TRUST COMMERCIAL BANK INDEPENDENT AUDITORS' REPORT AND FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 1999 AND 1998

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1 INDEPENDENT AUDITORS' REPORT AND FOR THE YEARS ENDED

2 CONTENTS PAGE Management's report 3 Statement of executive management responsibilities 4 Management of the Bank 5 Independent auditors report 6 Income statements 7 Balance sheets 8 Off-balance sheet items 9 Statements of changes in shareholders' equity 10 Statements of cash flows 11 Notes to the financial statements

3 MANAGEMENT'S REPORT The previous financial year has been difficult and full of trials for Trasta komercbanka. During this year the bank experienced essential asset and capital base decrease as well as decrease of income indicators. In the middle of the year several fundamental activities to stabilise the bank s financial situation were introduced, the management of the bank changed and for the moment we may assure that for Trasta komercbanka has successfully passed these trials. The crisis of Russia, August 1998 turned out to be rather important and almost all the year the bank felt its influence and worked at elimination of the sequences. The bank had to reduce its loan portfolio from 8,1 mil. LVL to 1,3 mil. LVL, doing it without any losses, as well as issue of loans and investments were interrupted. As the result was rapid decrease of the bank s income. To reduce the bank s expenses several development projects of the bank were interrupted as well. Significant resources were accumulated to provide the investments in Russia and Ukraine that could not be realised. As the result of all the mentioned the Bank s profit ratios decreased and Bank s 1999 year s profit was 731 thousands of lats. Wherewith, the bank has maintained its potential abilities of further work because of its prosperous customers that have undergone the difficult days together with the bank and remained faithful, the bank has got highly developed technology that is approvingly estimated by many specialists and there are still professional specialists in the bank. It makes a hopeful view in future. We are grateful to the bank s shareholders, employees and customers, which have been together with us during this year and still truehearted. We are grateful to all the members of the market we have been working together. The bank thanks you and hopes our co-operation will be successful further on. Alfrēds Čepānis Chairman of the Council Gundars Grieze Chairman of the Board Riga, March 31,

4 STATEMENT OF EXECUTIVE MANAGEMENT RESPONSIBILITIES Riga 31 March 2000 The management is responsible for preparing financial statements from the books of prime entry of the Bank for each financial period that present fairly the state of affairs of the Bank as at the end of the financial period and the results of its operations and cash flows for that period. The management confirms that suitable accounting policies have been used and applied consistently and reasonable, prudent judgements and estimates have been made in the preparation of the financial statements on pages 1 to 36 for the period ended 31 December The management also confirms that applicable international accounting standards have been followed and that the financial statements have been prepared on a going concern basis. The management is responsible for keeping proper accounting records, for taking reasonable steps to safeguard the assets of the Bank and to prevent and detect fraud and other irregularities. They are also responsible for operating the Bank in compliance with the Law on Credit Institutions, other legislation of the Republic of Latvia and with the regulations of the Bank of Latvia. On behalf of the management, Alfrēds Čepānis Chairman of the Council Gundars Grieze Chairman of the Board 4

5 MANAGEMENT OF THE BANK Supervisory Council of Shareholders Alfrēds Čepānis Vilnis Vītoliņš Jānis Cimzietiss Astamurs Gubass Radims Kiezler Buhuslav Sekerka Chairman of the Council Member of the Council Member of the Council Member of the Council Member of the Council Member of the Council Jānis Medens, Andrejs Osis, Armants Čapkevičs, Māris Fogelis and Nella Ušakova have resigned their positions during the period. Board of Management Gundars Grieze Māris Fogelis Aldis Reims Boriss Grigs Svetlana Krasovska Uģis Krūmiņš Chairman of the Board, President Vice-Chairman of the Board Vice-Chairman of the Board Vice-Chairman of the Board Member of the Board Member of the Board Ģirts Rungainis, Haralds Āboliņš, Jānis Lielcepure, Jānis Reirs, Signe Kalniņa and Ineta Limbena have resigned their positions during the period. Alfrēds Čepānis Chairman of the Council Gundars Grieze Chairman of the Board 5

6 INDEPENDENT AUDITORS REPORT To the shareholders of Trust Commercial Bank: We have audited the accompanying balance sheets of Trust Commercial Bank ( the Bank ) as of 31 December 1999 and 1998, and the related income statements, statements of changes in shareholders equity and cash flows for years then ended. These financial statements are the responsibility of the Bank s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of 31 December 1999 and 1998, and the results of its operations and its cash flows for the years then ended in accordance with International Accounting Standards. Without qualifying our opinion we would like to draw your attention to Note 34 to the accompanying financial statements. The issue discussed in this note has significantly impacted the financial position of the Bank for the year ended 31 December The accompanying 1999 financial statements have been prepared assuming that the Bank will continue as a going concern. As discussed in Note 38 to the financial statements, the Bank of Latvia requires that the Bank meet prescribed minimum capital requirements. As of 31 December 1999, as a result of the issue discussed in the preceding paragraph and Note 34, the Bank was able to meet such requirements. It is unlikely that the Bank will be able to meet the prescribed capital requirements in 2000 unless certain future events occur. Failure to meet these capital requirements may result in additional regulatory sanctions. These matters raise substantial doubt about the Bank s ability to continue as a going concern. Management s plans concerning these matters are described in Note 33. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Deloitte & Touche Riga, Latvia 31 March

