A/S REĢIONĀLĀ INVESTĪCIJU BANKA. Financial statements for the fifteen months period ended 31 December 2002

Transcription

1 A/S REĢIONĀLĀ INVESTĪCIJU BANKA Financial statements for the fifteen months period ended 31 December 2002

2 CONTENTS Report of the Management 3 The Council and the Board of the Bank 4 Statement of responsibility of the management 5 Auditors report 6 Financial statements: Income statement 7 Balance sheet 8 Statement of changes in shareholders equity 9 Cash flow statement 10 Notes to the financial statements

3 REPORT OF THE MANAGEMENT The reporting period has been the time of development for A/S Reģionālā investīciju banka, when the main focus was made on tasks required to ensure delivery of high quality services to clients of the Bank finding suitable premises, set-up of corresponding relationships, development of basic products as well as implementation of modern communication means between the Bank and its clients internet banking and electronic banking systems. The Bank has started delivery of services to both individuals and corporate clients, both residents and non-residents. The Bank has developed mechanism for the monitoring and management of financial risks, which is necessary to ensure stability of operations and financial position. Additional information on financial risk management has been provided in the note 21 to the financial statements. The number of clients has reached 150 during the reporting period and it continues to grow. Main client needs so far were lending, placement of deposits, trading with currencies and securities. Interest income on various types of debt securities as well as profit on trading with securities has formed the main part of the Bank s revenue during the reporting period. After the reporting period end and prior to the approval date of this report there have been no events, which would have a significant effect on the results of the reporting period. The management proposes to perform no distribution of the profit of the reporting period and include it in retained earnings. During 2003 it is planned to continue increase in the range of services and also raise the quality of services as well as focus on the development and expansion of the client base. 3

4 THE COUNCIL AND THE BOARD OF THE BANK As at 31 December 2002: Date of appointment/ resignation The Council Jānis Medens Chairman of the Council Jānis Cimdiņš Member of the Council Daila Vīksne Member of the Council Kārlis Uzuliņš Member of the Council Irēna Bauere Member of the Council Resigned during the period Māra Zepa Member of the Council The Board Haralds Āboliņš Chairman of the Board and President Jevgēņija Žagare Member of the Board Māra Zepa Member of the Board Resigned during the period Pēteris Putniņš Member of the Board

5 STATEMENT OF RESPONSIBILITY OF THE MANAGEMENT The Management of A/S Reģionālā investīciju banka (the Bank) is responsible for the preparation of the financial statements of the Bank. The financial statements on pages 7 to 27 are prepared in accordance with the source documents and present fairly the financial position of the Bank as at 31 December 2002 and the results of its operations and cash flows for the fifteen months period ended 31 December The financial statements are prepared in accordance with International Financial Reporting Standards on a going concern basis. Appropriate accounting policies have been applied on a consistent basis. Prudent and reasonable judgements and estimates have been made by the Management in the preparation of the financial statements. The Management of A/S Reģionālā investīciju banka is responsible for the maintenance of proper accounting records, the safeguarding of the Bank s assets and the prevention and detection of fraud and other irregularities in the Bank. They are also responsible for operating the Bank in compliance with the Law on Credit Institutions, regulations of the Finance and Capital Market Commission, Bank of Latvia and other legislation of the Republic of Latvia applicable for credit institutions. 5

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7 INCOME STATEMENT FOR THE FIFTEEN MONTHS PERIOD ENDED 31 DECEMBER 2002 Note 15 months 2002 Interest income 1 529,896 Interest expense 2 (144,651) Net interest income 385,245 Income from securities 10 12,269 Fee and commission income 16,754 Fee and commission expense (6,160) Net fee and commission income 10,594 Profit on financial instrument trading, net 3 403,390 Operating income 811,497 Other ordinary income 1,877 Administrative expense 4 (363,278) Depreciation 11, 12 (27,285) Change in provisions for bad and doubtful loans 8 (13,945) Profit before tax 408,867 Corporate income tax 5 (6,764) Profit for the period 402,103 Notes on pages 11 to 27 form an integral part of these financial statements. 7

