GENERAL INFORMATION 3 REPORT OF THE SUPERVISORY COUNCIL AND THE BOARD OF DIRECTORS OF THE BANK 4

Transcription

1 AS Sampo Banka Financial Statements prepared in accordance with International Financial Reporting Standards as adopted by European Union for the years ended 31 December 2006 and 2005 and Independent Auditors report

2 TABLE OF CONTENTS GENERAL INFORMATION 3 REPORT OF THE SUPERVISORY COUNCIL AND THE BOARD OF DIRECTORS OF THE BANK 4 THE SUPERVISORY COUNCIL AND THE BOARD OF DIRECTORS OF THE BANK 5 STATEMENT OF RESPONSIBILITY OF THE BANK S MANAGEMENT 6 INDEPENDENT AUDITORS REPORT 7 FINANCIAL STATEMENTS: Income Statements 8 Balance Sheets 9 Statements of Changes in Shareholders Equity 10 Statements of Cash Flows 11 Notes to the Financial Statements Page 2

3 GENERAL INFORMATION Name of the Company Legal status of the Company AS SAMPO BANKA Joint-Stock Company Registration number, place and date , Riga, 12 November, 1996 Address Lāčplēša iela 75, Riga, LV-1011 Reporting year Information of the shareholders Auditor SAMPO BANK PLC Address: Helsinki, Unionunkatu 22, Finland Shareholding: 100 % SIA Ernst & Young Baltic Diāna Krišjāne Chairperson of the Board Kronvalda bulvāris 3 5 Latvian Certified Auditor Riga, LV Certificate No. 124 Licence No. 17 2

4 REPORT OF THE SUPERVISORY COUNCIL AND THE BOARD OF DIRECTORS OF THE BANK Year 2006 for Sampo Banka (hereinafter also the Bank) was a year of continuing very rapid growth supported by implementation of main strategic decisions in areas of banking information technologies, human resources, bank services and products offered. As a result Sampo Banka increased total assets by 164% comparing to the year Bank continued active issuance of loans and achieved 161% increase over total loan portfolio and 178% increase over mortgage loans portfolio. The deposit portfolio has grown by 12% compared to the year end Pursuing a more active strategy on the market facilitated the Bank s growth and development in The Bank s share capital was increased from 8.5 million to 12.0 million in January 2007 to foster further growth and development. The Bank intends to increase its share capital also in future in order to implement its plans for further growth and development. The amount of the Bank s staff increased to 68 employees in the end of In May 2006 AS Sampo Banka migrated to the new Banking Information System, which will allow the Bank to offer modern, competitive and comprehensive technologies and services for the Bank s customers and it is planned to continue development of the system during During 2006 was signed contract for the rent of new head office premises which will support further expansion plans of the Bank s business activities. During 2006 the Bank opened one new branch and is planning to continue to open new branches in The Bank s result for 2006 was a profit of thousand. The management suggests that the profit for the reporting year should be transferred to reserves. We truly believe that 2007 will continue to provide many positive upsides for all of our customers and the bank. We will offer a wider range of services to our clients and introduce new Information Technologies solutions, especially in the area of Internet banking. We are looking forward to operate in the continuously growing Latvian financial market and believe in our ability to continue the Bank s long-term growth. On behalf of the Bank: Chairman of the Council Georg Franz Friedrich Schubiger Chairman of the Board Ingus Grasis 27 March

