FINANCIAL STATEMENTS OF THE BANK FOR THE PERIOD 5 SEPTEMBER 2008 THROUGH 31 DECEMBER 2009 PREPARED IN ACCORDANCE WITH IFRS. JSC Latvijas pasta banka

Transcription

1 FINANCIAL STATEMENTS OF THE BANK FOR THE PERIOD 5 SEPTEMBER 2008 THROUGH 31 DECEMBER 2009 PREPARED IN ACCORDANCE WITH IFRS JSC Latvijas pasta banka

2 Contents Management Report The Council and the Board Statement of Responsibility of the Bank s Management Bank s Financial Statements: Statement of Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Auditors Report

3 AS Latvijas pasta banka MANAGEMENT REPORT Dear Ladies and Gentlemen! On behalf of the management of AS Latvijas pasta banka allow us to present for your consideration the annual report of AS Latvijas pasta banka (hereinafter also the Bank) showing the Bank s financial performance for the period 5 September 2008 through 31 December In spite of various difficulties faced by the Bank in 2009 while implementing the joint project with VAS Latvijas Pasts, we are confident that the year 2009 was successful for the Bank. We believe that in 2009 a strong and sound foundation was laid for the targeted and rapid growth of the Bank for the subsequent five years. The Bank s operating strategy is aimed at creating a specialised bank enjoying a high level of trust, developing products that bring high added value, while the Bank s vision is to become a convenient bank that would be able to flexibly adapt to the customer needs and have a wide range of services. The Bank s strategy has a major focus on management of assets of affluent customers and products meeting the individual needs of our customers. The Bank provides its customers with standard banking services and continues working to expand the range of the financial products offered. In 2009 AS Latvijas pasta banka continued its active development and became one of the very few local banks to have the positive annual result. The Bank s audited profit for the reporting period is LVL Notwithstanding the current recession observed in Latvia s economy, the Bank s assets have reached LVL , which is evidence of the growing customer base by all operating segments. In 2009 AS Latvijas pasta banka was specifically focusing on the increase of its loan portfolio. The Bank s targeted efforts included introduction of new products and analysis of new lending opportunities, including successful development of cooperation and support of local residents in acquiring the EU financing. During 2009 the Bank developed and improved its structure as well as made substantial investments in the IT and infrastructure development. A Bank s objective is to develop longstanding relations with its customers and in 2009 the Bank was actively expanding its customer base. Regardless of the noteworthy increase in the customer base, the Bank pursues the knowyourcustomer principle, scrutinising the business of its customers. In spite of the tough competition, the Bank has evolved into a bank that is large enough even for most demanding customers, meanwhile remaining small enough to be able to offer individual and friendly customer service. This is achieved owing to the high professionalism and extensive experience of the Bank s employees as well as advanced bank technologies applied in its business. We are highly optimistic about the Bank s prospects for the year 2010 and beyond and we are sure that the Bank will have then an even steadier position in the Latvian banking sector. The Bank will continue developing its network of branches and is planning to offer customised financial solutions. A Bank s objective is to end the year 2010 with a profit of LVL and triple the number of its customers. We would like to express our deep gratitude to the customers of AS Latvijas pasta banka for their confidence and hope to continue our mutually beneficial cooperation also in the future! Best regards, Riga, 9 March

4 THE COUNCIL AND THE BOARD The Council The Council of the Bank as at 31 December 2009 Name Position Biomins Kajems Chairman of the Council Jūlija Kozlova Council Member Guntars Grīnvalds Council Member Date of appointment 13/10/ /10/ /10/2008 The Board The Board of the Bank as at 31 December 2009 Name Position Date of appointment Boriss Ulmans Arnis Kalveršs Einārs Vaivods Chairman of the Board Board Member Board Member 05/09/ /09/ /09/2008 Riga, 9 March 2010 For the Bank s management: 4

5 STATEMENT OF RESPONSIBILITY OF THE BANK S MANAGEMENT The management of AS Latvijas pasta banka (hereinafter the Bank) are responsible for the preparation of the Bank s financial statements. The Bank s financial statements are prepared in accordance with the source documents and present fairly the financial position of the Bank as at 31 December 2009 and the results of its operations and cash flows for the period 5 September 2008 through 31 December The management confirm that appropriate accounting policies have been applied on a consistent basis in preparing the Bank s financial statements for the period 5 September 2008 through 31 December 2009 set out on pages 6 to 40 and prudent and reasonable judgments and estimates have been made by the management. They also confirm that the Bank s financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the European Union and regulations of the Financial and Capital Market Commission on the preparation of annual reports of banks. The financial statements are prepared on a going concern basis. The management of AS Latvijas pasta banka are also responsible for the maintenance of proper accounting records, taking reasonable efforts to safeguard 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 (FCMC) and other legislation of the Republic of Latvia. Riga, 9 March 2010 For the Bank s management: 5