8 BALANCE SHEET AS AT 31 DECEMBER 2002 Assets Note 31/12/2002 Cash and demand deposits with the Bank of Latvia 6 109,050 Balances due from credit institutions 7 1,314,855 Loans and advances to non-banking customers 8 1,809,648 Trading securities with fixed income 9 3,967,779 Trading securities with variable income ,119 Intangible assets ,780 Property and equipment 12 69,402 Other assets 9,898 Prepayments and accrued income 13 96,016 Total assets 7,699,547 Liabilities Balances due to credit institutions ,100 Deposits from the public 15 2,932,365 Other liabilities 16 59,707 Deferred income and accrued expense 18,508 Deferred tax liabilities 5 6,764 Total liabilities 3,997,444 Shareholders equity Share capital 17 3,300,000 Profit for the period 402,103 Total shareholders equity 3,702,103 Total equity and liabilities 7,699,547 Memorandum items Contingent liabilities 18 55,000 Commitments 18 39,818 Funds under trust management ,100 Notes on pages 11 to 27 form an integral part of these financial statements. 8

9 STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY FOR THE FIFTEEN MONTHS PERIOD ENDED 31 DECEMBER 2002 Share capital Share premium Profit for the period Total shareholders equity Closed share issue 3,000, ,000-3,300,000 Closed share issue 300,000 (300,000) - - Profit for the period , ,103 Balance as at 31 December ,300, ,103 3,702,103 Notes on pages 11 to 27 form an integral part of these financial statements. 9

10 CASH FLOW STATEMENT FOR THE FIFTEEN MONTHS PERIOD ENDED 31 DECEMBER 2002 Note 15 months 2002 Cash flows from operating activities Profit before tax 408,867 Depreciation 27,285 Increase in provisions for bad and doubtful loans 13,945 Increase in cash and cash equivalents before changes in assets and liabilities, as a result of ordinary operations 450,097 Increase in deferred income and accrued expense 18,508 Increase in prepayments and accrued income (96,016) Increase in other assets (9,898) Increase in other liabilities 35,379 Increase in trading securities (4,184,898) Increase in loans (1,823,593) Increase in deposits from the public 2,932,365 Decrease in cash and cash equivalents from operating activities (2,678,056) Cash flows from investing activities Acquisition of fixed and intangible assets (178,139) Decrease in cash and cash equivalents from investing activities (178,139) Cash flows from financing activities Issue of share capital 3,300,000 Increase in cash and cash equivalents from financing activities 3,300,000 Net increase in cash and cash equivalents 443,805 Cash and cash equivalents at the end of the period ,805 Notes on pages 11 to 27 form an integral part of these financial statements. 10

11 NOTES TO THE FINANCIAL STATEMENTS GENERAL INFORMATION (hereinafter the Bank ) was registered in Riga, Republic of Latvia on 28 September The Bank provides financial services to corporate clients and individuals. The Bank has no branches. Name of the Bank: Joint stock company Reģionālā investīciju banka Legal address of the Bank: Jura Alunāna street 2, Riga LV-1010 Telephone, fax: , There are no publicly traded securities issued by the Bank. ACCOUNTING POLICIES The Bank maintains its accounting records in accordance with Latvian legislation. These financial statements have been prepared from those accounting records. Balances as at 31 December 2002 reflect the position as at the close of business on that date. (a) Basis of preparation These financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) under the historical cost convention as modified by the revaluation of certain types of investments in accordance with accounting policies set out below. All amounts presented in these financial statements are denominated in lats unless stated otherwise. (b) Interest income and expense Interest income and expense are recognised in the income statement for all interest bearing instruments on an accrual basis using the effective yield method based on the actual purchase price. Interest income includes coupons earned on fixed income trading securities and accrued discount and premium on discounted instruments. When loans become doubtful of collection, they are written down to their recoverable amounts and interest income is thereafter recognised based on the rate of interest that was used to discount the future cash flows for the purpose of measuring the recoverable amount. (c) Fee and commission income Fees and commissions are generally recognised on an accrual basis when the service has been provided. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts. (d) Foreign currency translation All assets and liabilities denominated in foreign currencies are translated into Latvian Lats () using the period end rates of exchange published by the Bank of Latvia. Gains and losses arising from this translation are included in the income statement for the period. The applicable rates for the principal currencies held by the Bank were as follows: 31/12/ USD = EUR = RUB = Transactions denominated in foreign currency are recorded at the rate ruling on the date of the transaction. Exchange differences arising from the settlement of transactions denominated in foreign currency are included in income statement at the time of settlement using the exchange rate ruling at that date. 11