7 INCOME STATEMENTS In thousands of lats Note months 12 months Interest income Interest expense 4 (422) (1 056) Net interest income Dividend income on shares and other non-fixed interest securities 7 44 Fee and commission income Fee and commission expense 6 (103) (698) Loss on dealing with securities and foreign exchange, net 7 (41) (788) Other operating income Net operating income Administrative expenses 9 (1 026) (1 520) Depreciation 19 (150) (204) Other operating expenses 10 (30) (72) Provisions and charges 11 (1 080) (516) Release of specific provisions Loss on revaluation of long-term investments (124) (198) Loss on ordinary activities (1 569) (1 778) Extraordinary items gain on sale of investments and other assets 33, Profit/(loss) before taxation 746 (1 778) Taxation 12 (15) (90) PROFIT/(LOSS) FOR THE YEAR 731 (1 868) EARNINGS/(LOSS) PER SHARE (LVL) (32.44) The notes are an integral part of these financial statements. The financial statements on pages 1 to 36 were approved by the Board of Directors on 31 March 2000 and by the Supervisory Council on 31 March 2000 and signed on their behalf by: Alfrēds Čepānis Chairman of the Council Gundars Grieze Chairman of the Board 7

8 BALANCE SHEETS In thousands of lats Note ASSETS Cash and balances with the Bank of Latvia Due from other credit institutions on demand term placements Loans, net Treasury bills and other fixed income securities Government bonds and other securities with fixed income Bonds of other institutions and other fixed income securities Securities with non-fixed income Investments in affiliates Intangible assets, net Fixed assets, net Other assets, net 20, Deferred expenses and accrued income Total assets Managed trust assets TOTAL ASSETS AND MANAGED TRUST ASSETS LIABILITIES Due to other banks on demand term placements Customer deposits on demand term deposits Other liabilities Deferred income and accrued expenses Other provisions - 6 Subordinated debt Total liabilities SHAREHOLDERS' EQUITY Share capital Share premium Reserve capital and other reserves (Accumulated deficit)/retained earnings (1 716) 152 Profit/(loss) for the year 731 (1 868) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY Managed trust liabilities TOTAL LIABILITIES, SHAREHOLDERS' EQUITY AND MANAGED TRUST LIABILITIES (CONTINUED) The notes are an integral part of these financial statements. The financial statements on pages 1 to 36 were approved by the Board of Directors on 31 March 2000 and by the Supervisory Council on 31 March 2000 and signed on their behalf by: Alfrēds Čepānis Chairman of the Council Gundars Grieze Chairman of the Board 8

9 OFF-BALANCE SHEET ITEMS In thousands of lats OFF-BALANCE SHEET ASSETS Receivable under foreign exchange contracts spot - 96 forward swap Total off-balance sheet assets OFF-BALANCE SHEET LIABILITIES Contingent liabilities: including guarantees collateralized by property Commitments: including payable under foreign exchange contracts spot - 96 forward swap including undrawn credit lines including letters of credit Total off-balance sheet liabilities (Concluded) The notes are an integral part of these financial statements. The financial statements on pages 1 to 36 were approved by the Board of Directors on 31 March 2000 and by the Supervisory Council on 31 March 2000 and signed on their behalf by: Alfrēds Čepānis Chairman of the Council Gundars Grieze Chairman of the Board 9

10 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY In thousands of lats Share capital as at 1 January Issue of new shares Individuals, residents Corporate, residents Share capital as at 31 December Share premium as at 1 January Share premium as at 31 December Other reserves as at 1 January Capitalisation of reserve capital Other reserves as at 31 December (Accumulated deficit)/retained earnings as at 1 January (1 716) 273 Retained earnings transfer to reserve - (121) (Accumulated deficit)/retained earnings as at 31 December (1 716) 152 Profit/(loss) for the year 731 (1 868) TOTAL SHAREHOLDERS EQUITY AND RESERVES The notes are an integral part of these financial statements. 10