6 STATEMENT OF COMPREHENSIVE INCOME 05/09/2008 Notes Interest and similar income Interest and similar expense Net interest income Commission and fee income Commission and fee expense Net commission and fee income Net trading income Other expense Net operating income Administrative expense Amortisation/ depreciation Operating expense Profit before tax Corporate income tax Net profit for the year Other comprehensive income comprehensive income Earnings per share (LVL) (318) (8) 19 (17) (107) 712 (564) (32) (596) 116 (18) The accompanying notes on pages 10 to 40 form an integral part of these financial statements. The Bank s financial statements set out on pages 6 to 40 were approved by the Council and the Board on 9 March

7 STATEMENT OF FINANCIAL POSITION Notes Assets Cash and balances with central banks Due from credit institutions Heldtomaturity financial investments Loans and receivables Current tax assets Property, plant and equipment Intangible assets Other assets assets Liabilities Derivative financial instruments Deposits from customers Deferred tax liabilities Other liabilities liabilities Equity attributable to the Bank s shareholders Paidin share capital Profit for the year equity attributable to the Bank s shareholders equity liabilities and equity The accompanying notes on pages 10 to 40 form an integral part of these financial statements. The Bank s financial statements set out on pages 6 to 40 were approved by the Council and the Board on 9 March

8 STATEMENT OF CHANGES IN EQUITY Bank Paidin share capital Retained earnings Balance as at 12 September 2008 comprehensive income Issue of share capital Balance as at 31 December The accompanying notes on pages 10 to 40 form an integral part of these financial statements. The Bank s financial statements set out on pages 6 to 40 were approved by the Council and the Board on 9 March

9 STATEMENT OF CASH FLOWS Notes Cash flows from operating activities Profit before tax Amortisation/ depreciation Unrealised foreign exchange (gain)/ loss Increase in cash and cash equivalents from operating activities before changes in assets and liabilities Decrease/ (increase) in balances due from credit institutions (Increase) in loans and receivables Decrease/ (increase) in other assets Increase / (decrease) in deposits from customers (19) 129 (3 109) (1 287) (91) Increase / (decrease) in other liabilities Change in cash and cash equivalents from operating activities Corporate income tax (paid) (Decrease) in cash and cash equivalents from operating activities (Purchase) of intangible assets and property, plant and equipment Acquisition of securities held to maturity (Decrease) in cash and cash equivalents from investing activities Issue of share capital Increase/ (decrease) in cash and cash equivalents from financing activities Increase/ (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Foreign exchange gain/(loss) Cash and cash equivalents at the end of the year (2) (419) (5 430) (5 849) Operational cash flows from interest 200 Interest paid Interest received 9 LVL The accompanying notes on pages 10 to 40 form an integral part of these financial statements. The Bank s financial statements set out on pages 6 to 40 were approved by the Council and the Board on 9 March

10 AS LATVIJAS PASTA BANKA FINANCIAL STATEMENTS FOR THE PERIOD 5 SEPTEMBER 2008 THROUGH 31 DECEMBER 2009 NOTES TO THE FINANCIAL STATEMENTS (CONT D) NOTE 1 GENERAL INFORMATION AS Latvijas pasta banka (hereinafter the Bank) is a joint stock company registered in the Republic of Latvia and operating according to the laws of the Republic of Latvia and the licence issued by the Financial and Capital Market Commission on 12 September The registered office of AS Latvijas pasta banka is at Katlakalna iela 1, Riga, LV1073, Latvia. The Bank has the head office and one customer service centre. The core business activity of the Bank comprises local and international payments, attraction of deposits, issue and servicing of payment cards, issue of loans, securities and foreign exchange transactions. According to the Commercial Law of the Republic of Latvia, the general shareholders meeting has a right and duty to decide on the approval of the annual report. NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (1) Significant accounting estimates and assumptions These financial statements are reported in thousands of lats (), unless otherwise stated. The Bank s financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ) as adopted by the European Union ( EU ). The financial statements are prepared on the going concern basis. The Bank s management have analysed the Bank s financial position, availability of financial resources as well as the impact of the financial crisis on the future operations of the Bank. The Bank has formulated an alternative development strategy based on an assumption that the initial Pasta Banka project is not supported and the existing development strategy cannot be implemented. The alternative strategy will be applied until it is confirmed legally that the initial strategy is or is not feasible. The Bank s alternative strategy is aimed at creating a specialised bank enjoying a high level of trust, developing products that bring high added value. These financial statements are prepared on a historical cost basis. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Where available and reasonably reliable, fair values are determined by reference to observable market prices. Where representative market prices are not available or are unreliable, fair values are determined by using valuation techniques which refer to observable market data. These include prices obtained from independent market surveys, comparisons with similar financial instruments, discounted cash flow analyses and other valuation techniques commonly accepted and used by market participants. The preparation of financial statements in conformity with International Financial Reporting Standards as adopted by the EU requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense, and disclosure of contingencies. The Bank makes accounting estimates and assumptions with regard to future periods. Accordingly, actual results could differ from those estimates. Estimates and underlying assumptions are revised on a regular basis. The effect of a change in an accounting estimate is recognised in the period of the change, if the change affects that period only or in the period of the change and future periods, if the change affects both. 10

