AS LATVIJAS PASTA BANKA. Interim condensed financial statements for the six-month period ended 30 June 2012

Transcription

1 for the six-month period ended 30 June 2012

2 CONTENTS Page Management Report 3-4 The Council and the Board 5 Statement of Management s Responsibility 6 Independent Auditors Report 7 Interim Condensed Financial Statements of the Bank: Interim Condensed Statement of Comprehensive Income 8 Interim Condensed Statement of Financial Position 9 Interim Condensed Statement of Changes in Equity 10 Interim Condensed Statement of Cash Flows 11 Notes to the Interim Condensed Financial Statements

3 MANAGEMENT REPORT Dear customers, cooperation partners and shareholders! The management of AS Latvijas pasta banka (hereinafter also the Bank) is proud to announce that the Bank has closed the first half of the year 2012 and successfully retained and enhanced its position and business profile on the local financial market started with positive trends in the economy; however, the external environmental risks remain related to future development in the euro zone. Because of decrease in economic growth of main trade partners of Latvia, the Latvian export growth may slow down and its positive effect on the economy as a whole can diminish. Latvian economic development is ensured not only by export but also by demand in the domestic market. The increase of private consumption is determined by gradual improvement of labour market employment growth and labour wage increase. The performance of the Bank as a relatively new member of the local financial market is certainly assessed as positive and aproves the Bank's ability to meet challenges and operate in all conditions. The core values of the Bank have not changed, rather they are supplemented with safety, namely, honesty honest and fair attitude to all Bank`s clients, professionalism professional team, responsibility high level of responsibility for decisions made, loyalty equal treatment to all the Bank s clients and colleagues, quality convenient and qualitative Banking services to clients and competitiveness of the Bank s services, flexibility the ability to adjust to the needs of the customers, safety the clients can be sure about their deposits and information provided in cooperation with the Bank. To guarantee the safety of the Bank, in the beginning of 2012 the additional subordinated investment in amount of LVL 352 thousands was made. The range of banking services is constantly extended, maintaining quality, as indicated by the consistently and organically growing number of customers. The Bank fully complies with all regulatory requirements. The capital adequacy ratio of the Bank is 30.55% and it exceeds the minimum rate set by the Financial and Capital Market Commission of the Republic of Latvia (FCMC). The liquidity ratio is %, which also exceeds the FCMC minimal requirement of 30% for several times. Based on the above mentioned, it appears that the Bank has all the abilities to successfully continue the implementation of its operational strategy. Also in the future the important role in the Bank s strategy is to be played by the administration of wealthy client`s funds and products that meet the individual needs of our clients. 3

4 MANAGEMENT REPORT (continued) As priority in the Bank s further strategy should be payment card issuing and acceptance in POS terminals and Internet, collaborating with wide-known organizations such as MasterCard, Visa, Tieto, First Data, Global Payment. The Bank's management is constantly monitoring the rapidly changing financial market conditions being aware of their responsibility to clients and potential risks which are evaluated in detail and administrated following prudent precaution principles, maintaining moderate level of general risks. The Bank is able to be a reliable partner for clients economic and personal activities, maintaining stable and professional approach to cooperate on behalf of further development. We thank AS Latvijas pasta banka customers for their loyalty and look forward to further common and beneficial business in the future! Best regards, Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 8 August

5 THE COUNCIL AND THE BOARD The Council The Council of the Bank as at 30 June 2012 Name Position Date of appointment Biomins Kajems Chairman of the Council 13/10/2008 Jūlija Kozlova Council Member 13/10/2008 Guntars Grīnvalds Council Member 13/10/2008 The Board The Board of the Bank as at 30 June 2012 Name Position Date of appointment Boriss Ulmans Chairman of the Board 05/09/2008 Arnis Kalveršs Board Member 05/09/2008 Dairis Krūmiņš Board Member 27/03/2012 On behalf of the Bank s management: Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 8 August

