AS LATVIJAS PASTA BANKA. Financial statements of the Bank for the year ended 31 December 2010

Transcription

1 for the year ended 31 December 2010

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

3 MANAGEMENT REPORT Dear customers, cooperation partners and shareholders! 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 year ended 31 December Adapting to the change of the business environment, in the first half of 2010 the Bank developed a new operating strategy for the subsequent three years. The cornerstone of this strategy is creation of a bank servicing certain customers and developing customised products and service technologies, which would allow evolving into a convenient bank that would be able to flexibly adapt to the customer needs. The Bank s basic values have not changed and those are integrity (fair and just treatment of all the customers), professionalism (professional team), responsibility (high level of responsibility for the decisions made), loyalty (equal treatment of all the customers and colleagues), quality (supply of convenient, high-quality and competitive services), flexibility (ability to adapt to the customer needs). 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 is constantly working to expand the range of the services it provides, meanwhile maintaining the high quality level, which is confirmed by the ever-growing customer base. In 2010 AS Latvijas pasta banka continued its active development and had the positive annual result. The Bank s audited profit for the year 2010 is LVL 81 thousand. During the year, notwithstanding the complicated economic situation, the Bank s assets have doubled and reached LVL 25.7 million. The performance of the Bank as a relatively new market player can undoubtedly be assessed as positive, reflecting the Bank s ability to successfully solve all problems and operate in all situations. In 2010 AS Latvijas pasta banka was specifically focusing on the increase of its loan portfolio. The Bank s targeted efforts included supplementing the range of its products and analysis of new lending opportunities, including successful development of cooperation and support of local residents in acquiring the EU financing. The Bank has complied with all the statutory requirements. The Bank s capital adequacy ratio is 28.66%, which is above the minimal threshold set by the Financial and Capital Market Commission. The liquidity ratio is %, which also exceeds the statutory threshold of 30% substantially. Having analysed the development trends of the financial market in a timely and realistic fashion, the Bank has entered into a limited number of transactions involving financial instruments and derivatives, meanwhile ensuring daily control, both current and long-term, against potential loss of the Bank and its customers. 3

4 The above shows that the Bank is well equipped to successfully continue implementing its operating strategy. The Bank s management keeps pace with the highly volatile situation on the financial market, being well aware of its responsibility towards the customers and potential risks that are carefully assessed and managed following the prudence principle, keeping the overall risk exposure moderate. The Bank is able to be a reliable partner in the business and private matters of its customers, keeping to the steady and professional approach to achieve further growth through joint efforts. We are highly optimistic about the Bank s prospects for the year 2011 and beyond and we are sure that the Bank will have then an even steadier position in the Latvian banking sector. A Bank s objective is to end the year 2011 with a profit of LVL 400 thousand and double 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, Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 9 March

5 THE COUNCIL AND THE BOARD The Council The Council of the Bank as at 31 December 2010 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 31 December 2010 Name Position Date of appointment Boriss Ulmans Chairman of the Board 05/09/2008 Arnis Kalveršs Board Member 05/09/2008 Einārs Vaivods Board Member 05/09/2008 There were no changes in the Council and the Board of the Bank in 2009 and For the Bank s management: Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 9 March

6 STATEMENT OF MANAGEMENT S RESPONSIBILITY The management of AS LATVIJAS PASTA BANKA (hereinafter the Bank) is responsible for the preparation of the Bank s financial statements for each financial year. In preparing the financial statements set out on pages 8 to 54 for the year ended 31 December 2010, the management has applied appropriate accounting principles that are based on prudent and reasonable judgments and estimates. In our opinion, all appropriate accounting principles have been consistently applied, including International Financial Reporting Standards as adopted by the European Union and the regulations of the Financial and Capital Market Commission. The Bank s management is responsible for maintaining proper accounting records and ensuring compliance of these financial statements with the Regulations of the Financial and Capital Market Commission on annual reports of credit institutions. Management is also responsible for taking all reasonable efforts to safeguard the Bank s assets and the prevention and detection of fraud and other irregularities in the Bank. Management s decisions and judgments used in the preparation of these financial statements were prudent and reasonable. For the Bank s management: Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 9 March