11 AS LATVIJAS PASTA BANKA FINANCIAL STATEMENTS FOR THE PERIOD 5 SEPTEMBER 2008 THROUGH 31 DECEMBER 2009 NOTES TO THE FINANCIAL STATEMENTS (CONT D) The Bank s financial statements for the period 5 September 2008 through 31 December 2009 will be comparable with the future financial statements of the Bank prepared for calendar years because the management believe that the Bank started active operations in 2009 and the financial data for four months of 2008 do not produce a significant impact on the present financial statements. (2) Adoption of new and/or changed IAS, IFRS and IFRIC interpretations IAS 1 Presentation of Financial Statements The standard is effective for financial periods beginning on or after 1 January The key amendments refer to the replacement of the income statement with the statement of comprehensive income comprising all nonowner changes in equity, like revaluation of availableforsale financial assets. Alternatively, entities may present two statements: the income statement and the statement of comprehensive income. In addition, the revised standard requires entities to present a comparative statement of financial position as at the beginning of the earliest comparative period when the entity has applied an accounting policy retrospectively, makes a retrospective restatement, or reclassifies items in the financial statements. IAS 1 has an impact on disclosures in the financial statements; however it does not impact the recognition and measurement of certain transactions and balance sheet captions. The Bank has to present two statements: the income statement and the statement of comprehensive income. In the reporting period the Bank had no other comprehensive income. The financial statements are prepared in accordance with the revised presentation requirements. IAS 23 Borrowing Costs The revised standard eliminates the option of expensing all borrowing costs and requires borrowing costs to be capitalised if they are directly attributable to the acquisition, construction or production of a qualifying asset. IAS 27 Consolidated and Separate Financial Statements The standard requires that the effect of transactions related to noncontrolling interests shall be accounted for as an equity transaction if there is no change in control and these transactions no longer give rise to goodwill nor will it give rise to a gain and loss. The standard also provides guidelines on the accounting for the loss of control of a subsidiary. IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements Puttable Financial Instruments and Obligations Arising on Liquidation The amendments refer to disclosures on the rights and liabilities arising from financial instruments on liquidation. IAS 39 Financial Instruments: Recognition and Measurement The amendment addresses the designation of a onesided risk in a hedged item and the designation of inflation as a hedged risk or portion in particular situations. IFRS 1 Firsttime Adoption of International Financial Reporting Standards and IAS 27 Consolidated and Separate Financial Statements Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate The amendment to IFRS 1 allows an entity to determine the cost of investments in subsidiaries, jointly controlled entities or associates in its opening IFRS financial statements in accordance with IAS 27 or using a deemed cost. The amendment to IAS 27 requires all dividends from a subsidiary, jointly controlled entity or associate to be recognised in the income statement in the separate financial statements. The Bank has no investments in other entities and, therefore, the amendment has no impact on the financial statements of the Bank. IFRS 2 Sharebased Payment 11

12 AS LATVIJAS PASTA BANKA FINANCIAL STATEMENTS FOR THE PERIOD 5 SEPTEMBER 2008 THROUGH 31 DECEMBER 2009 NOTES TO THE FINANCIAL STATEMENTS The amendments refer to the application of this standard in share deals whereby an entity transfers shares for no obvious consideration or for inadequate consideration. IFRS 3 Business Combinations The changes relate to the accounting for business combinations that will impact the amount of goodwill recognised. IFRS 1 Firsttime Adoption of International Financial Reporting Standards The standard clarifies that all the subsidiary s assets and liabilities must be classified as held for sale if the sale of the subsidiary s share will result in the loss of control. IFRS 7 Financial Instruments: Disclosures The amendments outline additional disclosure requirements for fair value measurement and liquidity risk. IFRS 8 Operating Segment Information The standard sets out requirements for disclosure of information about an entity s operating segments in breakdown by components that management uses to make operating decisions. According to the requirements of this IFRS, information on operating segments shall be disclosed by the companies, whose debt or equity instruments are traded in a public market. The Bank s shares and debt securities are not traded in a public market; thereby no information on the operating segments of the Bank has been disclosed. IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement This amendment to IFRIC 9 requires an entity to assess whether an embedded derivative must be separated from a host contract when the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category. IFRIC 13 Customer Loyalty Programmes This interpretation provides guidance on the appropriate accounting treatment of customer loyalty award credits granted under customer loyalty programmes. IFRIC 17 Distributions of Noncash Assets to Owners The interpretation provides guidance on the appropriate accounting treatment when an entity distributes assets other than cash as dividends to its shareholders. IFRIC 18 Transfers of Assets from Customers The interpretation deals with transfers of assets from customers, defines such assets, provides guidance on recognition and measurement upon initial recognition as well as identification of services that need to be recognised separately. IFRS and IFRIC Interpretations that have been issued but are not yet effective The Bank has not applied retrospectively the following IFRS and IFRIC Interpretations that have been issued but will be effective for financial periods beginning on or after 1 January 2010: IFRS 9 Financial Instruments, Phase 1 Classification and Measurement (effective for financial years beginning on or after 1 January 2013, once adopted by the EU). The Bank considers that the adoption of all the above standards and interpretations will not produce a significant impact on its financial statements. (3) Foreign currency translation Transactions and balances Transactions in foreign currencies are recorded in lats at the functional currency rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in 12