6 STATEMENT OF MANAGEMENT S RESPONSIBILITY The management of AS LATVIJAS PASTA BANKA (hereinafter the Bank) are responsible for the preparation of the Bank s interim condensed financial statements. These financial statements are prepared in accordance with IAS 34 as adopted by the European Union on a going concern basis. Appropriate accounting policies have been applied on a consistent basis in preparing the Bank s financial statements. Prudent and reasonable judgments and estimates have been made by the management in the preparation of the financial statements. The Bank s financial statements set out on pages 8 to 29 are prepared in accordance with the source documents and present fairly the financial position of the Bank as at 30 June 2012 and the results of its operations and cash flows for the six-month period ended 30 June The management of the Bank are responsible for the maintenance of proper accounting records, the safeguarding the Bank s assets, and the prevention and detection of fraud and other irregularities in the Bank. They are also responsible for operating the Bank in compliance with the Law on Credit Institutions, regulations of the Financial and Capital Market Commission and other legislation of the Republic of Latvia applicable to credit institutions. On behalf of the Bank s management: Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 8 August

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8 CONDENSED STATEMENT OF COMPREHENSIVE INCOME Notes Six-month period ended Interest and similar income Interest and similar expense 6 (443) (251) Net interest income Commission and fee income Commission and fee expense 7 (338) (214) Net commission and fee income Net trading income Other income Net operating income Administrative expense 8 (512) (379) Amortisation/ depreciation (41) (43) Other expense (150) (125) Operating expense (703) (547) Net provisions for doubtful assets (1) (339) Profit / (loss) before tax 685 (24) Corporate income tax 9 (104) 35 Net profit for the period Revaluation reserve 12 (70) Total comprehensive income / (loss) 593 (59) Profit per share (LVL) The accompanying notes on pages 12 to 29 form an integral part of these interim condensed financial statements. The Bank s financial statements set out on pages 8 to 29 were approved by the Board on 8 August 2012 and by the Council on 8 August Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 8 August

9 CONDENSED STATEMENT OF FINANCIAL POSITION Notes ASSETS Cash and balances with the Bank of Latvia Due from credit institutions Available-for-sale financial assets Derivative financial instruments - 95 Loans and receivables Held-to-maturity financial investments Current tax assets - 1 Deffered tax assets Property, plant and equipment Intangible assets Other assets Prepaid expense and accrued income Total assets LIABILITIES Due to credit institutions Liabilities at amortised cost Deposits from customers Subordinated liabilities Derivative financial instruments 8 73 Other liabilities Deferred income and accrued expense Total liabilities EQUITY ATTRIBUTABLE TO THE BANK S SHAREHOLDERS Paid-in share capital Asset revaluation reserve 13 (51) (63) Accumulated loss (974) (974) Profit for the period Total equity attributable to the Bank s shareholders Total equity Total liabilities and equity The accompanying notes on pages 12 to 29 form an integral part of these interim condensed financial statements. The Bank s financial statements set out on pages 8 to 29 were approved by the Board on 8 August 2012 and by the Council on 8 August Biomins Kajems Chairman of the Council Riga, 8 August 2012 Boriss Ulmans Chairman of the Board 9

10 CONDENSED STATEMENT OF CHANGES IN EQUITY Bank Paid in share capital Fair value revaluation reserve of availablefor-sale financial assets Retained earnings / (Accumulated loss) Total Balance as at 31 December (23) Dividends paid - - (179) (179) New share issue Total comprehensive loss - (70) 11 (59) Balance as at 30 June (93) New share issue Total comprehensive loss - 30 (985) (955) Balance as at 31 December (63) (974) Total comprehensive income Balance as at 30 June (51) (393) The accompanying notes on pages 12 to 29 form an integral part of these interim condensed financial statements. The Bank s financial statements set out on pages 8 to 29 were approved by the Board on 8 August 2012 and by the Council on 8 August Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 8 August

