JSC REĢIONĀLĀ INVESTĪCIJU BANKA INTERIM CONDENSED FINANCIAL STATEMENTS FOR THE 6 MONTH PERIOD ENDED 30 JUNE 2016

Transcription

1 JSC REĢIONĀLĀ INVESTĪCIJU BANKA INTERIM CONDENSED FINANCIAL STATEMENTS FOR THE 6 MONTH PERIOD ENDED 30 JUNE 2016

2 Contents Report of the Management 3 The Supervisory Council and the Board of Directors of the Bank 6 Statement of Responsibility of the Management 7 Auditors Report 8 Interim Condensed Financial Statements: Interim Condensed Statement of Comprehensive Income 9 Interim Condensed Statement of Financial Position 10 Interim Condensed Statement of Changes in Equity 11 Interim Condensed Statement of Cash Flows 12 Notes to the Interim Condensed Financial Statements JSC Regionala investiciju banka 2 J. Alunana Street, Riga, LV 1010, Latvia Phone: (371) Fax: (371) Registration number:

3 REPORT OF THE MANAGEMENT In the first six months of 2016, JSC Regionala investiciju banka (hereinafter referred to as the Bank) continued its successful development. The operating profit (the profit before tax and reserves for doubtful loans) in the first half of the year increased by 50% compared to the corresponding period last year and amounted to 5.38 million. In the first six months of 2016 the Bank created reserves for doubtful loans in the amount of 2.5 million. As a result, the Bank has completed the reporting period with a net profit of 1.9 million. General Economic Situation Forecasts for global economic growth for 2016 indicate slower rates of growth than estimated before. At present, the world economy is projected to grow by about 2.9% in The combination of lower than expected growth rates of the two largest economies in the world, China and the United States, affects the forecasts for global growth. The European economy continues to develop at a moderate pace, which is mainly driven by demand. Meanwhile, a part of the world economy faces significant challenges, which increases the risks of development for Europe as well. The projected growth for the EU in 2016 is 1.9%. Among the Baltic States, the fastest growth of the economy this year is forecast in Lithuania at 2.8%, while Estonia s GDP is expected to increase by 1.8%. Latvia has successfully joined the Organisation for Economic Cooperation and Development (OECD). According to the most recent prediction, the gross domestic product (GDP) in Latvia is expected to grow by 1.9% in At the same time, the deflation projected for 2016 in Latvia is 0.5%. The country s economy will recover after a temporary weakening in the fourth quarter of last year and the first quarter of this year, which was caused by the end of the period for disbursement of EU funds and a dramatic deterioration in economic relations with Russia. The significant growth of salaries ensures an increase in household consumption. The uncertainty of the external environment restricts the flow of investment, but the situation will gradually improve as soon as a stronger growth in the euro area results in the improvement of the situation on the export markets. In May, the international rating agencies Standard&Poor s (S&P) and Fitch Ratings affirmed the credit rating of Latvia for long-term debt in local and foreign currency at A- with stable outlook, reflecting the balance between Latvia s potential for fiscal and growth performance, and longer term demographic challenges coupled with a number of external vulnerabilities, including risks posed by the amount of nonresident deposits in the Latvian banking system. The assets of the Latvian banking sector at the end of the 1 st quarter of 2016 were at a level of 31.1 billion, which is 3.3% less than at the end of The total amount of loans in the 1 st quarter of the year did not change and amounted to 14.7 billion. Credit quality continues to improve: the amount of overdue loans (by more than 90 days) in the 1 st quarter decreased by 10.3% and amounted to million (5.4% of the total loan portfolio) at the end of March. Liquidity ratio of the banking system at the end of the 1 st quarter of 2016 was at a level of 64.66%. The overall Capital Adequacy Ratio (CAR) of the sector reached 20.13% at the end of the 1 st quarter, while the Common Equity Tier 1 (CET1) capital ratio was 17.26%. Profitability indicators remained at a stable level: the profit of the banking sector as a whole in the 1 st quarter of 2016 amounted to 106 million (as compared to million in the 1 st quarter of 2015), and ROE at the end of the 1 st quarter was 11.5% (in the 1 st quarter of 2015 it was 12.2%). Bank s Operations during the Reporting Period In the first half of 2016, the Bank continued to implement the previously developed and approved strategy, focusing in particular on the development of lending. As at 30 June 2016, the Bank s loan portfolio (consisting of loans granted and loan granting commitments) amounted to 122 million, which is 26 million more than at the end of Thus, the Bank s loan portfolio increased by 33% in the 6 months. During the reporting period, Customers paid off their liabilities in the amount of million. At the same time, the Bank issued new loans in the amount of 32.1 million and signed agreements on granting another 6.6 million in loans. 3