5 MANAGEMENT OF THE BANK As at the date of signing the financial statements: The Supervisory Council Name Position Date of appointment Georg Franz Friedrich Chairman of the Council (re-elected) Schubiger Edvīns Korneliuss Deputy Chairman of the (re-elected) Council Jukka Edvin Ohls Member of the Council (re-elected) Petri Kalervo Niemisvirta Member of the Council (re-elected) Markku Juhani Pehkonen Member of the Council (re-elected) Risto Kalle Kustaa Tornivaara Member of the Council (re-elected) Gintautas Galvanauskas Member of the Council (re-elected) Timo Pekka Vuorinen Member of the Council During 2006 the following members of the Council have resigned: Name Position Date of appointment Date of resignation Georg Franz Friedrich Deputy Chairman of the Schubiger Council Jukka Edvin Ohls Deputy Chairman of the Council Petri Kalervo Niemisvirta Member of the Council Markku Juhani Pehkonen Member of the Council Risto Kalle Kustaa Member of the Council Tornivaara Edvins Korneliuss Deputy Chairman of the Council Gintautas Galvanauskas Member of the Council The Board of Directors Name Position Date of appointment Ingus Grasis Chairman of the Board, CEO Raivis Kakānis Member of the Board, CFO Ģirts Osis Member of the Board, Head of Corporate Department Ilze Šulce Member of the Board, Chief Legal Counsel (re-elected) During 2006 the following members of the Board have resigned: Name Position Date of appointment Date of resignation Edvins Korneliuss Member of the Board Svetlana Ovčiņņikova Member of the Board

6 The Management of AS Sampo Banka (hereinafter the Bank) is responsible for the preparation of the financial statements of the Bank. The financial statements set out on pages 8 to 41 are prepared in accordance with the source documents and present fairly the financial position of the Bank as at 31 December 2006 and 2005 and the results of its operations, changes in shareholders equity and cash flows for the years then ended. The financial statements are prepared in accordance with International Financial Reporting Standards as adopted by 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 AS Sampo Banka is responsible for the maintenance of proper accounting records, the 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 and other legislation of the Republic of Latvia applicable for credit institutions. On behalf of the Bank: Chairman of the Council Georg Franz Friedrich Schubiger Chairman of the Board Ingus Grasis 6

7 Riga, Latvia 27 March

8 INCOME STATEMENTS Notes Interest income 3 4,382,535 2,094,420 Interest expense 4 (2,421,866) (1,233,026) NET INTEREST INCOME 1,960, ,394 Fees and commission income 5 162, ,851 Fees and commission expense (134,222) (74,425) NET FEES AND COMMISIONS INCOME 27,798 29,426 Net gain from foreign exchange 6 138, ,842 Net trading income 6 11,630 - Other operating income 9, TOTAL OPERATING INCOME 2,147,376 1,183,196 Personal expenses 7 (878,174) (475,405) Administrative expenses 8 (702,802) (452,916) Depreciations of property and equipment 16 (112,946) (28,535) Amortisation of intangible assets 15 (47,647) (1,408) Other expenses 9 (77,147) (51,254) Impairment losses on loans and advances 13 (131,259) (85,398) Release of previously established allowance for impairment losses , ,194 TOTAL OPERATING EXPENSES (1,779,089) (736,722) PROFIT BEFORE TAXATION 368, ,474 Corporate income tax 10 (53,440) (56,185) Deferred corporate tax 10 3,285 30,695 NET PROFIT 318, ,984 The accompanying notes on pages 12 to 41 form an integral part of these financial statements. The financial statements were signed on the behalf of the Board of Directors and the Supervisory Council on 27 March 2007 by: Chairman of the Council Georg Franz Friedrich Schubiger Chairman of the Board Ingus Grasis 8

9 BALANCE SHEETS At 31 December 2006 and 2005 ASSETS Notes Cash and balances due from the Bank of Latvia 11 13,137,894 3,361,848 Due from credit institutions: 12 4,368,614 4,360,891 Demand deposits 3,110,888 2,360,891 Other deposits 1,257,726 2,000,000 Loans ,810,511 43,737,232 Financial investments available-for-sale 4,180,684 - Intangible assets , ,550 Property and equipment , ,549 Deferred expenses and accrued income 17 35,744 11,288 Current tax assets 77,409 71,795 Deferred tax asset 10 55,181 51,896 Other assets ,146 1,714 Total assets 137,651,286 52,024,763 LIABILITIES Due to credit institutions 19 95,706,481 14,236,587 Term deposits 88,195,801 14,231,893 Due to customers 20 30,386,891 27,147,191 Current accounts 12,931,390 7,822,063 Term deposits 17,455,501 19,325,128 Provisions ,279 34,592 Provision for other liabilities 29,135 - Other liabilities ,286 77,740 Total liabilities 126,683,072 41,496,110 SHAREHOLDERS EQUITY Share capital 23 8,500,000 8,500,000 Reserves 2,028,653 1,607,669 Retained earnings 318, ,984 Available-for-sale reserve 121,429 - Total shareholders equity 10,968,214 10,528,653 Total liabilities and shareholders equity 137,651,286 52,024,763 OFF-BALANCE-SHEET ITEMS Guarantees issued 427,903 9,232 Undrawn credit lines 8,475, ,434 The accompanying notes on pages 12 to 41 form an integral part of these financial statements. The financial statements were signed on the behalf of the Board of Directors and the Supervisory Council on 27 March 2007 by: Chairman of the Council Georg Franz Friedrich Schubiger Chairman of the Board Ingus Grasis 9