11 CONDENSED STATEMENT OF CASH FLOWS Six-month period ended CASH FLOWS FROM OPERATING ACTIVITIES Profit / (loss) before tax 685 (24) Amortisation/ depreciation Increase in provisions for doubtful debts Unrealised foreign exchange gain (51) (18) Increase in cash and cash equivalents from operating activities before changes in assets and liabilities (Increase) / decrease in balances due from credit institutions (1 272) Increase in loans and receivables (161) (617) Decrease / (increase) in other assets 103 (135) Increase in balances due to credit institutions (Decrease) / increase in deposits from customers (49) Decrease in other liabilities (74) (4) Cash (used in) / generated from operating activities (723) CASH FLOWS USED IN INVESTING ACTIVITIES Purchase of property, plant and equipment (7) (8) Increase in held-to-maturity financial investments (6 299) (2 285) (Increase) / decrease in available-for-sale financial assets (3 093) Cash and cash equivalents used in investing activities (9 399) (211) CASH FLOWS FROM FINANCING ACTIVITIES Issue of share capital Dividends paid - (179) Decrease in subordinated liabilities (527) - Increase in subordinated liabilities Cash and cash equivalents generated from financing activities Net cash flows for the period (9 770) Cash and cash equivalents at the beginning of the period Foreign exchange gain Cash and cash equivalents at the end of the period The accompanying notes on pages 12 to 29 form an integral part of these interim condensed financial statements. The Bank s financial statements set out on pages 8 to 29 were approved by the Board on 8 August 2012 and by the Council on 8 August Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 8 August

12 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, LV-1073, Latvia. The Bank has the head office and three customer service centres. 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 2 BASIS OF PREPARATION (a) Statement of compliance These interim condensed financial statements of AS Latvijas pasta banka are prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union. These interim condensed financial statements do not include all the information and disclosures required in the complete financial statements and should be read in conjunction with the Bank s financial statements for the financial year ended 31 December (b) Going concern 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. Bank operates using development strategy based on an assumption that the initial Pasta Banka project is not supported and the initial development strategy cannot be implemented. This strategy will be applied until it is confirmed legally that the initial strategy is or is not feasible. The Bank s strategy is aimed at creating a bank servicing certain customers and developing customised products and service technologies. Monitoring of the Bank s capital sufficiency is performed by: - the analysis in accordance with the Bank's minimum capital requirement calculation procedure set out in the reports at least once a month; - evaluating the significant risks to the Bank to cover the amount of capital required and the amount of capital available for 3-year planning period at least once a year and every month, comparing to the actual Bank's financial performance with planned; - performing an active assessment of the quality and the required provision calculations at least once a quarter. In long-term capital crisis, the Bank's capital crisis management plan predicts to use its capital reserves, attract subordinated deposits or to ask shareholders to raise the Bank's capital. The uncertainty in financial markets continues, resulting in increased government securities impairment risk and likelihood that additional capital might be needed, therefore on 23 March 2012 the Bank has received the Bank's shareholders and related parties supporting evidence 12

13 (letters of support), confirming that the Bank's shareholders and related parties, if necessary, will provide additional capital. Bank's development strategy in 2012 is not affected by year 2011 results. Having analysed the key risks related to the present and potential economic situation, the development of the banking industry as well as the Bank s existing and potential human and financial resources, the Bank has selected to pursue the following strategy: - As a priority, to offer its services to legal entities, forming the customer portfolio based on customised services; - Along with legal entities, to offer equal customised services also to high-income and ultrahigh income private individuals; - To be present in Latvia, Russia, and Ukraine; - To define as the priority business activity the following: issue and acceptance of payment cards via POS terminals and the Internet, in cooperation with such well-known organizations such as MasterCard, Visa, Tieto, First Data, Global Payment, placement of capital in financial instruments, issuance of credit cards to private individuāls, issue of loans to legal entities based on the moderately conservative risk approach, especially financing of current assets and transportation flows; - To set the target capital adequacy ratio of at least 20 per cent. The Bank takes into account that this target ratio has been set in a resolution adopted by the Council of the Financial and Capital Market Commission on 12 July 2010, based on the information presented in the Bank s strategy for the years (c) Functional and presentation currency These financial statements are reported in thousands of lats (LVL 000), unless otherwise stated. The functional currency of the Bank is the Latvian lat (LVL). NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Except as disclosed below, in preparing these interim condensed financial statements, the Bank consistently applied accounting policies in line with those used for the financial period ended 31 December Income tax expense is recognised in each interim period based on the best estimate of the weighted average effective annual income tax rate expected for the full financial year. Amounts accrued for income tax expense in one interim period may have to be adjusted in a subsequent interim period of that financial year if the estimate of the weighted average effective annual income tax rate changes. Interim period income tax expense is accrued using the tax rate that would be applicable to expect total annual earnings, that is, the estimated average annual effective income tax rate is applied to the pre-tax income of the interim period. The interim condensed financial statements are prepared in accordance with IAS 34 Interim financial reporting as adopted by European Union. 13