4 REPORT OF THE MANAGEMENT (continued) Bank s Operations during the Reporting Period (continued) Stricter legislation in the field of anti-money laundering and terrorist financing, which has resulted in a continuous improvement of the Bank s internal control system, appearance of negative information on the activities of the Latvian banking system in the local and foreign media, as well as the widely announced comprehensive verification of Latvian commercial banks by external auditing companies from the US are the factors that have triggered the transfer of funds by some Customers to other banks in Western Europe. As a result, the Bank s liabilities decreased by 21% compared to the aggregate amount of 2015 and reached million as at 30 June The volume of deposits decreased by 25% and the number of Customers served by the Bank dropped by 2%. In early 2016, the FCMC Council registered the prospectus of the Bank s bond program. As part of the prospectus, the Bank acquired the right to hold public offering of bonds for 20 million US dollars. Two bond issues were successfully completed in the first half of the year, with the Bank placing five-year subordinated bonds worth a total of USD 16.5 million ( 14.9 million). One of the achievements of the first half of 2016 was the acquisition of new Customers by the Documentary Operations Section. A rapid increase in exports to new regions, namely to the markets of India, Pakistan and Egypt, has been reported. Taking into consideration a slowdown in the pace of economic activity in China, the expansion of export regions has a positive impact on the diversification of risks of the Section. Compared to the first half of 2015, the turnover of documentary operations rose by 18%. There is a growing need of the Customers for reduction of the risks of trading operations, which entails a demand for bank guarantees. The portfolio of the guarantees issued by the Bank grew by 43% in comparison with the first half of 2015 and amounted to 10.9 million as at 30 June Compared to the first half of the previous year, the number of active payment cards in the reporting period increased by 37%, while the turnover on payment cards increased by 39% and amounted to 21.3 million as at 30 June The Bank is actively working on the development of services for accepting payment cards, and as a result the semi-annual turnover has grown by 76% compared to the same period last year. During the first half of this year, 28 new employees were hired, bringing the total number of the Bank s employees to 216 people as at 30 June 2016, of which 29 provide services to Customers in the foreign representative offices of the Bank. Most new employees were hired to work in the IT Department and the Money Laundering Prevention Department. A number of significant enhancements in IT were made during the reporting period, optimising and improving internal and external IT processes of the Bank. Migration to the new and improved accounting software has been a success. The main banking system has been upgraded, and the continuous development of the internal IT infrastructure has been carried out. In November 2015, the FCMC established for the Bank an individual requirement for the capital at 15.6%, which also includes the capital reserve at the rate of 2.5%. The Bank met this requirement of the FCMC in the first half of The Bank continuously maintains the liquidity ratio according to the minimum requirement of 60% set by the FCMC. In the reporting period, the Bank s liquidity ratio did not drop below 76.27%, and it was 79.82% as at the end of the half-year. 4

5 REPORT OF THE MANAGEMENT (continued) Plans and Prospects for the Second Half of 2016 To enhance the Customer service quality, increase the number of Customers and offer banking services tailored to specific Customer needs, the Bank will continue work on improvement of private banking services with a particular focus on the investment product segment. Already in July this year, the Bank will complete the bond program for placement of five-year subordinated bonds in the amount of 20 million US dollars, which was successfully initiated in the first half of the year. Caring about the safety of Customers funds, the project for the introduction of the double protection of card data when shopping online was launched in the first half of this year. In the near future, all payment cards issued by the Bank will be registered in the 3D Secure system, which ensures greater safety of Internet shopping. To confirm their online purchase, the users of payment cards will be asked to enter a unique one-time password, which will be sent to the mobile phone of the Customer in the form of a short message. Taking care of the comfort of the Bank s future Customers, a project will be implemented at the beginning of the second half of the year where the Bank will provide the potential Customers with the opportunity to pay for some banking services using any VISA/VISA Electron or MasterCard/Maestro payment card on the Bank s website. The goal of the Bank for 2016 is to increase the number of Customers and to expand the loan portfolio. The Bank intends to work actively on launching programs of structured deposits and develop the sphere of investment consulting services. Riga, 26 July

6 THE SUPERVISORY COUNCIL AND THE BOARD OF DIRECTORS OF THE BANK As at 30 June 2016 and as at the date of signing the accounts: The Council Date of appointment Iurii Rodin Marks Bekkers Dmitrijs Bekkers Dmitrijs Bekkers Iryna Buts Chairman of the Council Deputy Chairman of the Council Member of the Council Member of the Council Member of the Council Re-elected Re-elected Re-elected Re-elected Re-elected The Board Olexandr Kovalsky Daiga Muravska Chairman of the Board, President Member of the Board Re-elected Aleksandrs Jakovlevs Member of the Board Gints Gritans Member of the Board

7 STATEMENT OF RESPONSIBILITY OF THE MANAGEMENT The Supervisory Council and the Board of Directors (hereinafter - the Management) of the Bank are responsible for the preparation of the financial statements of the Bank. The financial statements on pages 9 to 32 are prepared in accordance with the source documents and present fairly the financial position of the Bank as at 30 June 2016 and the results of its operations and cash flows for the 6 months period ended 30 June These financial statements are prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting as adopted by the European Union on a going concern basis. Appropriate accounting policies have been applied on a consistent basis. Prudent and reasonable judgements and estimates have been made by the Management in the preparation of the financial statements. The Management of the Bank is responsible for the maintenance of proper accounting records, safeguarding of the Bank s assets and the prevention and detection of fraud and other irregularities in the Bank. They are also responsible for operating the Bank in compliance with the Law on Credit Institutions, regulations of the Financial and Capital Market Commission, Bank of Latvia and other legislation of the Republic of Latvia applicable for credit institutions. Riga, 26 July