11 STATEMENTS OF CASH FLOWS In thousands of lats Notes Cash flows arising from operations: Profit/(loss) before taxation 746 (1 778) Depreciation Increase in provisions for bad debts Foreign currency revaluation loss Gain on revaluation of short-term investments 7 (14) (366) Loss on revaluation of long-term investments Decrease in accruals and deferred income 26 (115) (57) Decrease in accruals and deferred expense (Increase)/decrease in other assets 20 (2 229) 977 Decrease in other liabilities 25 (327) (900) Cash and cash equivalents used in operations (653) (437) before changes in operating assets and liabilities Decrease in short-term investments Decrease/(increase) in due from other credit institutions 14 3 (332) Decrease/(increase) in loans and advances to customers (3 561) Increase/(decrease) in due to other banks (478) Decrease in customer deposits 24 (11 839) (11 424) Decrease in minority interest - (13) Taxes paid - (192) Cash and cash equivalents used in operating activities (5 414) (14 124) Cash flows arising from investing activities: Purchase of fixed assets 19 (7) (593) Sale of fixed assets Purchase of intangible assets 19 - (25) Purchase of equity investments 17 (109) (509) Sale of equity investments Sale/(purchase) of investments in affiliates (17) Purchase of T-bills and other fixed income securities 16 - (2 664) Sale of T-bills and other fixed income securities Cash and cash equivalents provided by investing activities Cash flows arising from financing activities: Share issue and contributions to subordinated debt Cash and cash equivalents provided by financing activities Decrease in cash and cash equivalents (2 858) (4 014) Cash and cash equivalents at the beginning of the year Foreign currency revaluation 7 (46) (751) Cash and cash equivalents at the end of the year The notes are an integral part of these financial statements. 11

12 NOTES TO THE 1 INCORPORATION AND ACTIVITIES Trust Commercial Bank is a joint stock company, incorporated in Latvia. It operates under the legislation of the Republic of Latvia and licence from the Bank of Latvia. There is one branch in Riga which provide all banking services. The Bank's principal business activity is to provide corporate and retail lending, as well as investment banking services, including operations on Latvian and foreign securities markets. 2 ACCOUNTING POLICIES (1) Basis of accounting The Bank is subject to the Law on Credit Institutions of the Republic of Latvia and to the regulatory requirements of the Bank of Latvia. These requirements include capital adequacy, liquidity and open foreign currency position. The Bank maintains its accounting records, under the historical cost convention, in accordance with the Law on Accounting of the Republic of Latvia and applicable regulations of the Bank of Latvia. These financial statements have been prepared from those accounting records and adjusted as necessary to conform to the regulations of the Bank of Latvia on credit institutions financial statements and International Accounting Standards (IAS). Balances disclosed as at 31 December 1999 and 1998 reflect the position as at the close of business on that date. (2) Foreign currency translation All monetary assets and liabilities and open forward claims and liabilities denominated in foreign currencies are translated into Latvian Lats (LVL) using the period end rates of exchange published by the Bank of Latvia. Gains and losses arising from this translation are included in the statement of income for the period. The applicable rates for the principal currencies held by the Bank as of 31 December were as follows: LVL 1= USD 1,715 1,757 EUR 1,702 - UAH 9,434 6,623 RUB 46,948 37,453 GBP 1,062 1,049 (3) Income and expense recognition All income and expenses incurred during the period are stated in the statement of income for the period on accrual basis. Income is accrued only when, in the opinion of the directors, there is no doubt that it will be received. (4) Fixed income securities Investments in fixed income securities are stated at cost value, less any provision for bad and doubtful investments. Accrued interest is included in income statement only when there is no doubt that it will be received. 12

13 2 ACCOUNTING POLICIES (5) Non-fixed income securities Equity investments in non-listed companies and affiliates consist primarily of securities issued by privately owned companies and may be subject to restrictions on their resale or otherwise illiquid. Equity securities generally do not produce a current return, but are held for investment appreciation and ultimate gain on sale. Equity investments in non-listed companies and affiliates are valued based on various factors, including history of positive cash flow from operations, the market value of comparable publicly traded companies (discounted for illiquidity), and other pertinent factors. The management also considers recent offers to purchase a company s securities when valuing these investments Revaluation result is included in income statement. Investments in listed shares are stated at the lower of the market and cost value. Revaluation result is included in income statement. (6) Loans and advances Loans and advances are stated in the balance sheet at the amount of principal outstanding less any provision for bad and doubtful loans. Accrued interest income is included in the statement of income only when there is no doubt that it will be received. The level of provisions is based on estimates considering known relevant factors affecting loan collectibility, in particular financial performance of the borrower, debt servicing history, adequacy of collateral, compliance with the terms of loan agreement, as well as compliance with the requirements of the Bank of Latvia on risk operations limitation. Each loan is classified into one of the following five categories: Category Percentage provision Standard 0% Close control 10% Substandard 30% Doubtful 60% Lost 100% If, in the opinion of the directors, the chances of recovery of a loan are considered to be nil then the loan is written off. (7) Fixed assets and depreciation In the balance sheet fixed assets are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis using the following annual depreciation rates: Owned buildings: 5% Furniture and fittings: 10% Computers and equipment: 20% Motor vehicles: 20% Other fixed assets: 50% Leasehold improvements: over period of lease Gains and losses on disposals of fixed assets are dealt with in the statement of income of the period of disposal. 13