7 AS LATVIJAS PASTA BANKA for the year ended 31 December LVL AUDITORS REPORT 7

8 STATEMENT OF COMPREHENSIVE INCOME Notes Interest income Interest expense 4 (562) (268) Net interest income Commission and fee income Commission and fee expense 5 (140) (8) Net commission and fee income Net trading income 7 30 (16) Operating income Administrative expense 8 (616) (493) Amortisation/ depreciation 15 (73) (31) Other expense 6 (174) (107) Total operating expense (863) (631) Profit before tax Corporate income tax 9 (14) (18) Net profit for the year Revaluation reserve 13 (23) - Total comprehensive income Earnings per share (LVL) The accompanying notes on pages 12 to 54 form an integral part of these financial statements. The Bank s financial statements set out on pages 8 to 54 were approved by the Board on 8 March 2011 and by the Council on 9 March Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 9 March

9 STATEMENT OF FINANCIAL POSITION Notes 31/12/ /12/2009 ASSETS Cash and balances with the Bank of Latvia Due from credit institutions Available-for-sale financial assets Derivative financial instruments Loans and receivables Held-to-maturity financial investments Current tax assets 1 1 Property, plant and equipment Intangible assets Other assets Prepaid expense and accrued income 14 4 Total assets LIABILITIES Due to credit institutions Deposits from customers Derivative financial instruments 14-6 Deferred tax liabilities Other liabilities Deferred income and accrued expense Total liabilities EQUITY ATTRIBUTABLE TO THE BANK S SHAREHOLDERS Paid-in share capital Asset revaluation reserve (23) - Retained earnings Total equity attributable to the Bank s shareholders Total equity Total liabilities and equity The accompanying notes on pages 12 to 54 form an integral part of these financial statements. The Bank s financial statements set out on pages 8 to 54 were approved by the Board on 8 March 2011 and by the Council on 9 March Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 9 March

10 STATEMENT OF CHANGES IN EQUITY Bank Paid-in share capital Revaluation reserves Retained earnings/ (accumulated deficit) Total Balance as at 31 December (1) Total comprehensive income Balance as at 31 December Total comprehensive income Balance as at 31 December The accompanying notes on pages 12 to 54 form an integral part of these financial statements. The Bank s financial statements set out on pages 8 to 54 were approved by the Board on 8 March 2011 and by the Council on 9 March Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 9 March

11 STATEMENT OF CASH FLOWS CASH FLOWS TO/ FROM OPERATING ACTIVITIES Profit before tax Amortisation/ depreciation Unrealised foreign exchange (gain)/ loss (94) (41) Increase in cash and cash equivalents from operating activities before changes in assets and liabilities (Increase)/ decrease in balances due from credit institutions (1 322) 978 (Increase)/ decrease in loans and receivables (4 540) (1 284) Decrease/ (increase) in other assets (132) (36) Increase/ (decrease) in balances due to credit institutions Increase/ (decrease) in deposits from customers Increase/ (decrease) in other liabilities Change in cash and cash equivalents from operating activities CASH FLOWS TO/ FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (194) (296) Acquisition of held-to-maturity financial investments (8 406) (9 280) Redemption of held-to-maturity financial investments Acquisition of available-for-sale financial assets (3 869) - Sale/ redemption of available-for-sale financial assets Increase in cash and cash equivalents from investing activities (5 793) (5 726) Net cash flows for the year (1 558) Cash and cash equivalents at the beginning of the year Foreign exchange gain/(loss) Cash and cash equivalents at the end of the year The accompanying notes on pages 12 to 54 form an integral part of these financial statements. The Bank s financial statements set out on pages 8 to 54 were approved by the Board on 8 March 2011 and by the Council on 9 March

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 two 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 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, adopted and obtained approval of the Financial and Capital Market Commission for 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 bank servicing certain customers and developing customised products and service technologies. 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 ultra-high income private individuals; - To be present in Latvia, Russia, and Ukraine; - To define as the priority business activity the following: supply of customised banking services to the Bank s customers, lending based on the moderately conservative risk approach, especially financing of current assets and transportation flows, as well as issue and acceptance of payment cards via POS terminals and the Internet. 12