8 AUDITORS REPORT Translation from Latvian original 8

9 INTERIM CONDENSED STATEMENT OF COMPREHENSIVE INCOME Notes 6 months ended 30 June months ended 30 June 2015 Interest income 4,414,739 4,399,826 Interest expense (2,079,980) (2,736,011) Net interest income 2,334,759 1,663,815 Provisions for loan impairment (2,483,376) (4,226,767) Net interest (expenses)/ income after provision for loan impairment (148,617) (2,562,952) Fee and commission income 4,775,548 4,243,885 Fee and commission expense (651,097) (728,765) Net fee and commission income 4,124,451 3,515,120 Profit on deals with available for sale assets, net 6 1,256,507 - Profit on trading of securities at fair value through profit or loss, net 1,945 - Profit on revaluation of securities at fair value through profit or loss, net 163,253 48,702 Profit / (loss) on derivative financial instruments revaluation, net 782,183 (610,740) Profit on operations with foreign exchange, net 1,204,245 1,550,728 (Loss)/ profit on revaluation of foreign exchange, net (300,625) 508,178 Loss from increase in provisions for impairment of other assets (12,618) - Loss from sale of repossessed collateral (32,857) (28,133) Other operating income 266,709 52,081 Administrative expense (4,142,467) (2,951,413) Amortisation and depreciation charge (183,180) (109,667) Other operating expenses (86,155) (35,250) Profit / (loss) before income tax 2,892,774 (623,346) Income tax expense (975,096) (231,332) Profit / (loss) for the period 1,917,678 (854,678) Items that can be reclassified subsequently to profit or loss Sale of available-for-sale assets (919,970) - Total comprehensive income / (loss) for the period attributable to shareholders 997,708 (854,678) The interim condensed financial statements on pages 9 to 32 have been approved by the Council and the Board of Directors of the Bank and signed on their behalf by: Riga, 26 July 2016 The accompanying notes on pages 13 to 32 are an integral part of these interim condensed financial statements. 9

10 INTERIM CONDENSED STATEMENT OF FINANCIAL POSITION Notes Assets Cash and balances on demand with the Bank of Latvia 110,164, ,447,515 Balances due from banks 3 99,487, ,561,234 Loans and advances to customers 4 93,943,380 67,784,042 Loans and advances to customers 5 172,733, ,977,983 Available for sale financial assets 6 188, ,980 Derivative financial instruments 818, ,735 Intangible assets 258, ,318 Property and equipment 14,826,911 14,902,365 Other assets 6,764,532 5,313,064 Deferred expenses 301, ,868 Total assets 499,488, ,575,104 Liabilities Customer accounts 7 431,801, ,979,790 Derivative financial instruments 883,139 1,109,443 Other liabilities 585, ,124 Deferred income and accrued expenses 1,954,660 1,136,625 Issued debt securities 8 14,892,778 - Subordinated loan 13,360,087 13,623,927 Deferred tax liability 55,637 33,709 Total liabilities 463,534, ,618,618 Equity Share capital 32,334,756 32,334,762 Reserves 6 - Revaluation reserve on available-for-sale financial assets - 919,970 Retained earnings 3,619,432 1,701,754 Total equity 35,954,194 34,956,486 Total liabilities and equity 499,488, ,575,104 Commitments and contingent liabilities Guarantees issued 10,906,182 10,725,694 Credit related commitments 28,016,888 24,536,046 Assets under management 110,173, ,887,111 Riga, 26 July 2016 The accompanying notes on pages 13 to 32 are an integral part of these interim condensed financial statements. 10

11 INTERIM CONDENSED STATEMENT OF CHANGES IN EQUITY Share capital Reserves Retained earnings Revaluation reserve on available-forsale financial assets Total Balance as at 31 December 2014 Comprehensive loss for the period Balance as at 30 June ,334,762-3,271,561-35,606, (854,678) - (854,678) 32,334,762-2,416,883-34,751,645 Revaluation of available for sale assets , ,970 Loss for the period - - (715,129) - (715,129) Balance as at 31 December ,334,762-1,701, ,970 34,956,486 Denomination of share capital in * (6) Sale of available for sale assets - - (919,970) (919,970) Profit for the period - - 1,917,678-1,917,678 Balance as at 30 June ,334, ,619,432-35,954,194 * On 27th April 2016 denomination of share capital from lats to euros was registered. Rounding difference in amount of 6 arising as a result of denomination was transferred to reserves. Thereby, issued and fully paid share capital as at 30 June 2016 amounts to 32,334,756 (as at 31 December 2015: 32,334,762 ). Nominal value of each share is 1.00 (as at 31 December 2015: 1.43 ). All shares are ordinary shares with voting rights. No changes in shareholders listing occurred in The accompanying notes on pages 13 to 32 are an integral part of these interim condensed financial statements. 11

12 INTERIM CONDENSED STATEMENT OF CASH FLOWS 6 months ended 30 June months ended 30 June 2015 Cash flows from operating activities Interest received 4,814,327 4,220,942 Interest paid (2,110,408) (2,738,004) Fees and commission received 4,775,548 4,243,885 Fees and commission paid (651,097) (728,765) Income on sale of available for sale assets 980,702 - Income on foreign exchange 1,204,245 1,550,729 Other operating income 266, ,878 Personnel expenses paid (2,731,795) (2,132,482) Administrative and other operating expenses (1,945,836) (1,062,219) Income tax paid (127,118) (154,944) Cash flows from operating activities before changes in operating assets and liabilities 4,475,277 3,393,020 Changes in operating assets and liabilities Net decrease/ (increase) of securities at fair value through profit or loss 110,206,309 (38,792,015) Net decrease of available for sale financial assets 10 - Net decrease of balances due from banks 1,111,934 8,702,025 Net increase of loans and advances to customers (30,236,214) (10,583,361) Net increase of other assets (31,348) (1,317,515) Net increase/ (decrease) of customer accounts (142,133,733) 106,312,426 Net increase of other liabilities 384, ,572 Net cash and cash equivalents generated from operating activities (56,223,445) 67,837,152 Cash flows from investing activities Purchase of intangible assets (33,404) (54,572) Purchase of fixed assets (65,749) (14,748,628) Net cash and cash equivalents used in investing activities (99,153) (14,803,200) Cash flows from financing activities Issuance of debt securities 14,623,079 - Net cash and cash equivalents generated from financing activities 14,623,079 - Effect of exchange rates on cash and cash equivalents (3,393,267) (11,596,692) Net increase / (decrease) in cash and cash equivalents (45,092,786) 41,437,260 Cash and cash equivalents at the beginning of the period 244,002, ,226,206 Cash and cash equivalents at the end of the period 198,909, ,663,466 The accompanying notes on pages 13 to 32 are an integral part of these interim condensed financial statements. 12