14 These interim condensed financial statements should be read in conjunction with the 2011 full annual financial statements prepared in accordance with International financial reporting standarts (IFRS) endorsed in the European Union. The accounting methods used in the preparation of the year 2011 annual financial statements, are not changed for preparation of the interim condensed financial statements. Certain new standards and interpretations have been published that become effective for the accounting periods beginning on or after 1 January 2012 or later periods and which are not relevant to the Bank or are not yet endorsed by the EU: Disclosures - Transfers of Financial Assets - Amendments to IFRS 7(effective for annual periods beginning on or after 1 July 2011); Deferred Tax: Recovery of Underlying Assets - Amendment to IAS 12 (effective for annual periods beginning on or after 1 January 2012; not yet adopted by the EU); Employee benefits - Amendment to IAS 19 (effective for annual periods beginning on or after 1 July 2013; not yet adopted by the EU); Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters - Amendment to IFRS 1 (effective for annual periods beginning on or after 1 July 2011; not yet adopted by the EU); Financial statement presentation regarding other comprehensive income - Amendment to IAS 1 (effective for annual periods beginning on or after 1 July 2012; not yet adopted by the EU); IFRS 9, Financial Instruments Part 1: Classification and Measurement (effective for annual periods beginning on or after 1 January 2015; not yet endorsed by the EU); IFRS 10, Consolidated financial statements (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU); IFRS 11, Joint arrangements (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU); IFRS 12, Disclosures of interests in other entities (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU); IFRS 13, Fair value measurement (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU); IAS 27, Separate financial statements (revised 2011), (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU); IAS 28, Associates and joint ventures (revised 2011), (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU); IFRIC 20, Stripping costs in the production phase of a surface mine, (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU); Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 (effective for annual periods beginning on or after 1 January 2014; not yet endorsed by the EU); Disclosures Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7 (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU); IFRS 1, First time adoption on government loans (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU); 14

15 Annual improvements 2011 (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU). The Bank evaluates the potential effect, if any, of these new standards and interpretations to the financial statements. NOTE 4 RISK MANAGEMENT All the aspects of the Bank s risk management objectives and policies are consistent with those disclosed in the Bank s financial statements for the period ended 31 December NOTE 5 JUDGMENTS AND ESTIMATES The preparation of interim financial statements requires the management to make judgments, estimates and assumptions that affect the adoption of accounting policies, the reported amounts of assets, liabilities, income and expense. Accordingly, actual results could differ from those estimates. The significant areas of judgment regarding the adoption of accounting policies and the key sources of estimate uncertainty used in preparing these interim condensed financial statements are consistent with those used in the financial statements for the financial period ended 31 December NOTE 6 NET INTEREST INCOME Six-month period ended Interest income Due from credit institutions Loans and receivables Securities Incl. held to maturity available for sale Total interest income: Interest expense Due to credit institutions Non-bank deposits Payments to the Deposit Guarantee Fund Total interest expense: Net interest income

16 NOTE 7 NET COMMISSION AND FEE INCOME Six-month period ended Commission and fee income Service fee for account maintenance and cash transactions Asset management Payment card transactions Brokerage services Guarantees, loans, letters of credit Total commission and fee income: Commission and fee expense Correspondent bank services Payment card transactions Brokerage operations 31 - Other bank transactions 6 6 Total commission and fee expense: Net commission and fee income NOTE 8 ADMINISTRATIVE EXPENSES Six-month period ended Personnel remuneration expenses Council and Board remuneration 24 8 Personnel remuneration State compulsory social insurance contributions Total personnel remuneration expenses: Rent and expluatation expenses Non-refundable value added tax Communications (telephone, post) IT equipment and software related expenses Professional and legal services 11 8 Office supplies and other office expenses 7 9 Other personnel related expenses 14 7 Other administrative expenses 5 4 Total other expenses: Administrative expenses On 30 June 2012 number of employees in the Bank was 83 (on 30 June ). 16