13 AS LATVIJAS PASTA BANKA FINANCIAL STATEMENTS FOR THE PERIOD 5 SEPTEMBER 2008 THROUGH 31 DECEMBER 2009 NOTES TO THE FINANCIAL STATEMENTS foreign currencies are translated into lats at the official rate of exchange prevailing at the end of the year. All realised gains and losses are taken to the statement of comprehensive income in the period when incurred. Unrealised gains and losses resulting from the revaluation of assets and liabilities are included in the statement of comprehensive income applying the exchange rates prevailing at the reporting date. The principal yearend rates of exchange (LVL to one foreign currency unit) used in the preparation of these financial statements are as follows: Official exchange rate as at 31 December 2009 EUR USD (4) Financial assets and liabilities Derivatives recorded at fair value through profit or loss The Bank uses derivatives such as forward foreign exchange contracts and currency swaps. Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. The fair value of derivatives is disclosed in the statement of financial position as derivative financial instruments. Daily changes in the fair value of derivatives are included in the statement of comprehensive income in net trading income. Heldtomaturity financial investments Heldtomaturity financial investments are nonderivative financial assets with fixed or determinable payments and fixed maturities, which the Bank has the intention and ability to hold to maturity. Heldtomaturity financial investments comprise debt securities. Heldtomaturity financial investments are carried at amortised cost using the effective interest rate method, less any allowance for impairment. Loans and receivables Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans are carried at amortised cost using the effective interest method. The amortised cost of a loan is the amount at the issue of the loan minus principal repayments, plus or minus the cumulative amortisation using the effective interest rate method of any difference between the initial amount and the maturity amount, and minus any reduction for impairment or uncollectability. Financial liabilities Financial instruments carried as deposits from customers are classified as financial liabilities at amortised cost. After initial measurement, financial liabilities are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any discount on issue and fees that are an integral part of the effective interest rate. The amortisation is included in interest and similar expense in the statement of comprehensive income. 13

14 AS LATVIJAS PASTA BANKA FINANCIAL STATEMENTS FOR THE PERIOD 5 SEPTEMBER 2008 THROUGH 31 DECEMBER 2009 NOTES TO THE FINANCIAL STATEMENTS Impairment of financial assets The Bank assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. The Bank first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant and collectively for all past due loans regardless of their net carrying amount. 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 there is objective evidence that an impairment loss 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 discounted at the financial asset s original effective interest rate. For the purpose of a collective evaluation of impairment, the Bank assumes that contractual cash will be recovered and the impairment loss is evaluated on the basis of historical loss experience adjusted for current observable data. Specific allowances for the portfolios of homogeneous loans, such as credit cards and unsecured consumer loans, are calculated on a portfolio basis rather than individually. The key evaluation criterion is payment discipline. The calculations of portfolio allowances are based on historical experience and statistical data. The carrying amount of the asset is reduced through the use of an allowance account, and the decrease or increase of allowances is taken to the statement of comprehensive income for the reporting year. Loss together with the associated allowance are written off when there is no realistic prospect of future recovery. (5) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straightline method applying the following rates: Property, plant and equipment: Computers and equipment 33 % Other property, plant and equipment 1020 % An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset is calculated as the difference between the net disposal proceeds and the carrying amount of the item at the disposal date and is included in the statement of comprehensive income. Depreciation methods, useful lives and residual values are reviewed annually. (6) Intangible assets Intangible assets are identifiable nonmonetary assets without physical substance (licences, software that is not an integral part of the related hardware, etc.) held for supply of services or otherwise and are recognised as such when it is probable that the expected economic benefits that are attributable to the asset will flow to the Bank. Intangible assets are stated at cost less accumulated amortisation. The amortisation is included in the statement of comprehensive income on a straightline basis of the useful life of the asset. The useful life of each asset is estimated on an individual basis, considering the contractual provisions and/or the period in which the asset s future economic benefits are expected to be consumed by the Bank. 14