13 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS 1 INFORMATION ON THE BANK AND ITS OPERATING ENVIRONMENT a) INCORPORATION AND PRINCIPAL ACTIVITIES JSC Regionala investiciju banka (hereinafter the Bank) provides financial services to corporate clients and individuals. The Bank established its representative office in Odessa, Ukraine in 2005 and representative office in Dnepropetrovsk, Ukraine in In the beginning of 2009 the Bank has established new representative office in Kiev, Ukraine. Furthermore, in 2010 the Bank has established its representative office in the capital of Belgium Brussels. The Bank has no subsidiaries and branches apart from the mentioned above. The Bank is a joint-stock company incorporated and domiciled in Riga, Republic of Latvia. It was registered within Commercial Register on 28 September The legal and actual address of the Bank is: J. Alunana Street 2, LV-1010, Riga, Latvia These interim condensed financial statements (hereinafter financial statements) have been approved for issue by the Council and the Board of Directors on 26 July b) OPERATING ENVIRONMENT OF THE BANK Operations of the Bank are affected by tendencies in Ukrainian market, as largest shareholder of the Bank is Ukrainian public joint stock company bank Pivdennij, as well as significant portion of the loans issued by the Bank have been issued to the Ukrainian companies and companies with significant share of their revenues being generated from the operations in Ukraine. The following table indicates total exposure of the Bank in Ukraine as at 30 June 2016 and as at 31 December 2015: thousand thousand Balance sheet assets subject to the Ukraine country risk: Balances due from banks 1, Loans issued 21,961 19,960 Other assets 1,975 2,252 Total 25,435 23,088 Off-balance sheet items subject to the Ukraine country risk: Off-balance sheet commitments to clients 2,462 3,956 Total 2,462 3,956 Ukraine has started economic recovery. International Monetary Fund and European Bank for Reconstruction and Development forecast Ukraine s gross domestic product growth in 2016 of 1.5% - 2.0%. Inflation rate is expected to be 15%. Economic growth till now is being influenced by reduced export of goods to Russia, losses incurred as a result of hostilities in the eastern part of the country, low prices for raw materials as well as weakened financial sector. Primary factor affecting Ukrainian bank s asset quality is recession, fall in exchange rate and conflict in the eastern part of the country. Lack of trust in the Ukrainian banking sector, low capitalization level, large proportion of bad loans, and high savings rates are still the main features of Ukrainian banking system. New government, that started its operations in April 2016, is expected to continue its reform process, needed to obtain financing from external creditors. However, high risk exists that reform implementation process can be delayed. Delay in financing will not have significant impact the state's ability to repay its external debt, but can negatively impact hryvnia exchange rate and slow down the regeneration processes. 13

14 1 INFORMATION ON THE BANK AND ITS OPERATING ENVIRONMENT (continued) b) OPERATING ENVIRONMENT OF THE BANK (continued) Credit ratings agencies Fitch, Moody s and Standard&Poor s maintained credit rating for Ukraine on the same level (Moody s - Caa3, Fitch - CCC and Standard&Poor s - B-). Moody s changed the outlook for Ukraine's banking system from negative to stable in May 2016 based on expected economic recovery in the next months, that will stop the further deterioration of bank assets quality. Impact on borrowers Borrowers of the Bank may be affected by the lower liquidity situation which could in turn impact their ability to repay the amounts owed. Deteriorating operating conditions for borrowers may also have an impact on management's cash flow forecasts and assessment of the impairment of financial and nonfinancial assets. To the extent that information is available, management has properly reflected revised estimates of expected future cash flows in its impairment assessments. Impact on collateral The amount of provision for impaired loans is based on management's appraisals of these assets after taking into consideration the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. As a result of possible economy downturn, the actual realizable value on foreclosure may differ from the value ascribed in estimating allowances for impairment. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Basis of preparation These interim condensed financial statements for the 6 month period ended 30 June 2016 are prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting as adopted in the European Union. These interim condensed financial statements should be read in conjunction with the 2015 full annual financial statements prepared in accordance with International Financial Reporting Standards (IFRS) adopted in the European Union. The financial statements are presented in Latvian national currency - euros (), unless stated otherwise. The accounting policies used in the preparation of these interim condensed financial statements are consistent with those used in the annual financial statements for the year ended 31 December 2015, except as mentioned below. Corporate income tax is recognized in each interim period based on the best estimate of the weighted average effective annual income tax rate expected for the full financial year. If the estimate of the weighted average effective annual income tax rate changes, amounts accrued for income tax expense in one interim period may have to be adjusted in a subsequent interim period of that financial year. Interim period income tax expense is accrued using the tax rate that would be applicable to expected total annual earnings, that is, the estimated average annual effective income tax rate is applied to the pre-tax income of the interim period. Issued debt securities are comprised of bonds issued by the Bank during Debt securities are stated at amortised cost. If the Bank purchases its own issued debt securities, they are derecognised from the balance sheet and the difference between the carrying amount of the liability and the consideration paid is included in gains arising from debt extinguishment. 14