17 NOTE 9 CORPORATE INCOME TAX Corporate income tax expense comprises the following items: Six-month period ended Current corporate income tax charge for the reporting period - - Deferred corporate income tax (104) 35 Total corporate income tax income / (expense) (104) 35 The standard tax rate applied in 2012 is 15%. The movements in deferred corporate income tax can be specified as follows: Deferred corporate income tax liability: Accumulated excess of tax depreciation over accounting depreciation Deferred corporate income tax asset: Temporary difference on vacation reserve (6) (4) Tax loss carried forward (80) (194) Other deferred tax assets (1) 3 Deferred income tax asset (32) (136) NOTE 10 CASH AND BALANCES WITH THE BANK OF LATVIA Cash Balances with the central bank Total Balances with central bank include cash on the correspondent account and a short-term 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 30 June 2012, the Bank s compulsory reserve requirement was LVL thousand (31 December 2011: LVL thousand). 17

18 NOTE 11 DUE FROM CREDIT INSTITUTIONS Amounts due on demand Credit institutions registered in Latvia Credit institutions registered in the EU Credit institutions of other countries Term deposits Credit institutions registered in Latvia Credit institutions of other countries Total The Bank s average interest rates applicable for the balances due from credit institutions in the first half of 2012 are as follows: LVL 0.317% USD 0.723%, EUR 0.238%. (in the first half of LVL 0.265% USD 2.401%, EUR 0.902%.). NOTE 12 LOANS (a) Loans and receivables by customer profile Private non-financial companies Financial institutions Households Total loans Impairment Total net loans (b) Loans and receivables by geographical profile Residents of Latvia Residents of EU Member States Residents of other countries Total loans Impairment Total net loans

19 (c) Loans and receivables by types Commercial loans Industrial loans Finance leases Credit card loans Mortgage loans Factoring Other loans Cash with financial institutions Total loans Impairment Total net loans (d) Signifficant credit risk concentration As at 30 June 2012, the Bank had 1 borrower or group of related borrowers whose aggregate liabilities to the Bank exceeded 10% of the Bank s capital (31 December borrowers or groups of related borrowers). The total liabilities of the borrower or group of related borrowers whose aggregate liabilities to the Bank exceeded 10% of the Bank s share capital on 30 June 2012 was LVL thousand or 21% of the Bank s share capital (31 December 2011 LVL thousand or 33% of the Bank s share capital). The Bank's credit exposure to one client or client related group may not exceed 25% of the Bank's equity. If the customer is a credit institution or investment firm or group of related clients, which contains one or more credit institutions or investment brokerage, then the Bank's investment capital risk transactions total exposure should not exceed 25% of its equity, but risk exposures used for liquidity needs and settlements, including those outstanding for next business day to be used for currency transactions or the accumulation of capital by customer payments or security deposits for currency transactions, may not exceed 95% of Bank's equity. On 30 June 2012 and 31 December 2011 the Bank was in compliance with these requirements. 19

20 NOTE 13 FINANCIAL ASSETS a) Investments in financial assets by portfolios Available-for-sale financial assets Debt securities issued by EU central governments Debt securities issued by other country central governments Debt securities issued by EU credit institutions Debt securities issued by EU local governments Debt securities issued by EU non-finance institutions Total available-for-sale financial assets Held-to-maturity financial investments Debt securities issued by the Latvian government Debt securities issued by Latvian credit institutions Debt securities issued by EU central governments Debt securities issued by EU credit institutions Debt securities issued by EU finance institutions Debt securities issued by credit institutions of other countries Total held-to-maturity financial investments b) available-for-sale financial assets by geographical profile Carrying amount % of equity Revaluation reserve Carrying amount % of equity Revaluation reserve Debt securities issued by central governments x (81) x (49) Poland (2) Belgium (32) Slovenia (3) (15) Qatar Other countries (93) Debt securities issued by x x (4) credit institutions Sweden Other countries (4) Debt securities issued by local governments 773 x x (10) Poland (10) Debt securities issued by x (11) - x - non-finance institutions Netherlands (5) Austria (6) Total available-for-sale financial assets x (51) x (63) 20