14 2 ACCOUNTING POLICIES (8) Off-balance sheet financial instruments Off-balance sheet financial instruments include currency exchange spot and forward agreements. Off-balance sheet financial instruments are stated at the period end rates of exchange published by the Bank of Latvia. Revaluation result is included in income statement. Their transactions notional amounts are not included in the balance sheets. (9) Taxation Income tax expense in these financial statements is calculated on the basis of Latvian tax legislation and International Accounting Standard 12. (10) Fair value of financial instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 32. Fair value estimates involve uncertainties and matters of significant judgement regarding interest rates, credit risk, prepayments and other factors especially in the absence of broad markets for particular items. (11) Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand placements with and demand deposits due to the Bank of Latvia and other banks, term placements with and due to the Bank of Latvia and other banks with residual maturity less than 3 months, as well as short-term investments with residual maturity less than 3 months. (12) Earnings per share For the purpose of calculating earnings per share the weighted average number of common shares outstanding during 1999 and 1998 was and shares respectively. The Bank had no dilative options outstanding during 1999 and 1998 and at 31 December 1999 and (13) Use of estimates The preparation of financial statements in conformity with International Accounting Standards requires management to make estimates and assumptions. These estimates and assumptions effect 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. Ultimate results could differ from those estimates. 14

15 In thousands of lats months 12 months 3 INTEREST INCOME From placements with other banks From loans and advances to customers From bonds and fixed interest securities Other interest income Interest Income Analysis Monthly average Interest income Average balances rate (% p.a.) From placements with other banks From loans and advances to customers From bonds and fixed interest securities Other interest income INTEREST EXPENSE On deposits from other banks (77) (340) On customer deposits (277) (632) On subordinated loan capital (50) (12) Other interest expense (18) (72) (422) (1 056) Interest Expense Analysis Monthly average Interest expense Average balances rate (% p.a.) On deposits from other banks On customer deposits On subordinated loan capital Other interest expense

16 In thousands of lats months 12 months 5 FEE AND COMMISSION INCOME Cash operations Letters of Credit 7 12 Money transfers Travelers cheques and credit cards Securities Other commission income FEE AND COMMISSION EXPENSE Nostro accounts (51) (93) Cash operations (11) (8) Securities (29) (161) Foreign exchange transactions - (428) Other commission expenses (12) (8) (103) (698) 7 LOSS ON DEALING WITH SECURITIES AND FOREIGN EXCHANGE, NET Gain/(loss) from foreign currency dealing, net 93 (159) (Loss)/profit on forward contracts revaluation (11) 99 Foreign currency revaluation loss, net (46) (751) Loss on dealing with securities (91) (343) Gain from non-fixed interest securities revaluation (41) (788) 8 OTHER OPERATING INCOME Fines received 62 4 Other operating income

17 In thousands of lats months 12 months 9 ADMINISTRATIVE EXPENSES Staff costs (409) (579) salaries of council and board (49) (68) other wages and salaries (271) (385) social security costs (89) (126) Professional services (39) (41) Communications (114) (170) Rent & maintenance (147) (166) Office supplies (3) (15) Travel and entertainment (1) (13) Advertising and marketing (7) (87) Security (26) (28) Insurance (243) (388) Fines (31) (1) Other administrative expenses (6) (32) (1 026) (1 520) During 1999 The Bank had an average number of 86 (1998: 126) employees. Employees category Managers 19 Other OTHER OPERATING EXPENSES Sponsorship - (20) Member charges (5) (4) Social and cultural events (2) (2) Other expenses (23) (46) (30) (72) 17

18 In thousands of lats months 12 months 11 PROVISIONS AND CHARGES Specific provisions for other assets, placements with and loans to non-banks (1 080) (187) Specific provisions for placements with and loans to other-banks - (329) (1 080) (516) The following breakdown discloses details of movements in the specific and general provisions for doubtful debts during the period. Specific and general provisions as at 1 January Additional provisions Provisions on loans written off - (328) Release of specific provisions (256) (19) Foreign exchange revaluation 10 (18) Specific and general provisions as at 31 December TAXATION Changes in deferred tax - (86) Property tax - (4) Corporate income tax per 1999 (15) - (15) (90) Deferred tax calculation Deferred tax assets Temporary Tax Temporary Tax difference effect difference effect Accumulated taxable loss Loss from the sale of securities Securities revaluation loss Deferred tax assets Deferred tax liabilities Difference in depreciation rates Deferred tax liabilities Deferred tax assets, net Deferred tax assets as at 1 January - 86 Changes in deferred tax - (86) Deferred tax assets as at 31 December - - Deferred taxation is provided on all temporary differences between the carrying amount of an asset or liability in the balance sheet and the amount attributed to that asset or liability for tax purposes at a current corporate income tax rate of 25%. The principal temporary difference arises from revaluation of investments in dealing securities and different rates of depreciation on fixed assets. 18