15 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) b) Adoption of new revised standards and interpretations The following new and amended IFRS and interpretations became effective in the first part of 2016, but have no significant impact on the operations of the bank and these condensed interim financial statements: Amendment to IFRS 11 Joint arrangements on acquisition of an interest in a joint operation; Amendments to IAS 16 Property, plant and equipment and IAS 41 Agriculture regarding bearer plants; Amendment to IAS 16 Property, plant and equipment, IAS 38 Intangible assets on depreciation and amortisation; Amendments to IAS 27 Separate financial statements on the equity method; Amendments to IAS 1 Presentation of financial statements regarding disclosure initiative; Annual improvements The amendments include changes that affect 4 standards. Certain new standards and interpretations have been published that become effective for the accounting periods beginning after 1 July 2016 or later periods or are not yet endorsed by the EU: Amendments to IFRS 14, Regulatory Deferral Accounts" (effective for annual periods beginning on or after 1 January 2016, not yet endorsed in the EU); Amendments to IFRS 10 Consolidated financial statements, IAS 28 Investments in associates and joint ventures (effective for annual periods beginning on or after 1 January 2016, not yet endorsed in the EU); Amendments to IAS 7 Statement of Cash Flows (effective for annual periods beginning on or after 1 January 2017, not yet endorsed in the EU); Amendments to IAS 12, Income taxes recognition of Deferred Tax Assets for Unrealised Losses (effective for annual periods beginning on or after 1 January 2018, not yet endorsed in the EU); Amendments to IFRS 2 Share-based Payment (effective for annual periods beginning on or after 1 January 2018, not yet endorsed in the EU); Amendments to IFRS 15 Revenue from Contracts with Customers (effective for annual periods beginning on or after 1 January 2018, not yet endorsed in the EU); Amendments to IFRS 9 Financial instruments (effective for annual periods beginning on or after 1 January 2018, not yet endorsed in the EU); Amendments to IFRS 16 Leasing (effective for annual periods beginning on or after 1 January 2019, not yet endorsed in the EU); The Management of the Bank has disclosed the evaluation of these new standards and interpretations (if any) on the financial statements for Further detailed evaluation is in progress and its results will be disclosures in financial statements for the year ended 31 December

16 3 BALANCES DUE FROM BANKS Due from Republic of Latvia credit institutions 17,536,880 21,468,113 Due from non-oecd credit institutions 37,735,797 52,218,409 Due from OECD credit institutions 44,312,418 68,972,595 Balances due from banks, gross 99,585, ,659,117 Provisions for impairment of balances due from banks (97,718) (97,883) Balances due from banks, net 99,487, ,561,234 As at 30 June 2016 balances due from banks included receivables amounting to 97,718 ( : 97,883 ) from Zlatobank, which informed the Bank on the suspension of its operations. The Bank has created provisions amounting to 100% of these receivables. Other balances due from banks are not overdue and are not impaired. Balances due from banks are not collateralised. The following table discloses balances due from banks based on their type: On demand 73,207,786 98,648,930 Balances with maturity of three months or less 15,537,603 31,003,841 Other balances due from banks 10,839,706 13,006,346 Balances due from banks, gross 99,585, ,659,117 Provisions for impairment of balances due from banks (97,718) (97,883) Balances due from banks, net 99,487, ,561,234 The following table discloses balances due from banks according to their ratings as at 30 June 2016 and 31 December 2015: Due from banks Due from banks % % Rating Aaa to Aa A1 to A3 40,147, % 20,184, % Baa1 to Baa3 6,269, % 61,109,415 42,87% Ba1 to Ba3 7,535, % 500, % B1 to B3 5,097, % 14,700, % Below B3 22,227, % 23,252, % 81,277, % 119,746, % Without rating 18,307, % 22,912, % Provisions for impairment of balances due from banks (97,718) - (97,883) - Balances due from banks, net 99,487, % 142,561, % 16

17 4 LOANS AND ADVANCES TO CUSTOMERS Analysis of loans by client type and by loan types: Loans to legal entities 116,373, ,341,556 Loans to private individuals, except for mortgages 10,745,600 1,676,857 Mortgages 1,865,411 1,956,288 Gross loans and advances to customers 128,984, ,974,701 Less: provisions for loan impairment (35,040,997) (36,190,659) Total loans and advances to customers 93,943,380 67,784,042 The following table discloses changes in provisions for loan impairment during the 6 months of Loans to private individuals, Loans to legal entities except for mortgages Mortgages Total Provisions for loan impairment as at 1 January ,154,537 1,634,060 1,402,062 36,190,659 Increase / (decrease) in provisions for loan impairment for the period 2,484,093 (713) (3) 2,483,377 Write-off of loans (3,205,997) (164) - (3,206,161) Impact of foreign currency revaluation (405,986) - (20,892) (426,878) Provisions for loan impairment as at 30 June ,026,647 1,633,183 1,381,167 35,040,997 The following table discloses changes in provisions for loan impairment during the 6 months of Loans to private individuals, Loans to legal entities except for mortgages Mortgages Total Provisions for loan impairment as at 1 January ,076,601 1,629,049 1,291,482 28,997,132 Increase / (decrease) in provisions for loan impairment for the period 4,123,670 6,390 (928) 4,129,132 Impact of foreign currency revaluation 1,482,835-82,391 1,565,226 Provisions for loan impairment as at 30 June ,683,106 1,635,439 1,372,945 34,691,490 17

18 4 LOANS AND ADVANCES TO CUSTOMERS (continued) The industry concentration of risks in the credit portfolio is as follows: % % Trade and commercial activities 28,787, ,314, Private individuals 12,611, ,633,145 3,49 Agriculture and food industry 7,729, ,729, Construction and operations with real estate 27,838, ,098, Transport and communication 32,252, ,143, Production industry 9,296, ,651, Tourism and hotel services, restaurant 155, , business Finance and investment services 3,877, Other 6,436, ,182, Loans and advances to customers (before provisions for impairment) 128,984, ,974,