15 AS LATVIJAS PASTA BANKA FINANCIAL STATEMENTS FOR THE PERIOD 5 SEPTEMBER 2008 THROUGH 31 DECEMBER 2009 NOTES TO THE FINANCIAL STATEMENTS When the useful life of an asset is not specified in the contracts or cannot be determined reliably, the Bank assumes that the useful life of the asset is 10 (ten) years and the annual amortisation rate is 10%. The amortisation rates by categories of assets are as follows: Intangible assets: Licences Software 10 % 10 % (7) Recognition of income and expense Interest income and expense items are recognised on an accrual basis using the effective interest rate method. Interest income and expense include the amortisation of any difference between the cost of interestbearing financial assets or liabilities and the maturity amount calculated applying the effective interest rate method (discount, premium, etc.) Interest income comprises coupons earned from trading and availableforsale debt securities as well as other fixed income securities. Accumulated interest income and income from impaired financial assets are included in the statement of comprehensive income unless the Bank has objective evidence that payments will not be received in the due term. Commission and fee income from customers is usually recognised on an accrual basis as the service is supplied based on each particular situation, or on a certain performance. Income and expense attributable to the reporting period are taken to the statement of comprehensive income regardless of the receipt or payment date. (8) Cash and cash equivalents According to IAS 7 Cash flow statements, cash and cash equivalents comprise cash and amounts due from central banks and other credit institutions on demand with an original maturity of three months or less. The statement of cash flows reports cash flows during the period classified by operating, investing and financing activities. Cash flows from operating activities are reported using the indirect method. Cash flows from investing and financing activities are presented on the basis of comprehensive income and cash payments for the year. (9) Taxation Corporate income tax is calculated according to the requirements of Latvian tax laws. The income tax rate applied in 2009 is 15%. Deferred corporate income tax arising from temporary differences in the timing of the recognition of items in the tax returns and these financial statements is assessed using the liability method. The deferred corporate income tax is determined based on the tax rates that are expected to apply when the temporary differences reverse based on tax rates enacted or substantively enacted by the reporting date. The principal temporary differences arise from differing rates of accounting and tax depreciation on the Bank s assets, revaluation of securities, as well as the treatment of collective impairment allowances, deferred commissions for financial assets and vacation pay reserve. The carrying amount of the deferred corporate income tax asset, if any, is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. 15

16 AS LATVIJAS PASTA BANKA FINANCIAL STATEMENTS FOR THE PERIOD 5 SEPTEMBER 2008 THROUGH 31 DECEMBER 2009 NOTES TO THE FINANCIAL STATEMENTS (10) Offbalance sheet financial commitments and contingent liabilities In the ordinary course of business, the Bank is involved with offbalance sheet financial commitments and contingent liabilities comprising commitments to extend loans and receivables to customers, commitments for unutilised credit lines or credit card limits, and financial guarantees. Commitments to extend loans and receivables and commitments for unutilised credit lines or credit card limits represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements. (11) Trust activities Funds managed by the Bank on behalf of individuals, corporate customers, trusts and other institutions are not regarded as assets of the Bank and, therefore, are not separately included in the statement of financial position. Funds under trust management are presented in these financial statements only for disclosure purposes. NOTE 3 NET INTEREST INCOME Interest income Loans and receivables Due from credit institutions Heldtomaturity financial investments Interest expense Due to credit institutions Nonbank deposits Payments to the Deposit Guarantee Fund Net interest income

17 AS LATVIJAS PASTA BANKA FINANCIAL STATEMENTS FOR THE PERIOD 5 SEPTEMBER 2008 THROUGH 31 DECEMBER 2009 NOTES TO THE FINANCIAL STATEMENTS NOTE 4 NET COMMISSION AND FEE INCOME Commission and fee income Service fee for account maintenance and money transfers Payment cards Asset management Guarantees and loans Commission and fee expense Payment cards Correspondent bank services Other Net commission and fee income NOTE NET TRADING INCOME Net gain/(loss) from transactions with derivative financial instruments and foreign exchange Net trading gain/ (loss) Net revaluation result Net gain from revaluation of open positions NOTE 6 (42) (36) (6) 25 (17) OTHER EXPENSE FCMC financing fee Acquisition of plastic cards Credit card servicing Other expense

18 AS LATVIJAS PASTA BANKA FINANCIAL STATEMENTS FOR THE PERIOD 5 SEPTEMBER 2008 THROUGH 31 DECEMBER 2009 NOTES TO THE FINANCIAL STATEMENTS NOTE 7 ADMINISTRATIVE EXPENSE Personnel expense Remuneration to personnel Remuneration to the Council and the Board Statutory social insurance contributions Other expense Professional fees Rent EDP maintenance and communications VAT expense Public utilities and maintenance Security Stationery and other expense Other administrative expense At the end of 2009 the Bank had 37 employees. NOTE 8 CORPORATE INCOME TAX Corporate income tax expense comprises the following items: Current corporate income tax charge for the reporting year Deferred corporate income tax corporate income tax expense 2009 (18) (18) The standard tax rate applied in 2009 was 15%. 18