19 In thousands of lats CASH AND BALANCES WITH THE BANK OF LATVIA Cash on hand Balances with the Bank of Latvia In accordance with the Bank of Latvia regulations the Bank maintains 7% of the average monthly balance (calculated at four intervals during each month) of the following total on deposit with the Bank of Latvia: + Due to other banks and customer deposits - Due to other banks - Less Bank's liabilities against State Treasury on its consolidated account - Less amounts deposited with foreign subsidiaries (branches) of the Bank + Bonds and other debt securities issued by the Bank The compulsory reserve is compared to the Bank s average monthly cash and correspondent account balance in Lats. The Bank s average cash and correspondent balance should exceed the compulsory reserve requirement. 14 DUE FROM OTHER CREDIT INSTITUTIONS Other Latvian commercial banks OECD commercial banks Other countries commercial banks The largest placements are made with the following banks: Hansabanka/ Latvia Bankers Trust Company NY/USA Republic National Bank, NY/USA The Bank has established correspondent relationships with 35 banks. 19

20 In thousands of lats LOANS, NET Loans to companies Loans to private financial institutions Loans to public and religious organisations - 45 Loans to individuals Loans to employees Provisions on bad and doubtful debts (83) (197) Loans and advances to customers are composed of: Due within one year Due after one year Loan classification by activity of borrowers Agriculture, hunting and forestry Manufacturing industry Trading Transport, storage, communication Financial services Consumer loans Other services

21 In thousands of lats TREASURY BILLS AND OTHER FIXED INCOME SECURITIES Government treasury bills and other securities with fixed income Latvian government treasury bills - 2 Ukrainian government treasury bills issued in USD Russian government treasury bills issued in RUB Russian government treasury bills issued in USD Bonds of other institutions and other fixed income securities Provisions on Ukrainian government treasury bills issued in USD (615) - Provisions on Russian government treasury bills (395) (54) issued in RUB (44) (54) issued in USD (351) Government treasury bills and other securities with fixed income have been purchased for investment purposes. The nominal value amounts to thousand LVL. The unamortized discount comprises 427 thousand LVL at the end of the year. 17 SECURITIES WITH NON-FIXED INCOME Equity investments Stock Exchange quoted shares Stock Exchange non-quoted shares Investments in variable yield securities Stock Exchange quoted shares Loss on revaluation of equity investments (497) (320) Loss on revaluation of investments in variable yield securities (2) (16)

22 In thousands of lats 17 SECURITIES WITH NON-FIXED INCOME (continued) The Bank has the following long term holding in undertakings: Company Industry 1999 Amount and holding % 1998 Amount and holding % Total equity At cost % Carrying value At cost % Carrying value JSC Jewellery factory Jewellery JSC Staburadze AS Bakery JSC Strenču MRS Timber JSC Grindeks Pharmaceuticals Riga Stock Exchange Stock Exchange JSC Rebir Electronic JSC Lauma Clothes Bank communication SWIFT access centre JSC Arcus Production and sale JSC Druva Food production TKB Bond Portfolio Investment fund Ltd JSC Leta Information Other Total INVESTMENTS IN AFFILIATES Company Industry 1999 Amount and holding % 1998 Amount and holding % Total equity At cost % Carrying value At cost % Carrying value TKB Equity Portfolio Investment fund Ltd Total

23 In thousands of lats 19 FIXED AND INTANGIBLE ASSETS, NET (1) Fixed assets in 1999 Machinery & Leasehold Intangible Tangible assets Buildings Vehicles Equipment improvement assets Total Historical cost At 31 December Additions Disposals - (147) (20) - - (167) At 31 December Accumulated depreciation At 31 December Charge for the period Write-off - (62) (15) - - (77) At 31 December Net Book Value at 31 December (2) Fixed assets in 1998 Machinery & Leasehold Intangible Tangible assets Buildings Vehicles Equipment improvement assets Total Historical cost At 31 December Additions Prepayments Disposals - (8) (226) (1) - (235) At 31 December Accumulated depreciation At 31 December Charge for the period Write-off - (8) (9) (1) - (18) At 31 December Net Book Value at 31 December