19 4 LOANS AND ADVANCES TO CUSTOMERS (continued) The following table shows the loans outstanding as at 30 June 2016 by credit quality: Loans to legal entities Loans to private individuals, except for mortgages Mortgages Total Loans that are neither past due nor impaired - Standard loans 58,109,269 9,112, ,702 67,588,321 Total neither past due nor impaired 58,109,269 9,112, ,702 67,588,321 Past due but not impaired - past due up to 30 days 2,323, ,323,657 - past due days 1,410, ,410,354 - past due days 487, ,668 - past due days Total past due, but not impaired 4,221, ,221,824 Individually impaired loans (gross amount) - not past due 25,663,376-1,175,420 26, past due up to 30 days 47, ,445 - past due days 107, ,089 - past due days 556, ,045 - past due days 2,201, ,201,697 - past due over 360 days 25,466,688 1,633, ,289 27,423,160 Total individually impaired loans (gross amount) 54,042,340 1,633,183 1,498,709 57,174,232 Less: provisions for loan impairment (32,026,647) (1,633,183) (1,381,167) (35,040,997) Total loans and advances to customers 84,346,719 9,112, ,244 93,943,380 Loans past due, but not impaired include all amounts due from borrowers. Amount actually overdue as at 30 June 2016 was 678,085 (as at 31 December 2015: 21,881 ). Loans past due and individually impaired include all amounts due from borrowers. Amount actually overdue as at 30 June 2016 was 27,506,093 (as at 31 December 2015: 30,678,925 ). 19

20 4 LOANS AND ADVANCES TO CUSTOMERS (continued) The following table shows the loans outstanding as at 30 June 2015 by credit quality: Loans to legal entities Loans to private individuals, except for mortgages Mortgages Total Loans that are neither past due nor impaired - Standard loans 42,087,067 42, ,363 42,564,071 Total neither past due nor impaired 42,087,067 42, ,363 42,564,071 Past due but not impaired loans - past due from 30 to 90 days 306, ,423 - past due from 91 to 180 days 39, ,097 - past due from 181 to 360 days - past due over 360 days 504, , Total past due, but not impaired 849, ,927 Individually impaired loans (gross amount) - not past due 24,513,890-1,198,633 25,712,523 - past due up to 30 days 217, ,846 - past due days 1,433, ,433,609 - past due days 4,946, ,946,105 - past due over 360 days 26,293,268 1,634, ,292 28,250,620 Total individually impaired loans (gross amount) 57,404,718 1,634,060 1,521,925 60,560,703 Less: provisions for loan impairment (33,154,537) (1,634,060) (1,402,062) (36,190,659) Net loans and advances to customers 67,187,019 42, ,226 67,784,042 As at 30 June 2016, the total amount of loans issued to 10 largest customers was 62,532,699 (2015: 45,880,708 ), which comprises % of the total credit portfolio (2014: %). As at 30 June 2016 loans to 10 largest customers were secured by deposits amounting to 8,300,617 (as at 31 December 2015: 13,001,878 ). 20

21 4 LOANS AND ADVANCES TO CUSTOMERS (continued) The following table shows the information about collateral as at 30 June 2016: Loans to legal entities Loans to private individuals, except for mortgages Mortgages Total Unsecured 16,044,608 1,762, ,478 18,469,725 Collateralised by: - residential real estate 798,554 60, ,701 1,226,109 - other real estate 43,051,742 8,918,179-51,969,921 - deposits 117, ,185 - guarantees and other assets 9,812,992 3,621-9,816,613 Loans insufficiently collateralized by: - residential real estate 1,115, ,559 1,221,597 - other real estate 32,267, ,673 32,997,526 - deposits 8,301, ,301,518 - guarantees and other assets 4,863, ,863,183 Total loans and advances to customers (before provisions for impairment) 116,373,366 10,745,600 1,865, ,984,377 The following table shows the information about collateral as at 31 December 2015: Loans to legal entities Loans to private individuals, except for mortgages Mortgages Total Unsecured 17,639,221 1,668, ,292 19,630,782 Collateralised by: - residential real estate 750, ,363 1,184,692 - other real estate 20,500, ,500,324 - deposits 145,788 2, ,690 - securities 245, ,418 - guarantees and other assets 10,511,502 4,766-10,516,269 Loans insufficiently collateralized by: - residential real estate 996, ,742 1,202,392 - other real estate 34,026, ,891 35,019,503 - deposits 13,001, ,002,797 - guarantees and other assets 2,523, ,523,834 Total loans and advances to customers (before provisions for impairment) 100,341,556 1,676,857 1,956, ,974,701 21

22 4 LOANS AND ADVANCES TO CUSTOMERS (continued) The recoverable value of collateral in respect of loans past due but not impaired and in respect of loans individually determined to be impaired at 30 June 2016 was as follows: Loans to legal Mortgages entities Recoverable value of collateral loans past due but not impaired - residential real estate 30, other real estate objects 1,645, deposits 117, other assets 4,443,946 - Recoverable value of collateral individually impaired loans - residential real estate 949, ,559 - other real estate objects 13,719, deposits 8,301, other assets 1,233,485 - Total 30,441, ,559 The recoverable value of collateral in respect of loans past due but not impaired and in respect of loans individually determined to be impaired at 31 December 2015 was as follows: Loans to legal Mortgages entities Recoverable value of collateral loans past due but not impaired - residential real estate 91, other real estate objects 1,149, deposits 71, other assets 3,933,700 - Recoverable value of collateral individually impaired loans - residential real estate 930, ,863 - other real estate objects 10,544, deposits 13,001, other assets 9,763,690 - Total 39,484, ,863 The Bank s policy is to classify each loan as neither past due nor impaired until specific objective evidence of impairment of the loan is identified. 22

