. Already, significant resources have been expended in training and job enrichment. In closing, Management wishes to thank all stakeholders for their unwavering support and patronage during the year under review and looks forward to forging a closer partnership in the following years. 38

39 Our Team 39

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88 88 Eastern Caribbean Home Mortgage Bank (ECHMB) ECCB Complex, Bird Rock Road P.O. Box 753 Basseterre, St.Kitts, West Indies Tel: (869) Fax: (869)