10 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005 Share Retained Capital Reserves earnings Total As of 31 December ,500,000 1,353, ,776 5,107,669 Increase in share capital 5,000, ,000,000 Profit for the year , ,984 Appropriations to reserves - 253,776 (253,776) - As of 31 December ,500,000 1,607, ,984 10,528,653 Profit for the year , ,132 Unrealized gains on available-to-sale financial investments - 121, ,429 Total income for the year 121, , ,561 Appropriations to reserves - 420,984 (420,984) - As of 31 December ,500,000 2,150, ,132 10,968,214 The accompanying notes on pages 12 to 41 form an integral part of these financial statements. As at 31 December 2006 the issue has been paid up in full amount. On 11 January 2007 there was held an extraordinary meeting of Shareholders, where it was decided to increase share capital to 12 million. Reserves comprise retained earnings, they are intended for the development of the Bank. Every year shareholders makes decision regarding he amount of these reserves. 10

11 CASH FLOW STATEMENT Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit before taxation 368, ,474 Depreciation and amortization charge 15, ,592 29,943 Decrease of impairment loss allowances (39,627) (272,796) Foreign exchange (4,193) (1,098) (Gain) on disposal of tangible assets (110) - (Increase) in deferred expenses and accrued income (24,456) (9,661) Increase/(decrease) in deferred income and accrued expenses 97,822 (11,649) Operating profit before changes in assets and liabilities 558, ,213 (Increase) in other assets (340,144) (1,305) Increase/ (decrease) in other liabilities 379,656 6,243 Due from credit institutions 73,761,208 10,839,256 (Increase) in loans (71,033,652) (19,368,321) (Decrease) in due to credit institutions (1,034,596) (1,862,209) Increase in customer deposit accounts 3,239,700 4,808,040 Net cash and cash equivalents (used in)/ provided by operating activities 5,530,487 (5,397,083) Corporate income tax paid (54,462) (95,118) CASH FLOWS FROM INVESTMENT ACTIVITIES Purchase of intangible assets 15 (207,763) (137,958) Purchase of fixed assets 16 (296,739) (327,924) Sale of fixed assets 18,906 30,829 Sale of equity investments and other long-term investments - 44,000 Purchase of fixed income securities (3,954,135) - Net cash and cash equivalents provided by investment activities (4,439,731) (391,053) CASH FLOWS FROM FINANCING ACTIVITIES Share capital increase - 5,000,000 Net cash and cash equivalents used in financing activities - 5,000,000 Net increase/ (decrease) in cash and cash equivalents 1,036,294 (883,254) Cash and cash equivalents at the beginning of the year 7,102,823 7,984,979 Foreign exchange 4,193 1,098 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 24 8,143,310 7,102,823 The accompanying notes on pages 12 to 41 form an integral part of these financial statements. 11