13 (b) 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 (a) Adoption of new and/or changed IAS, IFRS and IFRIC interpretations The Bank has adopted the following new and amended IFRS and IFRIC interpretations during the year: Amendment to IFRS 2 Share-based Payment; Amendments to IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements; Amendment to IAS 39 Financial Instruments: Recognition and Measurement Eligible Hedged Items; IFRIC 12 Service Concession Arrangements; IFRIC 17 Distributions of Non-cash Assets to Owners; IFRIC 18 Transfers of Assets from Customers; Improvements to IFRS (issued in 2008 and 2009 and effective on 1 January 2010). Standards and interpretations that have been issued but are not yet effective The Bank has not applied the following IFRS and IFRIC Interpretations that have been issued but are not yet effective: Amendments to IFRS 7 Financial instruments: Disclosures (effective for financial years beginning on or after 1 July 2011, once adopted by the EU) The amendment modifies disclosure requirements for certain transfers of financial assets. The amendment is not expected to have any impact on the financial statements since the Bank does not have these kinds of transfers. IFRS 9 Financial Instruments (effective for financial years beginning on or after 1 January 2013, once adopted by the EU). IFRS 9 will eventually replace IAS 39. The IASB has issued the first two parts of the standard, establishing a new classification and measurement framework for financial assets and requirements on the accounting for financial liabilities. The Bank has not yet evaluated the impact of the implementation of this standard. Amendments to IAS 12 Income Taxes (effective for financial years beginning on or after 1 January 2012, once adopted by the EU). The amendment provides a practical solution to the problem of determining whether an entity that is measuring deferred tax related to investment property, measured using the fair value model, expects to recover the carrying amount of the investment property through use or sale by introducing a presumption that recovery of the carrying amount will normally be through sale. The Bank has not estimated yet the impact of the implementation of these changes. 13

14 Amendments to IAS 24 Related Party Disclosures (effective for financial years beginning on or after 1 January 2011). The amendments simplify the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition. They also provide a partial exemption from the disclosure requirements for government-related entities. The implementation of these amendments will have no impact on the financial position or performance of the Bank, however it may impact the related parties disclosures. Amendment to IAS 32 Financial Instruments: Presentation Classification of Rights Issues (effective for financial years beginning on or after 1 February 2010). The amendment changes the definition of a financial liability to exclude certain rights, options and warrants. The amendment will have no impact on the financial position or performance of the Bank, as the Bank does not have such instruments. Improvements to IFRSs In May 2010 IASB issued omnibus of amendments to its standards. The amendments become effective for annual periods on or after either 1 July 2010 or 1 January The adoption of the following amendments may result in changes to accounting policies but will not have any impact on the financial position or performance of the Bank: IFRS 3 Business Combinations; IFRS 7 Financial instruments: Disclosures; IAS 1 Presentation of Financial Statements; IAS 27 Consolidated and Separate Financial Statements; IFRIC 13 Customer Loyalty Programmes. Amendment to IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for financial years beginning on or after 1 January 2011). The amendment modifies the accounting for prepayments of future contributions when there is a minimum funding requirement. This amendment will not have any impact on the financial statements because the Bank does not have defined benefit assets. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective for financial years beginning on or after 1 July 2010). The interpretation provides guidance on accounting for extinguishing financial liabilities with equity instruments. Since the Bank does not have such transactions, IFRIC 19 will not have any impact on its financial statements. 14

15 (b) Significant accounting judgments and estimates In the process of applying the Bank's accounting policies, management has exercised judgment and estimates in determining the amounts recognised in the financial statements. The most significant uses of judgment and estimates are as follows: Going concern The Bank s management has made an assessment of the Bank s ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any uncertainties that may cast doubt upon the Bank s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis. Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but where observable market data are not available, judgment is required to establish fair values. The judgments include considerations of liquidity and model inputs. (c) 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 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 year-end rates of exchange (LVL to one foreign currency unit) used in the preparation of these financial statements are as follows: Official exchange rate 31 December December 2009 EUR USD (d) Financial assets and liabilities Recognition and derecognition of financial assets Financial assets are recognised in the statement of financial position when, and only when, the Bank becomes a party to the contractual provisions of the instrument. A financial asset is derecognised only when the contractual rights to receive cash flows from the asset have expired, or the Bank has transferred the financial asset and substantially all the risks and rewards of the asset to the counterparty. 15

16 All purchases and sales of financial assets, except for loans issued to non-bank customers, are recognised and derecognised on the settlement date. Loans to non-bank customers are recognised in the statement of financial position when cash is transferred to the customer s current account. 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. Available-for-sale financial assets The Bank acquires available-for-sale securities to hold them for an undefined period and generate interest income and/or profit from the increase in prices of securities. The available-forsale portfolio includes fixed income securities. After initial recognition at fair value, including direct transaction costs, available-for-sale securities are measured at fair value. The revaluation result is charged through the statement of comprehensive income to the shareholders equity as the fair value revaluation reserve of available-for-sale financial assets. For available-for-sale securities acquired at a discount (premium), the respective discount (premium) amount is amortised on a systematic basis, using the effective interest method. Amortised amounts are charged to the statement of comprehensive income as interest income from debt securities. Any gain or loss resulting from disposal of available-for-sale securities and the fair value revaluation reserve accrued until such disposal are included in the statement of comprehensive income as net realised gain/ (loss) from available-for-sale financial assets. Held-to-maturity financial investments Held-to-maturity financial investments are non-derivative financial assets with fixed or determinable payments and fixed maturities, which the Bank has the intention and ability to hold to maturity. Held-to-maturity financial investments comprise debt securities. Held-to-maturity 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 non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. 16