24 In thousands of lats 20 OTHER ASSETS, NET Amount receivable from assets sold (see Note 34) Prepayments Travellers cheques 8 13 Receivable from financial institutions Claims on Russia s budget 5 7 Items in transit 21 - Other assets Specific provisions to claims on Russia s budget (5) (7) DEFERRED EXPENSES AND ACCRUED INCOME Accrued interest income Deferred expenses Other accrued income MANAGED TRUST ASSETS Assets under management on behalf of clients are included in financial statements where the Bank holds the legal title to these assets. The amount of these assets and liabilities is shown within the corresponding items. Managed trust assets and liabilities are composed as follows: Managed trust assets Term placements from other credit institutions Investments in other countries Treasury Bills Shares and other non-fixed income securities Managed trust liabilities Individuals Private financial institutions Private enterprises Credit institutions The Bank does not carry credit, interest rate or any other risks in respect of the managed trust assets. 24

25 In thousands of lats DUE TO OTHER BANKS Due to Latvian commercial banks - 1 Due to OECD countries banks Due to other commercial banks CUSTOMER DEPOSITS Central government Local government 2 3 State enterprises 7 67 Private financial institutions Private enterprises Individuals Public and religious organisations Items in transit Customers deposits maturity profile: Demand Up to 3 months From 3 months to 6 months From 6 months to 12 months Over 1 year

26 In thousands of lats OTHER LIABILITIES Due to insolvent credit institutions Other liabilities DEFERRED INCOME AND ACCRUED EXPENSES Accrued interest expenses Other accrued expenses SUBORDINATED DEBT As of 31 December 1999 the balance of subordinated non-convertible debt is LVL (1998: LVL ) on the terms and matures in 2004 and Subordinated debt is contributed by the following lenders: Amount and Currency Date Maturity Interest % Edgars Pīgoznis USD Astamur Gubaz USD Vilnis Vītoliņš USD Vilnis Vītoliņš USD The above stated amount of subordinated capital has been included in Tier Two Capital for the purposes of calculation of the capital adequacy ratio (see Note 38). 26

27 28 SHARE CAPITAL The Bank has authorised share capital of LVL consisting of shares of LVL 50 each. Issued share capital as of 31 December 1999 constituted LVL consisting of ordinary shares of LVL 50 each (1998: LVL consisting of ordinary shares). There are 54 shareholders: 12 - corporate and 42 -individuals. During the period 1 January - 31 December 1999, ordinary shares were issued for cash consideration of LVL All shares are outstanding and fully paid. Principal shareholders: Shareholder Shareholding Country % LVL 000 V.Vītoliņš 35, Latvia A.Vītoliņš 8, Latvia I.Vītoliņa 8, Latvia The following changes have occurred in shareholdings during the year ended 31 December 1999 (in thousands of lats): V. Vītoliņš +156 Lanciano Ltd. -30 Total changes +126 Earnings per share: In lats Net earnings (loss) ( ) Weighted average number of common stock outstanding Earnings/(loss) per share (32.44) 27

28 29 LIGITATION AND CLAIMS On 31 December 1999 the Bank was not involved in any legal proceeding that might have material effect on the financial statements. 30 CASH AND CASH EQUIVALENTS In thousands of lats Cash and balances with the Bank of Latvia Short-term placements with other banks Short term investments with residual maturity of less than 3 months - 4 Due to other banks on demand (537) (430) RELATED PARTY TRANSACTIONS Related parties are defined as shareholders who have a significant interest, their close relatives, members of the supervisory council and management board and other employees, which have ability to exert planning, management and control of Bank s activities, as well as their close relatives and companies in which abovementioned persons have a controlling interest. During the period the bank has carried out transactions with those related parties who are also major depositors of the bank. Trust Commercial Bank offered standard services to the related parties, such as money transfers, purchasing and selling of treasury bills, trust operations on the instructions of customers, brokerage and so on. These transactions were conducted predominantly on normal business terms, although certain other commission fees were reduced due to market conditions. Set out below is the total of loans and deposits with related parties: In thousands of lats Loans to related parties Deposits placed by related parties The Bank holds securities in its name, but on behalf of related parties, in the amount of 2 thousand lats. In accordance with the Law of the Republic of Latvia on Credit Institutions the related party transactions total amount should not exceed 15 percent of the Bank's equity capital. 28