12 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (1) General information AS Sampo Banka (previously A/S Māras Banka) was registered on 12 November 1996 as a Joint Stock Company. It provides retail and corporate banking services in Latvia. In 2004 Sampo Bank plc (registered in Finland) acquired 100% of A/S Māras Banka shares. The Extraordinary Meeting of the Shareholders on the 17 February 2005 took a decision to change the name of the bank to AS Sampo Banka. AS Sampo Banka main areas of operation include accepting deposits from customers and granting short-term and long-term loans mostly to private individuals, as well as issuing payment cards. In December 2005, the Bank opened its first branch, second branch was opened in June 2006 in Riga. Regulatory requirements The Bank is subject to the regulatory requirements of the Financial and Capital Markets Commission of Latvia. These requirements, among others, include maintenance of minimum capital adequacy, minimum share capital requirements, liquidity, foreign currency position and loan concentration by individual customers, group of related customers, and individual related party customers. A summary of principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. (2) Basis of Preparation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by European Union (EU). Certain disclosures are prepared in the format required by the Financial and Capital Market Commission and employed by domestic banks. International Financial Reporting Standards (IFRS) referred to above comprise standards and interpretations approved by the International Accounting Standards Board (IASB), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee (IASC), effective as at 31 December 2006 as adopted by European Union. The accompanying financial statements are presented in the national currency of Latvia, the Lat ( ). The preparation of financial statements in conformity with IFRS and the Regulations of Financial and Capital Market Commission require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (3) Changes in Accounting Policies Several new International Financial Reporting Standards (IFRS) and Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) as endorsed by the European Union are amended and enter into force starting from 1 January Those Standards and Interpretations are mandatory for annual periods beginning on or after 1 January IAS 19 Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures (revised) - IFRS 6 Exploration for and Evaluation of Mineral Resources - IFRIC 4 Determining whether an Arrangement contains a Lease - IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds - IFRS 4 Insurance Contracts Financial Guarantee Contracts (revised) IAS 39 Financial Instruments: Recognition and Measurement (revised) - Fair Value Option (in effect from 1 January 2006) 12

13 - Financial Guarantees (in effect from 1 January 2006). The adoption of the amendments to IAS 39 listed above has a direct impact on the Bank s regular operations, meanwhile producing no significant impact on the financial statements in the period of initial application. The Standards and Interpretations which have a direct impact on the Bank s reporting periods beginning on or after 1 January 2007 and which have not been early adopted by the Bank: Changes to IAS 1 Presentation of financial statements (effective for annual periods beginning on or after 1 January 2007) IFRS 7 Financial instruments: Disclosures (effective for annual periods beginning on or after 1 January 2007) IFRS 8 Operating segments (effective for annual periods beginning on or after 1 January 2009) IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies (effective for annual periods beginning on or after 1 March 2006) IFRIC 8 Scope of IFRS 2 (effective for annual periods beginning on or after 1 May 2006) IFRIC 9 Reassessment of Embedded Derivatives (effective for annual periods beginning on or after 1 June 2006) IFRIC 10 Interim Financial Reporting and Impairment (effective once adopted by EU, but not earlier than for annual periods beginning on or after 1 November 2006) IFRIC 11 IFRS 2 - Group and Treasury Share Transactions (effective once adopted by EU, but not earlier than for annual periods beginning on or after 1 March 2007) IFRIC 12 Service Concession Arrangements (effective once adopted by EU, but not earlier than for annual periods beginning on or after 1 January 2008) The Bank expects that the adoption of the pronouncements listed above will have no significant impact on the Bank s financial statements in the period of initial application, except for IFRS 7 Financial Instruments: Disclosures. IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under IFRS. The amendment to IAS 1 introduces disclosures about the level of an entity s capital and how it manages capital. The Bank assessed the impact of IFRS 7 and the amendment to IAS 1 and concluded that the main additional disclosures will be the sensitivity analysis to market risk and the capital disclosures required by the amendment of IAS 1. The Bank will apply IFRS 7 and the amendment to IAS 1 from annual periods beginning 1 January (4) Foreign Currencies Transactions denominated in foreign currencies are translated into Latvian lat at the official Bank of Latvia exchange rate on the date of the transaction, which approximates the prevailing market rates. Monetary assets and liabilities, including unmatured commitments to deliver or acquire foreign currencies under spot exchange transactions, if any, are translated at the exchange rate on the balance sheet date. The applicable rates used for the principal currencies as of 31 December were as follows: USD EUR