17 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 expense in the statement of comprehensive income. 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. 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. (e) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method applying the following rates: 17

18 Property, plant and equipment: Computers and equipment 33 % Other property, plant and equipment % 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. (f) Intangible assets Intangible assets are identifiable non-monetary 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 straight-line basis over 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. 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 10 % Software 10 % (g) 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 interest-bearing financial assets or liabilities and their maturity amount calculated applying the effective interest rate method (discount, premium, etc.) 18

19 Interest income comprises coupons earned from debt securities of the Bank s portfolio. 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. (h) 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. (i) Taxation Corporate income tax is calculated according to the requirements of Latvian tax laws. The income tax rate applied in 2009 and 2010 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 calculated 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. 19

20 (j) Off-balance sheet financial commitments and contingent liabilities In the ordinary course of business, the Bank is involved with off-balance 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. (k) 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 4 NET INTEREST INCOME Interest income Due from credit institutions Loans and receivables Securities Incl. held to maturity available for sale 77 - Total interest income: Interest expense Due to credit institutions (57) (30) Non-bank deposits (482) (230) Payments to the Deposit Guarantee Fund (23) (8) Total interest expense: (562) (268) Net interest income

21 NOTE 5 NET COMMISSION AND FEE INCOME Commission and fee income Service fee for account maintenance and cash transactions 45 6 Asset management 44 9 Payment card transactions Guarantees, loans, letters of credit, etc Total commission and fee income: Commission and fee expense Correspondent bank services (15) (4) Payment card transactions (110) (3) Other bank transactions (15) (1) Total commission and fee expense (140) (8) Net commission and fee income NOTE 6 OTHER EXPENSE Other expense FCMC financing fee 3 2 Payment card project implementation and servicing Incl. VISA International membership fee 76 - Other 3 2 Total other expense NOTE 7 NET TRADING INCOME Net gain/ (loss) from transactions with derivative financial instruments and foreign exchange 95 (41) Incl. net trading gain/ (loss) 87 (35) net revaluation result 8 (6) Net gain from revaluation of open positions (65) 25 Net trading gain/ (loss) 30 (16) 21

22 NOTE 8 ADMINISTRATIVE EXPENSE Remuneration expense Remuneration to the Council and the Board Remuneration to personnel Statutory social insurance contributions Total remuneration expense: Lease and maintenance of premises Non-deductible input tax Telephone, communications and mail Software maintenance Professional and legal fees 11 8 Outsourced accounting services - 89 Stationery and other office expense 8 2 Other personnel expense 6 2 Other administrative expense Total other expense: Administrative expense As at 31 December 2010, the Bank had 59 employees (2009: 37 employees). NOTE 9 CORPORATE INCOME TAX Corporate income tax expense comprises the following items: Current corporate income tax charge for the reporting year - - Deferred corporate income tax Total corporate income tax expense Below is presented the comparison of corporate income tax and the theoretical tax calculated applying the 15% statutory rate prescribed by Latvian tax laws (2009: 15%): Profit before tax Corporate income tax at the statutory rate of 15% Tax adjustment, net (92) (298) Current corporate income tax charge 3 (181) Utilisation of prior period tax loss (3) - Current corporate income tax charge for the reporting year

23 The movements in deferred corporate income tax can be specified as follows: 31/12/ /12/2009 Deferred corporate income tax liability: Accumulated excess of tax depreciation over accounting depreciation Deferred corporate income tax asset: Vacation pay reserve (3) (2) Unutilised tax loss (26) (26) Other deferred tax assets 1 (1) Deferred corporate income tax liability As at 31 December 2010, the unutilised tax loss amounted to LVL 178 thousand (2009: LVL 181 thousand). 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. In 2010, the Bank used the current corporate income tax charge amounting to LVL 3 thousand to cover the prior period tax loss. NOTE 10 CASH AND BALANCES WITH THE BANK OF LATVIA 31/12/ /12/2009 Cash Balances with the Bank of Latvia Total Balances with the Bank of Latvia 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 31 December 2010, the Bank s compulsory reserve requirement was LVL 900 thousand (2009: LVL 422 thousand). NOTE 11 DUE FROM CREDIT INSTITUTIONS 31/12/ /12/2009 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