19 The movements in deferred corporate income tax can be specified as follows: 2009 Deferred corporate income tax liability: Accumulated excess of tax depreciation over accounting depreciation 47 Deferred corporate income tax asset: Vacation pay reserve Unutilised tax loss Other deferred tax asset Deferred corporate income tax liability (2) (26) (1) 18 Unutilised tax loss amounts to 180. According to the tax laws, the tax loss can be covered in the chronological sequence from the taxable income of the next eight taxation periods. NOTE 9 CASH AND BALANCES WITH CENTRAL BANKS Cash Balances with central banks Balances with central banks include cash on the correspondent account and a shortterm deposit with the Bank of Latvia. According to the instructions of the Bank of Latvia, the Bank s average monthly balance on its correspondent account may not be less than the compulsory reserve calculated for the balance of liabilities included in the reserve basis on the last day of the month. As at 31 December 2009, the Bank s compulsory reserve requirement was 422. NOTE 10 DUE FROM CREDIT INSTITUTIONS Amounts due on demand Credit institutions of other countries Credit institutions registered in OECD countries Credit institutions registered in Latvia Term deposits Credit institutions registered in Latvia The Bank s average interest rates are: LVL 6.29%, USD 1.21%, EUR 0.85%. NOTE 11 DERIVATIVE FINANCIAL INSTRUMENTS The following table presents the fair values of the Bank s derivative financial instruments. The notional amount is the amount of a derivative s underlying asset and is calculated according to 11

20 the FCMC capital adequacy requirements. The notional amount indicates the volume of transactions outstanding as at the year end. As at Currency swaps Assets Liabilities 6 Notional amount As at 31 December 2009, the Bank had foreign exchange transactions, the revaluation methods and, as a result, the revaluation results of which may affect the Bank s financial performance. The Bank determines the value of these transactions based on the prices of underlying assets at the reporting date, i.e. the currency exchange rates are determined on the basis of the official exchange rates set by the Bank of Latvia and the interest rates are based on the respective LIBOR and/or RIGIBOR or RIGIBID rates. The Bank s management believes that the revaluation methods applied are correct and conservative enough to prevent potential significant changes of the Bank s financial indicators. NOTE 12 LOANS AND RECEIVABLES Net loans Private entities Private individuals net loans and receivables Loans and receivables by geographical profile Net loans Residents of Latvia net loans and receivables Loans by types Commercial loans Credit card loans Net loans NOTE HELDTOMATURITY FINANCIAL INVESTMENTS The Bank has acquired discount securities issued by the Latvian government. As at 31 December 2009, the amortised cost of these debt securities was The maximum maturity of the securities is one year. Considering that the debt securities included in the portfolio of heldtomaturity financial investments may be used for main refinancing transactions with the Bank of Latvia, the portfolio is viewed as liquid and its objective is to 12

21 maintain secondary liquidity. NOTE 14 INTANGIBLE ASSETS The table below shows movements in the Bank s intangible assets for the period 5 September 2008 through 31 December 2009: Additions 341 Amortisation 17 Net carrying amount 324 The Bank s intangible assets basically comprise the software of ABS PsBANK having the net carrying amount of 106 and the payment card processing software having the net carrying amount of 98 and the useful life of 10 years. NOTE 15 PROPERTY, PLANT AND EQUIPMENT The table below shows movements in the Bank s property, plant and equipment for the period 5 September 2008 through 31 December 2009: Additions 78 Depreciation 15 Net carrying amount 63 The Bank s property, plant and equipment basically comprise the hardware having the net carrying amount of 53 and the useful life of three years. NOTE 16 OTHER ASSETS Prepaid expense Accrued income VAT Other receivables NOTE 17 FUNDS UNDER TRUST MANAGEMENT Assets Loans Liabilities Nonfinancial companies

22 The Bank issues loans classified as funds under trust management based on specific requests of asset owners. According to the trust management agreements concluded with customers, the asset owners assume all the risks inherent in these loans and the Bank acts only as an intermediary receiving the management fee. NOTE 18 DEPOSITS FROM CUSTOMERS Demand deposits Companies Private individuals Financial institutions Local authorities Term deposits Companies Private individuals Public nonfinancial companies Deposits by geographical profile Demand deposits Residents of Latvia Residents of OECD countries Term deposits Residents of Latvia The Bank s average interest rate is 8.38%. NOTE 19 OTHER LIABILITIES Accrued expense Payment card settlements Vacation pay reserve Deferred income Other liabilities NOTE PAIDIN SHARE CAPITAL As at 31 December 2009, the Bank s registered and paidin share capital was LVL 5 million. The Bank s share capital consists of only ordinary voting shares. The par value of each share is LVL 1. As at 31 December 2009, all the shares were paid fully. As at 31 December 2009, the Bank did not possess any of its own shares. As at 31 December 2009, the Bank s sole shareholder was SIA Mono. As at 31 December 2009, the Bank had not raised any subordinated capital. No dividends were declared for

23 Shareholder SIA Mono NOTE 21 Number of shares % of total paidin share capital LVL 000 Paidin share capital EARNINGS PER SHARE Earnings per share are calculated by dividing net profit by the number of shares issued. As at 31 December 2009, basic earnings per share were equal to diluted earnings per share. Net profit () Weighted average number of ordinary shares ( 000) Earnings per share (LVL) NOTE CASH AND CASH EQUIVALENTS Cash and demand deposits with the Bank of Latvia Balances due from other credit institutions with maturities of less than three months 31/12/