21 c) held-to-maturity financial assets by geographical profile Carrying amount % of equity Fair value Carrying amount % of equity Fair value Debt securities issued by central governments x x Latvia Greece Ireland Portugal Debt securities issued by credit institutions x x Latvia Russia Germany Debt securities issued by EU finance institutions Total net held-to-maturity financial investments x x Maturity of debt securities of Ireland and Portugal are 18 April 2013 and 23 September 2013 respectively. The Bank uses the following hierarchy of three levels of input data for determining and disclosing the fair value of financial assets and liabilities: Level 1: Quoted prices in active markets; Level 2: Other techniques for which all inputs which have a significant effect on the recorded fair value are observable. Level 3: Other techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. As at 30 June 2012, all the Bank s financial assets and liabilities met the requirements of Level 1 and Level 2. Bank s financial assets portfolio mainly consists of debt securities of governments and credit institutions of several European Union countries and Russia. Banks' investments in financial assets are carried out in accordance with the Bank's approved strategies: "Available-for-sale portfolio investment strategy" and "Held-to-maturity financial instruments portfolio investment strategy". The Bank is aware of the current changing situation in the financial instruments market and, therefore, avoiding high-risk transactions, the Bank has set additional restrictions on new investments in financial instruments, determining that the investments should be limited to low-risk instruments, i.e. financial instruments with credit rating Aa2 or higher and at least a stable outlook (Moody's scale or its equivalent by Fitch or Standard & Poor's). The Bank performs regular analysis of the news and information about the events in these countries in order to timely detect changes that may adversely affect certain governments and/or residents' ability and/or willingness to meet their financial obligations to the Bank. For the 21

22 purposes of this monitoring the Bank uses Moody s assigned credit ratings (Moody's credit rating equivalent of Fitch or Standard & Poor's (in order specified) is used in case the country doesn t have Moody s credit rating). Information is obtained from the mass media, international organizations dealing with economic analysis and data collection, as well as from rating agencies. In cases when there is information received about the events that could have substantial impact on the solvency of the country's government or on the recovery of the Bank s investment in a country s sovereign debt securities, the Bank s Risk control department: reports to the Board, performs increased monitoring of the affected country, and if necessary proposes to Resources department to avoid future investments or to reduce the country risk limits for transactions with the residents of the country. If the Bank s risk exposure with the residents of the affected country can not be reduced during the next three months, risk exposure mitigating measures such as creation of provisions and attraction of financial security deposits are carried out. Within the risk management process, the Bank constantly follows the events around the European Union countries' economic and financial situation, who have benefited from international lenders - the International Monetary Fund and / or the European Union's financial stabilization program loans. Greece, Ireland, Portugal and the Latvian Central Government Debt securities possessed by the Bank are subject of the enhanced risk management process. Assessing the economic and financial situation in Ireland, Portugal and Latvia, the Bank has concluded that number of objective circumstancesexist, which might help the Bank to fully recover investments from central government securities in countries mentioned above. Therefore, the Bank has not changed the classification of these investments or created provisions, but the Bank continues to follow and keep up to date the information relating to these investments. NOTE 14 FUNDS UNDER TRUST MANAGEMENT Assets Loans to private non-financial companies Loans to households Investments in finance instruments Liabilities Credit institutions Private non-financial companies Households 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. As at 30 June 2012, the accumulated outstanding commission fee for the asset management was LVL 11 thousand (31 December 2011: LVL 23 thousand). 22

23 NOTE 15 DUE TO CREDIT INSTITUTIONS Term deposits Latvian credit institutions including interbank REPO transactions Credit institutions of other countries Total The Bank s average interest rates applicable for the balances due to credit institutions in the first half of 2012 are as follows: LVL 0.493%, USD 1.218%, (in the first half of 2011: USD 2.091%, EUR 1.010%) NOTE 16 DEPOSITS FROM CUSTOMERS (a) Demand and term deposits by customer profile: Demand deposits Private non-financial companies Households and non-profit organisations serving them Financial institutions Local authorities 3 - Term deposits Private non-financial companies Households and non-profit organisations serving them Total (b) Demand and term deposits by geographical profile Demand deposits Residents of Latvia Residents of EU Member States Residents of other countries Term deposits Residents of Latvia Residents of EU Member States Residents of other countries 75 - Total The Bank s average interest rate on customer deposits for the first half of 2012 is 1.806% (LVL), 2.043% (USD) and 2.770% (EUR). Iin the first half of 2011: 1.405% (LVL), 3.386% (USD), 2.729% (EUR)) 23