23 4 LOANS AND ADVANCES TO CUSTOMERS (continued) The financial effect of collateral is presented by disclosing separately impact (i) on assets with collateral being equal or in excess of the book value of assets ("Assets with collateral value exceeding the loan balance"), and (ii) on assets with collateral being less than the book value of assets ("Assets with insufficient collateral"). The values of collateral disclosed under heading Recoverable value of collateral represent estimated recoverable value which can be obtained from repossession and subsequent sale of the collaterals, and which has been applied in assessment of the impairment of loans. These values are lower than the fair values estimated by independent appraisers. The haircut applied to the fair values to large extent is associated with the uncertainty described in Note 1b) Operating Environment of the Bank which, along with other uncertainties, may impact the expenses for foreclosure and sale of collateral as well as the price and timing of the sale of the collateral. The impact of collateral at 30 June 2016: Assets with collateral value exceeding the loan balance Book value of asset (before provisions for impairment) Recoverable value of collateral Assets with insufficient collateral Book value of asset (before provisions for impairment) Recoverable value of collateral Loans to legal entities 53,776, ,382,319 62,596,729 30,570,082 Loans to individuals 8,982,961 12,904,281 1,762, ,456 consumer loans Mortgage loans 366, ,716 1,498, ,542 Total 63,126, ,177,317 65,858,077 30,817,080 The impact of collateral at 31 December 2015: Assets with collateral value exceeding the loan balance Book value of asset (before provisions for impairment) Recoverable value of collateral Assets with insufficient collateral Book value of asset (before provisions for impairment) Recoverable value of collateral Loans to legal entities 30,783, ,497,632 69,558,049 37,418,782 Loans to individuals 7,669 73,831 1,669, consumer loans Mortgage loans 434, ,974 1,521, ,863 Total 31,225, ,477,437 72,749,162 37,539,564 23

24 5 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Latvian government debt securities 13,902,534 19,381,188 OECD state government debt securities 127,577, ,302,647 Non-OECD state government debt securities 9,545,421 9,917,633 OECD region corporate debt securities 21,669,872 9,236,577 Non-OECD region corporate debt securities 29,744 9,131,726 Unquoted shares 8,053 8, ,733, ,977,983 Analysis of securities by the issuer rating is presented below as at 30 June 2016 and 31 December 2015: Rating Securities Securities % % Aaa to Aa3 115,218,659 66,70% 228,478, % A1 to A3 34,401,201 19,92% 38,990, % Baa1 to Baa3 22,893,684 13,25% 12,368, % Ba1 to Ba3 182, % 9,098, % B1 to B Below B3 37, % 41, % 172,733, % 288,977, % Without rating ,733, % 288,977, % 6 AVAILABLE FOR SALE FINANCIAL ASSETS As at 31 December 2015 available for sale financial assets were comprised of VISA Europe Limited shares. On 21 June 2016 Bank received payments that compensate for the value of shares held. These payments consist of the cash payment in amount of 984,944 already received by the Bank, VISA Inc. class C preference shares with a fair value of 188,972 and deferred earn-out payment in amount of 84,591. As a result, the Bank recognized profit in amount of 1,256,507, preference shares received were classified as Available for sale financial assets, while deferred payment classified as Other assets. VISA Inc class C preference shares are without rights to sell or pledge them and after three years are converted to VISA Inc class A shares. Since there is a significant uncertainty in determining the value of preference shares, currently their value is determined by discounting the market value of VISA Inc class A shares by discount factor of 46%, that is based on the calculated possible reduction in share value before conversion based on information published by VISA Inc to its shareholders. If the market price of VISA Inc A class share decreases by 10%, fair value of shares will decrease by 18,897, while if haircut applied to conversion outcome would change by 10%, fair value of C class shares will change by 37,

25 7 CUSTOMER ACCOUNTS Analysis of groups by customers Legal entities: - current/ settlement accounts 341,384, ,454,379 - term deposits 30,706,016 35,934,617 Private individuals - current/ settlement accounts 54,304,080 49,863,865 - term deposits 5,407,696 16,726,929 Total customer accounts: 431,801, ,979,790 Sector profile: Private companies 372,006, ,340,044 Private individuals 59,711,776 66,590,794 Financial institutions 7,672 6 Non-profit institutions 24,225 32,821 Latvian government 51,796 16,125 Total customer accounts: 431,801, ,979,790 Analysis by place of residence Residents 23,464,879 26,786,289 Non-residents 408,337, ,193,501 Total customer accounts: 431,801, ,979,790 The average interest rate on term deposits in 2016 was 2.21% (2015: 2.68%) and the average interest rate on demand deposits was 0,00% (2015: 0.04%). All deposits have a fixed interest rate. Economic sector concentration within customer accounts is as follows: % % Manufacturing 6,583, ,187, Construction and real estate 10,176, ,285, Trade and commercial activities 207,073, ,292, Financial and insurance services 75,912, ,951, ,83 Transport and communications 62,860, ,986, Agriculture and food industries 343, , Private individuals 59,711, ,590, Other 9,140, ,893, Total customer accounts: 431,801, ,00 583,979, ,00 Amount attributable to 20 largest depositors as at 30 June 2016 is 133,376,691 (in 2015: 200,499,793), comprising 30.89% of the total portfolio (in 2015: 34.33%). 25

26 8 ISSUED DEBT SECURITIES Issued debt securities 14,892,778-14,892,778 - In 2016 the Bank issued several series of debt securities. Issued debt securities are traded outside the stock exchange and are not quoted in the open market. Debt securities in use comprise of: o Series of subordinated bonds RIB SUBUSD-01/2016, issue in amount of USD. Maturity: 26 April 2021, coupon rate 4,50%, coupon payment twice a year on 26 October and 26 April. Balance as at 30 June 2016 is 1,997,725 ; o Series of subordinated bonds RIB SUBUSD-03/2016, issue in amount of USD. Maturity: 22 June 2021, coupon rate 4,50%, coupon payment twice a year on 22 December and 22 June. Balance as at 30 June 2016 is 12,895,