24 A term deposit serves as security for the balances due (term deposits) from credit institutions of other countries totalling LVL 283 thousand. The Bank s average interest rates applicable for the balances due from credit institutions in 2010 are as follows: LVL %, USD %, EUR % (2009: LVL %, USD %, EUR %). NOTE 12 LOANS (a) By customer profile 31/12/ /12/2009 Private non-financial companies Financial institutions 86 - Households Total loans (b) By geographical profile 31/12/ /12/2009 Residents of Latvia Residents of EU Member States Residents of other countries Total loans (c) By type 31/12/ /12/2009 Commercial loans Industrial loans Finance leases Credit card loans Mortgage loans Cash with financial institutions 86 - Total loans (d) Significant credit risk concentration As at 31 December 2010 and 2009, the Bank did not have any borrowers or groups of related borrowers whose aggregate liabilities would exceed 10% of the total loans. According to the regulator s requirements, the Bank s credit risk concentration to one customer or a group of related customers may not exceed 25% of the Bank s equity. As at 31 December 2010 and 2009, the Bank was in compliance with the above requirements. 24

25 NOTE 13 FINANCIAL ASSETS 31/12/ /12/2009 Available-for-sale financial assets Debt securities issued by EU central governments Debt securities issued by EU credit 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 credit institutions of other countries Total held-to-maturity financial investments The key objective of forming the available-for-sale portfolio is to establish and maintain a secondary source of liquidity, by acquiring highly liquid debt securities of EU central governments and financial institutions. The securities of this portfolio are revalued at fair value on a daily basis and the revaluation result is taken to equity. As at 31 December 2010, the revaluation reserve was LVL -23 thousand. The held-to-maturity portfolio comprises debt securities of central governments and financial institutions, which the Bank has the intention and ability to hold to maturity. As at 31 December 2010, the held-to-maturity portfolio included debt securities of EU central governments and certain financial institutions. Held-to-maturity financial instruments are carried at amortised cost. Part of the securities included in this portfolio may be used in major refinancing transactions with the Bank of Latvia and, if necessary, as security to acquire liquid assets. Term deposits serve as security for the held-to-maturity EU securities totalling LVL thousand. NOTE 14 DERIVATIVE FINANCIAL ASSETS AND LIABILITIES The fair value of the Bank s currency swaps is as follows: 31/12/ /12/2009 Assets Liabilities Assets Liabilities Notional amount Fair value The notional amount is the amount of a derivative s underlying asset and is calculated according to the FCMC capital adequacy requirements. The notional amount indicates the volume of transactions outstanding as at the year end. 25

26 As at 31 December 2009 and 2010, 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 15 INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT Intangible assets Computers and equipment Inventory Total assets Acquisition value As at 31 December Additions As at 31 December Additions As at 31 December Accumulated amortisation/ depreciation As at 31 December Amortisation/ depreciation charge for the year As at 31 December Amortisation/ depreciation charge for the year As at 31 December Net carrying amount As at 31 December As at 31 December As at 31 December NOTE 16 OTHER ASSETS 31/12/ /12/2009 Card operations 68 - Input tax 5 5 Security deposit for transactions 76 - Prepayments for property, plant and equipment 3 - Other receivables Total

27 NOTE 17 FUNDS UNDER TRUST MANAGEMENT 31/12/ /12/2009 Assets Loans to private non-financial companies Loans to households Liabilities 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 31 December 2010, the accumulated outstanding commission fee for the asset management was LVL 6 thousand (2009: LVL 2 thousand). NOTE 18 DUE TO CREDIT INSTITUTIONS 31/12/ /12/2009 Term deposits Latvian credit institutions Incl. term deposits against securities pledge Credit institutions of other countries Total The Bank s average interest rates applicable for the balances due to credit institutions in 2010 are as follows: LVL %, USD %, EUR %. NOTE 19 DEPOSITS FROM CUSTOMERS (a) By customer profile: 31/12/ /12/2009 Demand deposits Private non-financial companies Households and non-profit organisations serving them Financial institutions Local authorities 12 2 Term deposits Private non-financial companies Households and non-profit organisations serving them Total