24 NOTE 17 SUBORDINATED LIABILITIES Lender Household resident, Bank`s related party Household resident, not related party to the bank Household resident, not related party to the bank Total subordinated liabilities Carrying value Date Interest Carrying value Date Interest x x x x Contracts on subordinated loans are agreed for the term of 5 years. Interest on subordinated loan is paid once per month, on the last working day of month. According to the contract terms, lenders has the right to recover the loan ahead of schedule only in case of the Bank's liquidation and the creditor's claim is upheld after all other creditors, but before the Bank's shareholders' claims. NOTE 18 PAID-IN SHARE CAPITAL As at 30 June 2012, the Bank s registered and paid-in share capital was LVL 6,2 million (31 December 2011: LVL 6.2 million). Share capital consists only of ordinary shares with voting rights. The value of one share is 1 Lat, and at 30 June 2012 all shares were fully paid and the Bank did not own any of shares. As at 31 December 2011 and 30 June 2012, the Bank s sole shareholder was SIA Mono, reg.no , legal address Riga, Katlakalna street 1, which is Bank`s ultimate parent company. 24

25 NOTE 19 EARNINGS PER SHARE Earnings per share are calculated by dividing net profit by the weighted average number of shares issued during the reporting period. As at 30 June 2012, basic earnings per share were equal to diluted earnings per share. Six-month period ended Net profit (LVL 000) Weighted average number of ordinary shares ( 000) Earnings per share (LVL) NOTE 20 CASH AND CASH EQUIVALENTS Cash and demand deposits with the Bank of Latvia Balances due from other credit institutions with original maturities of less than three months Balances due to other credit institutions with original maturities of less than three months (2 517) - Total NOTE 21 MEMORANDUM ITEMS Contingent liabilities Guarantees Financial commitments Unutilised credit lines Credit card commitments Total 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 paying 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. 25

26 NOTE 22 RELATED PARTY TRANSACTIONS 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. As at 30 June 2012, 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 Memoran Total Carrying Memoran dum amount dum items items Total Assets Loans and receivables, net Related companies and persons Council and Board Derivatives Related companies and persons Liabilities Deposits Related companies and persons Council and Board Derivatives Related companies and persons The table below presents income and expense on the balances due from/ to related parties: Six-month period ended Interest income Interest expense Net interest income (43) (47) Commission and fee income

27 NOTE 23 CAPITAL MANAGEMENT The primary objective of the Bank s capital management is to ensure that the Bank complies with externally imposed capital requirements (i.e. Financial and Capital Market Commission s regulations and IFRS) and that the Bank maintains healthy capital ratios and equity, both in terms of elements and composition, to an extent sufficient for covering significant risks inherent in the Bank s current and planned operations. Capital adequacy refers to the sufficiency of the Bank s capital resources to cover credit risk, operational risk and market risks. The Bank applies the standardised approach and the basic indicator approach to calculate the capital requirement for credit risk and operational risk respectively. In assessing its overall capital adequacy, the Bank calculates the capital adequacy for the following risks: - Credit risk. The Bank has estimated that in 2012 the capital required to cover credit risk should be at least in line with the results of stress tests performed under the basic scenario. - Operational risk. In determining the required capital level, the Bank considers the capital requirement calculated according to the basic indicator approach referred to in Regulations No. 60 on the Calculation of Minimum Capital Requirements issued by the Financial and Capital Market Commission on 2 May 2007 as well as the results of the internal operational risk assessment and stress testing. - Market risks: The Bank assumes that for currency risk the Bank will have to maintain capital to the extent as determined as a result of stress tests performed under the basic scenario (assuming a change of one-currency s exchange rate). The Bank analyses how the market risk exposure is affected by market liquidity of financial instruments on a regular basis, once every month. All instruments of the Bank s available-for-sale portfolio were traded on liquid markets without applying any significant discounts and, therefore, the Bank believes that its available-for-sale portfolio does not affect the capital required to cover market risk. The Bank takes into consideration the fact that over the next two years the Bank intends neither to significantly expand its available-for-sale portfolio nor to revise the portfolio maturity and quality, it is assumed that new investments (due or sold) will be made in financial instruments with similar maturities and prudent assumptions are made regarding the quality of these investments. - Interest rate risk in the banking book. The Bank assumes that for interest rate risk in the banking book the Bank will have to maintain capital at least in line with the results of stress tests performed under the pessimistic scenario. - Concentration risk. The Bank applies the simplified approach according to Regulations No. 38 on the Internal Capital Adequacy Assessment Process issued by the Financial and Capital Market Commission on 20 March 2009 to determine the relevant adequate capital. The analysis of concentration risk for the loan portfolio includes: Name concentration risk analysis, 27