29 32 FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of monetary assets and liabilities approximates their carrying value as of 31 December 1999 and The information concerning the principal characteristics of these items are separately disclosed. 33 GOING CONCERN The accompanying financial statements have been prepared in accordance with International Accounting Standards, which contemplates continuation of the Bank as a going concern with the realisation of assets and satisfaction of liabilities in the normal course of business. The Bank is presently operating under the decree of the Bank of Latvia that, among other things, restricts its ability to grant loans and make investments. Due to the Bank's recurring losses and insufficient capital base, the Bank is seeking a strategic investor to infuse sufficient working and equity capital to continue operations. The Bank is presently in discussions with such an investor. Additionally, in order for the Bank be in compliance with the minimum capital requirements of the Bank of Latvia at 31 December 1999, this investor has purchased certain assets of the Bank (See Note 34) during The future plans for the Bank are for this investor to apply with the Bank of Latvia for permission to acquire the Bank. The Banks continued existence is dependent upon the ability of this investor to obtain such permission, infuse the required working and equity capital and return the Bank to profitable operations. While management of the Bank believes that the actions presently being taken provide the opportunity for the Bank to continue as a going concern, the results of these actions cannot presently be determined. 34 AMOUNT RECEIVABLE FROM ASSETS SOLD In December 1999, due to risks that the Bank would not meet its capital requirements, the management of the Bank concluded an agreement with a third party, according to which the Bank has sold investments and other assets with a book value of LVL for a gain of LVL 000 2,542. Of this amount LVL 000 2,315 was recorded as extraordinary gain, and the remaining amount of LVL was booked as reduction of specific provision expenses for loan losses in the profit and loss account. At the date of the release of these financial statements the full amount of the receivable outstanding, as a result of this sale, as of year end has been paid. Therefore, there were no provisions recorded as of 31 December 1999 to reflect uncertainties related to the recoverability of this amount. If this transaction had not occurred, the Bank would not have been in compliance with the Bank of Latvia s minimum capital requirements. Management of the Bank has represented that there are no repurchase agreements with this third party regarding this transaction. The terms of the transaction were not on an arms length basis. 29

30 In thousands of lats 35 MATURITY ANALYSIS OF ASSETS AND LIABILITIES Up to 1 month to 3 months to 6 months to 1 year to Over 1 month 3 months 6 months 12 months 5 years 5 years Total ASSETS Cash and balances with the Bank of Latvia Due from other credit institutions Loans, net Treasury bills and other fixed income securities Securities with non-fixed income Investments in affiliates Intangible assets, net Fixed assets, net Other assets, net Deferred expenses and accrued income Total assets LIABILITIES Due to other banks Customer deposits Other liabilities Deferred income and accrued expenses Other provisions Subordinated debt Total liabilities OFF-BALANCE SHEET ITEMS Off-balance sheet assets Claims to customers Total off-balance sheet assets Off-balance sheet commitments Commitments Total off-balance sheet commitments Net position (2 010)

31 In thousands of lats 36 CURRENCY ANALYSIS OF ASSETS AND LIABILITIES Other LVL USD EUR currencies Total ASSETS Cash and balances with the Bank of Latvia Due from other credit institutions Loans, net Treasury bills and other fixed income securities Securities with non-fixed income Investments in affiliates Intangible assets, net Fixed assets, net Other assets, net Deferred expenses and accrued income Total assets LIABILITIES Due to other banks Customer deposits Other liabilities Deferred income and accrued expenses Other provisions Subordinated debt Total liabilities OFF-BALANCE SHEET ITEMS Off-balance sheet assets Claims to customers Total off-balance sheet assets Off-balance sheet commitments Commitments Total off-balance Total amount of the long position Total open position % of regulatory capital - 50% 2% 1% 72% According to the Law on Credit Institutions of the Republic of Latvia, the open currency position total could not exceed 20% of the regulatory capital and each currency position separately could not exceed 10% of the regulatory capital. 31

32 In thousands of lats 37 GEOGRAPHICAL ANALYSIS OF ASSETS, LIABILITIES AND OFF-BALANCE SHEET ITEMS Other Latvia USA Russia countries Total ASSETS Cash and balances with the Bank of Latvia Due from other credit institutions Loans, net Treasury bills and other fixed income securities Securities with non-fixed income Investments in affiliates Intangible assets, net Fixed assets, net Other assets, net Deferred expenses and accrued income Total assets LIABILITIES Due to other banks Customer deposits Other liabilities Deferred income and accrued expenses Other provisions Subordinated debt Total liabilities OFF-BALANCE SHEET ITEMS Off-balance sheet assets Claims to customers Total off-balance sheet assets Off-balance sheet commitments Commitments Total off-balance Net position (342) (501)

33 In thousands of lats CALCULATION OF CAPITAL ADEQUACY According to the regulations of the Bank of Latvia Tier 1 equity items Share capital Share premium Reserve capital (Accumulated deficit)/retained earnings (1 716) 152 Intangible assets (28) (37) Profit/(loss) for the period 731 (1 868) Total Tier 2 equity items Subordinated debt Total Total Assets weighted value calculation 20% credit risk weighted assets % credit risk weighted assets % credit risk weighted assets % credit risk weighted assets Total assets Risk weighted off-balance sheet items (risk weight) Off-balance sheet items with credit risk depending on their cost 100% adjustment off-balance sheet items % adjustment off-balance sheet items Financial contracts - 6 Total off-balance sheet items Assets and off-balance sheet items weighted value Capital adequacy ratio 51% 12% In accordance with the Bank of Latvia regulations, capital adequacy ratio may not be less than 10%. 33