24 NOTE 23 MEMORANDUM ITEMS Contingent liabilities Guarantees Financial commitments Unutilised credit lines Credit card commitments memorandum items, gross In the ordinary course of business, the Bank issues loans and guarantees. The main purpose of these financial instruments is to ensure that adequate funds are available to customers. Guarantees that comprise irrevocable commitments are assigned the same risk as loans because those commit the Bank to pay in the event of a customer s default. Liabilities arising from credit lines represent the undrawn balances of credit lines. As regards credit risk, the Bank is potentially exposed to loss arising also from loan commitments. NOTE 24 RELATED PARTY DISCLOSURES Related parties are defined as shareholders that have the ability to control or exercise significant influence over the Bank s management policy, Council and Board members, their close members of the families, and entities in which these persons have a controlling interest. In the ordinary course of business, the Bank enters into transactions with related parties. All loans are issued to and financial transactions are made with related parties on an arm s length basis. In 2009, there were no any loans issued to related parties that would have been past due or impaired. The Bank s financial statements include the following balances of assets, liabilities and memorandum items associated with the Bank s transactions with related parties: Carrying amount Assets Loans and receivables, net Related companies and persons Council and Board Liabilities Deposits Related companies and persons Council and Board Memorandum items as at The table below presents interest income and expense on the balances due from/ to related parties: (13) (13) Interest income Interest expense Net interest income NOTE 25 RISK MANAGEMENT 16

25 The Bank organises risk management according to the requirements of the Law of the Republic of Latvia on Credit Institutions and FCMC regulations as well as following the Bank s strategy and other documents governing the Bank s operations. The Bank s risk management policy details the Bank s risk management objectives, goals and principles as well as related instruments. The Bank s risk management policy is based on the principle of continuing profitability and is aimed at achieving an appropriate balance between risks assumed by the Bank and returns. The risk management policy prescribes that the full range of risk mitigation instruments should be used and each specific instrument should be selected depending on the risk type. RISK MANAGEMENT STRUCTURE The risk management system is a systemic and complex approach providing for various activities: Identification and analysis of all the risks inherent in the Bank s operations; Determination of the acceptable risk level for various risk types setting limits and restrictions; Qualitative and quantitative measurement of certain risk types; Analysis of the risk level inherent in current and future operations to define the Bank s exposure; Timely identification of risks before products, services or activities are introduced and the effect these risks may produce on capital adequacy; Ongoing control of the compliance with the limits and restrictions set; Setup of the internal system to trace risks as soon as the negative trends emerge as well as establishment of the internal system to ensure prompt and adequate response to prevent or minimise the risk. All the risks that the Bank encounters should be identified. The highly volatile external and internal environment requires regular risk monitoring and analysis. The Bank s management defines the treatment of all the risks established. The portion of the risks that the Bank is not willing to accept should be eliminated fully and, in addition, the Banks ceases activities related to such risks. The maximum acceptable exposure limit is determined for the risks accepted by the Bank. For the risks that the Bank has designated as significant for its business, the Bank formulates, documents, and implements the relevant risk management policies and control procedures defining the following: Risk measurement and assessment methods and their regularity; Risk control procedures applied, including the restrictions and limits of the maximum risk exposure, risk mitigation techniques, control procedures to minimise risks that cannot be quantified; The procedure whereby the Council, the Board and heads of structural units are informed regularly about the risks inherent in the Bank s operations, risk amounts and trends, their impact on the capital amount and adequacy as well as receive other information required for decisionmaking purposes; The procedure for controlling the compliance with the risk management policies and control procedures, including the restrictions and limits set; Segregation of duties, powers, and responsibilities for risk management purposes. The Bank reviews and updates its risk management system regularly, but no less than once every year, and identifies the existing or potential risks inherent in its current operations. In analysing the specifics and amount/ volume of the existing and planned operations, the Bank identifies most significant risks, such as liquidity risk, credit risk, interest rate risk, currency risk of the nontrading portfolio, operational risk, compliance risk, reputational risk, and strategic risk. 17