28 Sector concentration risk analysis, Collateral concentration risk analysis, Currency mismatch risk analysis. The total capital needed to cover concentration risk is determined by aggregating the results of all individual calculations. In analysing name concentration risk, the Bank assesses the exposure concentration for the entire loan portfolio and the held-to-maturity portfolio. - Money laundering and terrorist financing risk. The Bank applies the simplified approach according to Regulations No. 38 on the Internal Capital Adequacy Assessment Process issued by the Financial and Capital Market Commission on 20 March 2009 to determine the relevant adequate capital. - Other risks. As other risks which would require an additional capital analysis, the Bank determines country risk, residual risk, compliance risk, reputational risk and strategic and business risks based on the material risk assessment. Pursuant to Regulations No. 38 on the Internal Capital Adequacy Assessment Process issued by the Financial and Capital Market Commission on 20 March 2009, the Bank applies the simplified approach to define the adequate capital, namely the capital to cover other risks is determined as 5% of the total minimum capital requirements. The total capital adequacy is calculated as a total of the capital buffer and the adequate capital to cover all risks involved in the capital adequacy assessment process. The capital buffer is determined on the basis of the general stress testing results. The regulations of the Financial and Capital Market Commission (the bank regulator) require that Latvian banks maintain a capital adequacy ratio based on financial statements prepared under IFRS as adopted by the EU of 8% of risk weighted assets. In fact, the Bank s capital adequacy ratio exceeds the minimum 20% threshold specified in the Bank s strategy approved by a resolution of the Council of the Financial and Capital Market Commission on 24 May As at 30 June 2012, the Bank s capital adequacy ratio calculated in accordance with the above requirements was % (2011: 23.32%). The Bank s eligible capital also exceeds the adequate capital to cover all significant risks defined during the capital adequacy assessment process. The Bank applies the capital definition and the procedure for capital calculation laid down in Regulations No. 60 on the Calculation of Minimum Capital Requirements issued by the Financial and Capital Market Commission on 2 May 2007, which is incorporated in the Bank s Procedure for Calculating the Minimum Capital Requirements relevant for the Bank s instruments. Namely, the eligible capital comprises Tier 1 items, i.e. paid-in share capital, reserve capital, retained earnings, including current year s profit which is not subject to dividend distribution, less negative fair value revaluation reserve of available-for-sale financial assets and intangible assets, and Tier 2 items, i.e. subordinated capital. Capital adequacy assessment is governed by a Bank s internal document named the Capital Adequacy Assessment Policy. 28

29 The capital adequacy calculation of the Bank can be disclosed as follows: Tier I - paid-in share capital prior period (accumulated loss) / retained earnings (974) - - audited profit / (loss) - (974) - Available-for-sale financial assets revaluation reserve (51) (63) Less - intangible assets (383) (405) Total Tier I Total Tier II Decrease of Tier I and Tier II capital resulting from specificē regulatory provisions (416) - Total eligible capital Risk capital requirements Total capital charge for credit risk and counterparty risk, incl. the following statutory asset classes: Central governments or central banks Regional or local governments International organizations 8 - Credit institutions Commercial institutions Other assets Other risk capital requirements: Foreign exchange risk capital requirement Operational risk capital requirement Total capital requirement The capital adequacy ratio (Equity capital / Total capital) x 8% 30.55% 23.32% NOTE 24 EVENTS AFTER REPORTING DATE As of the last day of the reporting period until the date of signing these financial statements there have been no events requiring adjustment of or disclosure in the financial statements or notes. * * * 29