27 9 RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. Related parties are defined as shareholders, members of the Council and the Board, key management personnel, their close relatives and companies in which they have a controlling interest as well as companies, where they have significant influence. The direct parent company of the Bank is AB Pivdenny bank, as it has control over the operations of the Bank. Ultimate beneficiary of AB Pivdenny bank is Iurii Rodin. Balances with the related parties were as follows as at 30 June 2016: Parent company of the Bank Entities under control of the Bank s shareholders Other related parties Total loans and advances (interest rate on agreement: 10,839,707 3,074, %) Provisions for loan impairment - (906,323) - Correspondent account 10,992, Customer accounts (interest rate: 0.0%) - 4,889,083 77,717 Subordinated loan (interest rate on agreement: %) 7,951,715 2,726,015 - Income and expense from operations with related parties during the 6 months of year 2016: Parent company of the Bank Entities under control of the Bank s shareholders Other related parties Interest income 806, , Interest expenses (325,286) (34,316) - Increase in provisions for loan (906,323) - impairment - Fee and commission income - 13, Fee and commission expense (3,419) - - Administrative and other operating expenses 7, The balances in respect of operations with related parties are as follows as at 30 June 2016: Entities under control of the Bank s shareholders Other related parties Undrawn credit lines - 16,134 Assets under management 5,908,799 - Total amounts of loan commitments issued to and repaid by related parties during the 6 month period ended 30 June 2016 are as follows: Parent company of the Bank Entities under control of the Bank s shareholders Other related parties Issued to related parties ,848 Repaid by related parties 1,750,241 64,909 33,958 Transactions with the parent company of the Bank include total amount of short term loans issued and repaid during 6 month period ended 30 June

28 9 RELATED PARTY TRANSACTIONS (continued) Balances with the related parties were as follows as at 31 December 2015: Parent company of the Bank Entities under control of the Bank s shareholders Other related parties Total loans and advances (interest rate on agreement: 13,006,346 3,166,334 3, %) Correspondent account 10,243, Customer accounts (interest rate: %) - 4,697,172 63,006 Subordinated loan (interest rate on agreement: %) 8,108,748 1,061,851 - Income and expense from operations with related parties during the first 6 months of year 2015 were as follows: Parent company of the Bank Entities under control of the Bank s shareholders Other related parties Interest income 999, , Interest expenses (361,893) (171,970) - Fee and commission income - 4, Fee and commission expense (8,243) - - Administrative and other operating expenses (8,511) - - The balances in respect of off-balance sheet liabilities towards related parties are as follows as at 31 December 2015: Entities under control of the Bank s shareholders Other related parties Undrawn credit lines - 6,597 Assets under management 5,878,558 - Total amounts of loan commitments issued to and repaid by related parties during 2015 are as follows: Parent company of the Bank Entities under control of the Bank s shareholders Other related parties Issued to related parties 453,619,923-43,677 Repaid by related parties 465,122,244 21,736 45,600 Transactions with the parent company of the Bank include total amount of short term loans issued and repaid during Remuneration to key management personnel is disclosed below: 6 months of year months of year 2015 Short-term benefits: - Salaries 307, ,119 Pension benefits: - Expenses to the state pension fund 69,630 45,659 Total 376, ,778 28

29 10 LIQUIDITY RISK AND ANALYSIS OF ASSETS AND LIABILITIES BY MATURITY PROFILE The table below allocates the Bank s assets and liabilities to maturity groupings as at 30 June 2016 based on the time remaining from the balance sheet date to the contractual maturity dates: Ovedue Within 1 month 1 3 months 3 6 months 6 12 months 1 5 years Over 5 years and undated Assets Cash and balances with - 110,164, ,164,230 the Bank of Latvia Balances due from banks - 88,595,412 83,102 10,808, ,487,377 Loans and advances to customers 7,807,884 5,764, ,340,469 13,161,306 44,940, ,096 93,943,380 Financial assets at fair value through profit or - 77,081,815 14,254,317 14,442,083 33,687,494 32,759, , ,733,506 loss Available for sale financial assets , ,972 Intangible assets , ,937 Property, plant and equipment ,826,911 14,826,911 Derivative financial instruments - 818, ,614 Deferred expenses , ,885 Other assets - 5,995, , ,175 6,764,532 Total assets 7,807, ,420,350 22,563,363 38,893,300 46,848,818 77,784,193 17,170, ,488,344 Liabilities and equity Customer accounts - 403,610,911 4,421,237 12,821,466 9,343,236 1,605, ,801,986 Derivative financial instruments - 879,694 3, ,139 Deferred income and accrued expenses - 725,039 26,662 1,202, ,954,660 Deferred tax liability , ,637 Other liabilities - 585, Issued debts securities ,591-14,862,187-14,892,778 Subordinated loan - 3,378 2, ,354,350-13,360,087 Equity Total Total liabilities and equity Off-balance sheet liabilities - 405,804,885 4,453,703 14,110,653 9,343,236 29,821,673 35,954, ,488,344-38,309,157 86, ,000 80, ,510-38,923,070 Net liquidity 7,807,884 (155,693,692) 18,023,401 24,482,647 37,425,438 47,815,010 (18,783,758) As at 31 December 2015 Total assets 9,750, ,004,892 24,993,361 16,372,876 53,239,769 76,960,811 19,253, ,575,104 Total liabilities and equity - 542,521,223 5,436,371 3,880,383 20,623,074 22,115,953 40,998, ,575,104 Off-balance sheet liabilities - 2,122,398 3,620,948 8,516,857 10,769,332 10,050, ,481 35,261,740 Net liquidity 9,750,074 (109,638,729) 15,936,042 3,975,636 21,847,363 44,794,134 (21,926,260) 29