28 (b) By geographical profile 31/12/ /12/2009 Demand deposits Residents of Latvia Residents of EU Member States 30 - Residents of other countries Term deposits Residents of Latvia Residents of EU Member States Total The Bank s average interest rate in 2010 was 3.514% (2009: 8.38%). NOTE 20 OTHER LIABILITIES 31/12/ /12/2009 Payment card settlements Taxes 5 6 Other liabilities 2 - Total NOTE 21 ACCRUED EXPENSE 31/12/ /12/2009 Payment card servicing 17 - Payments to the Deposit Guarantee Fund 8 4 Vacation pay reserve Other accrued expense Total NOTE 22 PAID-IN SHARE CAPITAL As at 31 December 2010, the Bank s registered and paid-in share capital was LVL 5 million and it has not changed since the registration date. The Bank s share capital consists of only ordinary voting shares. The par value of each share is LVL 1. As at 31 December 2010, all the shares were paid fully. As at 31 December 2010, the Bank did not possess any of its own shares. As at 31 December 2009 and 2010, the Bank s sole shareholder was SIA Mono. As at 31 December 2009 and 2010, the Bank had not raised any subordinated capital. No dividends were declared for

29 NOTE 23 EARNINGS PER SHARE Earnings per share are calculated by dividing net profit by the number of shares issued Net profit (LVL 000) Weighted average number of ordinary shares ( 000) Earnings per share (LVL) NOTE 24 CASH AND CASH EQUIVALENTS 31/12/ /12/2009 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 (1947) - Total NOTE 25 MEMORANDUM ITEMS 31/12/ /12/2009 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. NOTE 26 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. 29

30 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 31 December 2010, 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 31/12/ /12/2009 Memorandum items Total Carrying amount Memorandum items Assets Loans and receivables, net Related companies and persons Council and Board Liabilities Deposits Related companies and persons Council and Board The table below presents income and expense on the balances due from/ to related parties: Interest income 2 - Interest expense (132) (12) Net interest income (130) (12) Commission and fee income Total NOTE 27 RISK MANAGEMENT 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 or acceptable loss and is aimed at achieving an appropriate balance between risks assumed by the Bank and returns. The policy prescribes that various risk mitigation instruments should be used, their selection depending on the risk type. The Bank s risk management objective is as follows: - To establish and maintain such a system of risk identification and management which would allow minimisation of the negative effect the risks may produce on the Bank s 30

31 operations and performance; - To identify and determine the acceptable risk level which would facilitate achievement of the Bank s strategic goals; - To define the levels of responsibility of the Bank s risk management system and their respective functions; - To define the risk management structure; - To ensure the Bank s statutory compliance. As a result of the regular capital adequacy assessment, the Bank has established that risks inherent in its current and planned business are as follows: credit risk, market risk (currency risk), operational risk, concentration risk, money laundering and terrorist financing risk, liquidity risk, interest rate risk, and business or strategic risk. RISK MANAGEMENT STRUCTURE The Council of the Bank is responsible for establishing and effective functioning of the risk management system and approving the relevant risk management policies and strategies. The Board of the Bank has the responsibility for implementing risk management strategies and policies approved by the Council. The Risk Control Division identifies significant risks the Bank is exposed to and formulates the relevant risk management policies and procedures, ensures monitoring of compliance with the risk management policies and procedures, including the limits and restrictions set, as well as reports information about the risks inherent in the Bank s business to the Bank s Board on a regular basis, thereby allowing permanent assessment of risks affecting the Bank s ability to achieve its goals and, if necessary, making decisions on the relevant corrective actions. The Resource Division is responsible for managing the Bank s assets and liabilities and the overall financial structure as well as ensuring the daily management of liquidity risk. The key goal of the Operational Compliance Control Division is identification, measurement, and management of operational compliance risk. The Internal Audit Division carries out the regular review and assessment of the Bank s operational compliance with its risk management strategies, policies and procedures and communicates the review results to the Council. The heads of the Bank s structural units and other employees of the Bank are aware of their duties and responsibility related to the routine risk management and, within the boundaries of their competence, report the compliance with the limits and restrictions set to the Risk Control Division as well as participate in the risk identification, effect assessment, and materiality determination process. RISK MEASUREMENT AND REPORTING SYSTEMS The Bank performs quantitative risk assessment on the basis of the standardised and basic indicator approaches 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 31