14 All realised gains and losses are recorded in the income statement in the period in which they arise. Unrealised gains and losses on exchange rate translation are credited or charged at foreign exchange rates prevailing at the year-end to the income statement. (5) Comparative figures Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current year. There was changed reflection of payments to deposit guarantee fund, payments for Financial Capital Market Committee financing, payments for associations of commercial banks in In annual report for 2005 these aforementioned payments are reflected in position interest expenses, but for 2006 in position Other expenses. The effect of reclassifications is presented in the table below: Income statement 2005 (comparative) figures As reported Restatements Restated Interest expenses Deposits 953,464 (51,116) 902,348 Due to credit institutions 330, ,678 Total 1,284,142 (51,116) 1,233,026 Other expenses Payments to deposit guarantee fund - 41,371 41,371 Payments for FCMC financing - 4,691 4,691 Payments to associations of commercial banks - 5,054 5,054 Other expenses Total ,116 51,254 Reclassification effect has no impact on financial year 2005 profit of the Bank. (6) Recognitions of revenue and expenses Interest income and expense are recognized on an accrual basis calculated using the effective interest method. Loan origination fees for loans issued to customers are deferred and recognized as an adjustment to the effective yield of the loans. Fees, commissions and other income and expense items are generally recorded on an accrual basis when the service has been provided. Portfolio and other management advisory and service fees are recorded based on the applicable service contracts. Income from penalty payments is recognised on a cash basis. (7) Intangible assets Intangible assets include computer software and licences. Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic lives of 1 to 5 years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortisation periods and methods for intangible assets with finite useful lives are reviewed at least at each financial year-end. Costs associated with maintaining computer software programmes are recorded as an expense as incurred. 14

15 (8) Fixed Assets Fixed assets are stated at historical cost, less accumulated depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or are recognised as separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation is calculated using the straight-line method over the estimated useful lives as follows: Furniture 20% Computers 35% Other fixed assets 20% Leasehold improvements are capitalised and depreciated over the remaining lease contract period or the life of the lease asset, whichever is shorter, on a straight-line basis. Gains and losses on disposal of fixed assets are recognised in the income statement in the year of disposal. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset s fair value less costs to sell and value in use. (9) Cash and Cash Equivalents For the purposes of the cash flow statement cash and cash equivalents comprise balances with less than three months maturity, including cash and deposits with the Bank of Latvia and other credit institutions less balances due to the Bank of Latvia and credit institutions with a maturity of less than three months. (10) Financial assets The Bank recognises financial asset on its balance sheet when, and only when, the Bank becomes a party to the contractual provisions of the instrument. Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Bank determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial year-end. All regular way purchases and sales of investments are recognised using trade date accounting. Financial assets at fair value through profit or loss Financial assets classified as held for trading are included in the category financial assets at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Such assets are initially accounted for at acquisition cost and are subsequently revalued at the fair value, which is market price. Related profit or loss on revaluation is charged directly to the income statement. Interest and dividends on such investments are recognised as interest income and dividend income respectively. Held to maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-tomaturity when the Bank has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. Other long-term investments that are 15

16 intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in the income statement when the investments are derecognised or impaired, as well as through the amortisation process. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in income when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Loans and advances are recognised at their trade date. Loan agreements foresee the possibility of repayment before the maturity date. The management of the Bank cannot estimate how often or when clients would use such an option and therefore impact of such repayment, if any, was not reflected in the financial statements of the Bank. Non-performing loans Loans are treated as non-performing when loan principal or interest payable is overdue for 90 and more days. Write-offs When the loans and advances cannot be recovered, they are written-off and charged against impairment for possible credit losses. The management of the Bank makes the decision on writing-off loans. Recoveries of loans previously written-off are credited to the income statement. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available-forsale or are not classified in any of the three preceding categories. After initial recognition available-for sale financial assets are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the income statement. The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business on the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm s length market transactions, reference to the current market value of another instrument, which is substantially the same and discounted cash flow analysis. (11) Derecognition of financial assets and liabilities Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised where: the rights to receive cash flows from the asset have expired; the Bank has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; and 16