26 The Council and the Board are responsible for the establishment and effective functioning of the risk management system. The Board is responsible for risk identification and management, including risk measurement, assessment, control and reporting, implementing the risk identification and management policies designed by the Council, as well as other risk management documents. The risk management policy with an annex thereto is reviewed by the Board meetings and approved by the Council at least annually. The internal control function related to risk management is discharged by the Council and the Board. LIQUIDITY RISK Liquidity risk represents the Bank s exposure to significant loss in the event that the Bank does not have a sufficient amount of liquid assets to meet legally justified claims or overcome unplanned changes in the Bank s assets and/or market conditions on a timely basis. A liquidity crisis may be caused by unexpected events, such as prolonged outflow of cash from the accounts opened with the Bank without a corresponding cash inflow. This process may be a consequence of the loss of trust, or a national crisis like a currency crisis. The Bank is basically exposed to liquidity risk when its cash flows are not balanced in terms of their maturity due to the Bank s activities involving borrowings, loans, capital and other items of assets and liabilities. Liquidity problems may be caused also by the lack of liquidity of the financial market. The objective of liquidity management is to achieve that the Bank s assets are placed in a manner enabling the Bank to meet legally justified claims of its creditors at any time. To maintain its liquidity position, the Bank: Assesses and plans the maturity structure of its assets and liabilities on a regular basis; Maintains sufficient liquid assets to ensure that financial liabilities can be met; Ensures that the liquidity ratio is at least 40%; Ensures that the proportion of highly liquid assets and liquid assets that are readily convertible into cash over a period not exceeding 30 days is more than 50%. The liquidity ratios for the year were as follows: 2009 % Yearend Average Maximum Minimum Liquidity risk control and management are prescribed by the Liquidity Risk Management Policy formulated by the Bank, which comprises the risk that the Bank will be unable to meet legally justified claims of its customers and other creditors. The Board determines the general liquidity risk management criteria by setting limits by exposure, maturity and Bank s business lines. The Resource Division is responsible for managing Liquidity Reserve Fund I (cash, correspondent account balances with other banks, shortterm interbank transactions). Liquidity risk management instruments comprise the maturity analysis of assets and liabilities, cash inflow and outflow analysis, setting internal limits for the net liquidity position, effective placement of the excess assets of Liquidity Reserve Fund I, fixing liquidity requirements for free funds, etc. ANALYSIS OF ASSETS AND LIABILITIES BY CONTRACTUAL MATURITIES The table below summarises the contractual maturity profile of the Bank s assets, liabilities and 18

27 memorandum items. Pledged availablefor sale assets are disclosed as Other. As at 31 December 2009 Less than 1 to 3 1 month months inclusive Assets Cash and balances with central banks Due from credit institutions Heldtomaturity financial investments Loans and receivables Property, plant and equipment Intangible assets Other assets assets Liabilities Derivative financial instruments Deposits from customers Deferred tax liabilities Other liabilities liabilities Memorandum items Net liquidity position 3 to 6 months 6 months to 1 year to 5 years Other (1 279) (769) 70 (262) The table below presents the maturity analysis of the estimated cash flows arising from the Bank s financial liabilities: As at 31 December 2009 Derivative financial instruments Deposits from customers Less than 1 to 3 1 month months inclusive to 6 months 6 months to 1 year 1 to 5 years

28 Deferred tax liabilities Other liabilities liabilities CREDIT RISK Credit risk is the risk the Bank will incur loss because its borrowers (debtors) or counterparties fail or refuse to settle their contractual obligations to the Bank. Credit risk is inherent in the Bank s transactions which give rise to the Bank s claims against another person and which are reported by the Bank in the statement of financial position or as memorandum items. Credit risk arises as soon as the Bank s funds are issued, invested or transferred to other parties for use based on the contractual provisions. Concentration risk is the risk arising from transaction concentrations. To hedge its exposure to concentration risk, the Bank sets limits for investments in various assets, instruments, markets, etc. A limit is defined as a numerical restriction applied to various investment types and it is used as a hedging and control instrument. Country risk country partner risk is the risk the Bank will incur loss if the Bank s assets are invested in a country where the Bank might have difficulties in recovering its assets in the due time and amount due to economic and political changes occurring in a specific country. The reasons for the partner s or issuer s default are primarily currency devaluation, adverse legislative changes, introduction of new restrictions and barriers as well as other factors including force majeure circumstances. Concentration risk and country risk are viewed by the Bank as components of credit risk. The objective of managing credit risk is to determine the maximum acceptable exposure to credit risk and ensure the compliance with the limits so set in the normal course of business. At present the Bank is involved in the following transactions giving rise to credit risk: Cash placements with other banks Loans and credit lines to banks Loans and credit lines to customers Guarantees issued to third parties and other contingent liabilities for the benefit of customers if they may demand settlement of obligations Securities transactions Dealing The credit risk management system is composed of the following components: approval of methods used to measure credit risk related to partners, borrowers and issuers, setting restrictions for loan types and investments in the securities included in the Bank s portfolio and fixing limits for lending by amount and maturity, regular assessment of assets and memorandum items. The Board and the Credit Committee are responsible for credit risk management, while the Credit Department monitors the related procedures and limits on an ongoing basis. The Bank has the following statutory documents dealing with credit risk management: the Credit Policy and Procedures, the Large Exposure Management Procedure, the Country Risk Management Policy, and the Country Risk Management Procedures. The Bank believes that its exposure to credit risk arises mainly from loans and balances due from credit institutions. The maximum exposure of the Bank s assets and memorandum items is shown in the credit risk concentration analysis. At the end of the financial year the Bank had loans that would be past due but not impaired. MAXIMUM EXPOSURE TO CREDIT RISK 20