34 In thousands of lats CALCULATION OF CAPITAL ADEQUACY (continued) (2) Assets grouped according to their credit risk 0% credit risk weighted assets (Group 1) Cash and balances with the Bank of Latvia Latvian Central government securities - 2 Claims collateralised by term deposits, placed in the Bank Group 1 total assets % credit risk weighted assets (Group 2) Claims on A-zone countries banks Claims on demand on banks incorporated in Latvia Group 2 total assets Group 2 assets weighted value % credit risk weighted assets (Group 3) Claims on Latvian incorporated banks excluding claims on demand Claims on B-zone central governments and central banks denominated in national currency and funded in that currency 2 3 Accruals and deferred expense Group 3 total assets Group 3 assets weighted value % credit risk weighted assets (Group 4) Claims collateralised by property according to the regulations of the Bank of Latvia Group 4 total assets Group 4 assets weighted value % credit risk weighted assets (Group 5) Claims on B-zone countries central governments Claims on B-zone countries banks Claims on A-zone and B-zone countries non-bank debtors excluding lower risk weighted claims T-bills and other fixed income securities Non-fixed interest securities and equity investments Fixed assets Other assets Group 5 assets weighted value % adjustment off-balance sheet items (Group 1) Loan agreements or credit line agreements, including 80% risk weighted partner's liabilities % risk weighted partner's liabilities Guarantees to the third parties, including 100% risk weighted partner's liabilities Group 1 total off-balance sheet items % adjustment off-balance sheet items (Group 2) Letters of Credit, confirmed Letters of Credit, including 100% risk weighted partner's liabilities Group I1 total off-balance sheet items Group II weighted value Financial agreements weighted value calculation Financial agreements with a residual maturity of up to one year (including) - 6 Financial agreements weighted value

35 In thousands of lats CALCULATION OF CAPITAL ADEQUACY (continued) According to the International Capital Adequacy Valuation (Basle Capital Accord) Tier 1 equity items Share capital Share premium Reserve capital (Accumulated deficit)/retained earnings (1 716) 152 Profit/(loss) for the period 731 (1 868) Total Tier 2 equity items Subordinated debt Total Total Assets weighted value calculation 20% credit risk weighted assets % credit risk weighted assets % credit risk weighted assets Total assets Risk weighted off-balance sheet items (risk weight) Off-balance sheet items with credit risk depending on their cost 100% adjustment off-balance sheet items % adjustment off-balance sheet items Financial contracts - 6 Total off-balance sheet items Assets and off-balance sheet items weighted value Capital adequacy ratio 52% 12% According to the recommendations of Basel accord the Bank s capital adequacy should be at least 8%. 35

36 In thousands of lats CALCULATION OF CAPITAL ADEQUACY (continued) (2) Assets grouped according to their credit risk 0% credit risk weighted assets (Group 1) Cash and balances with the Bank of Latvia Claims on central governments and central banks denominated in national currency and funded in that currency 2 5 Claims collateralised by cash or OECD central government securities or guaranteed by OECD central governments Group 1 total assets % credit risk weighted assets (Group 2) Claims on banks incorporated in the OECD and loans guaranteed by OECD incorporated banks Claims on banks incorporated in countries outside the OECD with a residual maturity of up to one year and loans with a residual maturity of up to one year guaranteed by banks incorporated in countries outside the OECD Group 2 total assets Group 2 assets weighted value % credit risk weighted assets (Group 3) Loans fully secured by mortgage on residential property that is or will be occupied by the borrower or that is rented claims on demand Group 3 total assets Group 3 assets weighted value % credit risk weighted assets (Group 5) Claims on the private sector Claims on central governments out side the OECD Fixed assets Non-tangible assets T-bills and other fixed income securities Non-fixed interest securities and equity investments Other assets Group 5 assets weighted value % adjustment off-balance sheet items (Group 1) Loan agreements or credit line agreements, including 80% risk weighted partner's liabilities % risk weighted partner's liabilities Guarantees to the third parties, including 100% risk weighted partner's liabilities Group 1 total off-balance sheet items % adjustment off-balance sheet items (Group 2) Letters of Credit, confirmed Letters of Credit, including 100% risk weighted partner's liabilities Group I1 total off-balance sheet items Group II weighted value Financial agreements weighted value calculation Financial agreements with a residual maturity of up to one year (including) - 6 Financial agreements weighted value - 6 * * * * * 36