17 the Bank either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Bank has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay. Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Bank s continuing involvement is the amount of the transferred asset that the Bank may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Bank s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss. (12) Offsetting Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. (13) Impairment of financial assets If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows. Future cash flows consists of any proceeds received, including, but not limiting to, any payments received, realisation of collateral and other payments. Present value of future cash flows is estimated using discount factor, which covers both: cash flow assessment and effective interest rate. The carrying amount of the asset is reduced through use of an impairment account in the income statement. The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. 17

18 (14) Impairment of other assets The Bank assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Bank makes an estimate of the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or cash- generating unit s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses of continuing operations are recognised in the income statement in those expense categories consistent with the function of the impaired asset. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation (if any), had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal the depreciation charge (if any) is adjusted in future periods to allocate the asset s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. (15) Fair values of financial assets and liabilities For financial instruments traded in organised financial markets the fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities. The fair value of interest-bearing financial instruments is estimated based on discounted cash flows using the interest rates for items with similar terms and risk characteristics. Where the fair values of financial assets and liabilities differ materially from their book values, such fair values are separately disclosed in the notes to the financial statements. The Management believes that the fair value of amount due from banks, loans and receivables, amounts due to banks and customer deposits approximate their book values. (16) Borrowings The Bank recognises financial liability on its balance sheet when, and only when, the Bank becomes a party to the contractual provisions of the instrument. In the balance sheet borrowings are recognised initially at cost amounting to their issue proceeds net of transaction costs. Subsequently borrowings stated at amortised cost and any difference between net proceeds and value at redemption is recognised in the income statement over the period of borrowings using the effective interest rate. (17) Share capital Share capital is shown in the balance sheet at the amount subscribed. (18) Corporate income tax Corporate income tax payable is assessed based on the taxable income for the period in accordance with Latvian tax legislation. In the year 2006 the tax rate by Latvian tax legislation is 15 %. 18

19 Deferred tax is provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred income tax is determined using tax rates that have been enacted and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the tax assets can be utilised. (19) Dividends Dividends on ordinary shares are recognised in equity in the period in which they are approved by the Bank s shareholders. (20) Leases Finance Bank as lessee The Bank recognizes finance leases as assets and liabilities in the balance sheet at the date of commencement of the lease term at amounts equal to the fair value of the leased property or, if lower, at the present value of the minimum lease payments. In calculating the present value of the minimum lease payments the discount factor used is the interest rate implicit in the lease, when it is practicable to determine; otherwise, the Bank s incremental borrowing rate is used. Initial direct costs incurred are included as part of the asset. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The costs identified as directly attributable to activities performed by the lessee for a finance lease, are included as part of the amount recognised as an asset under the lease. Operating Bank as lessee Leases of assets under which the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under an operating lease are recognized as expenses on a straightline basis over the lease term and included into other administrative and operating expenses. (21) Error corrections The Bank shall correct material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by restating the comparative amounts for the prior period(s) presented in which the error occurred or if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented. When it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity shall restate the opening balances of assets, liabilities and equity for the earliest period for which retrospective restatement is practicable (which may be the current period). 19

20 (22) Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and stand-by letters of credit which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties carry the same credit risk as loans. Documentary and commercial letters of credit which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. (23) Provisions Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is presented in the income statement. If the effect of the time value of money is material, provisions are discounted using current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a borrowing cost. Provisions made to guarantees and stand-by facilities. The amount of the loss is recognized when it is probable that the Bank will recognize an outflow of economic benefit that can be reliably estimated and represents a present legal or constructive obligation. (24) Contingencies Contingent liabilities are not recognised in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the financial statements but disclosed when an inflow or economic benefits is probable. (25) Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with International Financial Reporting Standards, as published by the International Accounting Standards Board, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingencies. The significant areas of estimation used in the preparation of the accompanying financial statements relate to depreciation and evaluation of impairment for loans, provisions for loan commitments and stand-by facilities. Below are presented key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that has a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. The Bank regularly reviews its loans and receivables to assess impairment. The Bank uses its experienced judgement to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and there are few available historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on the observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in 20

21 the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans and receivables when scheduling its future cash flows. The Bank uses its experienced judgement to adjust observable data for a group of loans or receivables to reflect current circumstances. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Future events may occur which will cause the assumptions used in arriving at the estimates to change. The effect of any changes in estimates will be recorded in the financial statements, when determinable. In 2005, the Management of the Bank changed the estimate regarding loan issuance commission recognition term. Effective from 1 January 2005 it was changed from 3 to 15 years. Should the Bank continued to apply the previous estimate of 3 years deferral period further, the net profit for the year 2005 and the shareholders equity as at 31 December 2005 would increase for 167 thousand. However during 2006 it was observed that average maturity of loans issued prior 1 January 2006 was substantially lower than 15 years (actually it was around 3.2 years) as big part of those loans were prepaid during 2006 and the Management of the Bank made decision to recognize all respective loan issuance commissions based on actual loan prepayment dates. In result net profit for the year 2006 and the shareholders equity as at 31 December 2006 increased by 111 thousand. (26) Subsequent events Post-year-end events that provide additional information about the Bank s position at the balance sheet date (adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material. 21

22 2. RISK MANAGEMENT The Bank has developed and follows risk management policies describing and regulating ways to minimize the risk of losses. The Board and Council have approved risk management policies. The Board supervises the risk management system but responsibility over implementation lies with business line managers. The risk management system is under continuous improvement in response to development of the Bank s activities and financial market. Interest rate, foreign exchange and liquidity risk Interest rate risk arises due to potential adverse changes of interest payments on the Bank s local and foreign assets and payments for the Bank s liabilities. The Board controls the operations of the Bank s units in charge of the management of interest rate risk and plans the Bank s future operations. The financial director of the Bank controls the daily aspects of activities related to management of interest rate risk. Foreign exchange risk management is governed by the Bank s foreign exchange risk management policy. The financial director of the Bank maintains control over limits of foreign exchange positions in order to avoid losses arising from adverse changes in the exchange rates. Liquidity risk management is determined by the Bank s liquidity management policy, which includes treatment of the risk of untimely settlement of customer and creditor claims. Credit risk The Bank has developed a credit policy regulating controls over credit risk. Credit risk includes untimely or incomplete settlement of debtor liabilities. The Board and Credit Committee manage the risk. The Credit department continuously monitors compliance with related procedures and limits. Other risks such as operational risk, control over money market transactions with other banks is the responsibility of the board of the Bank. To ensure proper evaluations of the credit risk before entering into any cooperation with the clients, the Bank performs a comprehensive review of the clients solvency and collateral. The financial position of borrowers is reviewed at least on annual basis or on more frequent bases if there is suspicion of weakening of financial situation of the customer. Other risks related to operations The Bank s operations might be exposed to other risks that may result in unexpected losses. The cause of such risks may be, for instance: human errors or fraud, disruption of information systems, insufficient internal control and procedures etc. The Board and respective structural units of the Bank manage these risks. The Bank maintains the resources necessary for continued operations. 22

23 3. INTEREST INCOME Loans 3,953,896 1,901,404 Due from banks 323, ,016 Financial investments available-to-sale 105,119 - Total 4,382,535 2,094, INTEREST EXPENSE Due to credit institutions 1,492, ,678 Due to customers 929, ,348 Total 2,421,866 1,233, NET FEES AND COMMISSION INCOME Account maintenance and money transfers 77,776 74,190 Credit related fees 50,721 - Brokerage fees 4,375 - Other 29,148 29,661 Total fees and commission income 162, ,851 Credit related fees paid 99,250 - Brokerage fees paid 31,661 - Other fees paid 3,311 74,725 Total fees and commission expenses 134,222 74,425 Net fees and commission income 27,798 29, NET GAIN FROM OPERATIONS WITH FOREIGN CURRENCIES AND TRADING SECURITIES Profit from currency exchange operations, net 134, ,744 Loss from foreign currency revaluation, net 4,193 1,098 Gain on equities 11,630 - Total 149, ,842 The decrease of the profit from currency exchange operations is mainly due to the transaction result on reduction of open EUR position against on the end of Open EUR position was reduced from million EUR to 5.19 million EUR at the end of 2006 and that resulted in loss of 77 thousand. 23