12 ACCOUNTING POLICIES (continued) (e) Originated loans and provisions for loan impairment Loans originated by the Bank by providing money directly to the borrower (other than those that are originated with the intent of being sold immediately or in the short term which are recoded as trading assets) are categorised as loans originated by the Bank and are carried at amortised cost, which is defined as the fair value of cash consideration given to originate those loans. All loans and advances are recognised when cash is advanced to borrowers. An allowance for loan impairment is established if there is objective evidence that the Bank will not be able to collect all amounts due according to the original contractual terms of loans. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted at the original effective interest rate of loans. If the amount of the impairment subsequently decreases due to an event occurring after the write-down, the release of the provision is included in the income statement. (f) Trading securities Investments in securities are initially recognised at cost (which includes transaction costs). All securities are acquired for trading purposes and are subsequently re-measured at fair value based on bid prices quoted on listed securities or over-the-counter market prices. All gains and losses from revaluation and trading in these securities are reported in the income statement. Interest earned whilst holding trading securities is reported as interest income. Dividends received are included in dividend income. All purchases and sales of trading securities that require delivery within the time frame established by regulation or market convention ( regular way purchases and sales) are recognised at trade date, which is the date that the Bank commits to purchase or sell the asset. Otherwise such transactions are treated as derivatives until settlement occurs. (g) Sale and repurchase agreements of securities Securities sold subject to linked repurchase agreements ( repos ) are retained in the financial statements as trading securities and the counter party liability is included in balances due to credit institutions. The difference between sale and repurchase price is treated as interest and accrued over the life of repo agreements using the effective yield method. (h) Intangible assets All intangible assets are stated at historical cost less accumulated amortisation. Costs that are directly associated with purchased software licences and implementation services that carry probable economic benefit exceeding the cost and have a useful life beyond one year are recognised as intangible assets and amortised using the straight - line method over their useful lives (5 years). Where an indication of impairment exists, the carrying amount of any intangible asset is assessed and written down immediately to its recoverable amount, recognising impairment loss as an expense in the income statement. 12

13 ACCOUNTING POLICIES (continued) (i) Tangible fixed assets and depreciation Tangible fixed assets are stated at historical cost less accumulated depreciation. Depreciation is charged on a straight-line basis using the following rates based on estimated useful lives of the assets: Furniture and fittings: Computer equipment: Other fixed assets: 10% per annum 20% per annum 20% per annum Gains and losses on disposals of fixed assets are recorded in the income statement in the period of disposal. Repairs and renewals extending the useful life of the building or increasing its value are depreciated over their useful economic life while other repairs and renewals are charged directly to the income statement when the expenditure is incurred. Property, plant and equipment are periodically reviewed for impairment. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount, recognising impairment loss as an expense in the income statement. (j) Leases To date, the Bank has entered into an operating lease only. The total payments made under operating lease are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place. (k) Taxation The charge for current tax is based on computations made by management in accordance with Latvian tax legislation. Deferred taxation is provided using the full liability method for all temporary differences arising between the tax bases of assets and liabilities and their carrying value for financial reporting purposes. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted by the balance sheet date. The principal temporary differences arise from depreciation on property, plant and equipment and revaluation of investments in trading securities. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. (l) Accrued employee holiday pay The accrued employee holiday pay is estimated for the Bank s personnel based on the total number of holidays earned but not taken, multiplied by the average daily remuneration expense for the preceding 2 months including social security expense. (m) Cash and cash equivalents For the purposes of cash flow statement cash and cash equivalents comprise cash and deposits with the Bank of Latvia and deposits held with credit institutions and with original maturity of less than 3 months, net of borrowings from credit institutions with original maturity of less than 3 months. Cash flow statement is prepared using indirect method. (n) Share capital Ordinary shares with discretionary dividends are classified as equity. Dividends on ordinary shares are recognised in the period in which they are declared. 13

14 ACCOUNTING POLICIES (continued) (o) Off-balance sheet instruments In the ordinary course of business, the Bank has been involved with off-balance sheet financial instruments consisting of commitments to extend loans and advances and financial guarantees. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. The methodology for provisioning against off-balance sheet instruments is consistent with that adopted for loans and advances to customers as described in paragraph (e) above. (p) Trust activities Funds managed by the Bank on behalf of individuals, trusts and other institutions are not regarded as assets of the Bank and, therefore, are not included in the balance sheet. 14

15 1. Interest income 15 months 2002 On debt securities 430,779 On loans 65,251 On balances due from credit institutions 33,663 Other , Interest expense On balances due to credit institutions 91,117 On deposits 51,114 Other 2, , Profit on financial instruments trading, net Net profit on securities trading and foreign exchange represents the profit or loss from trading activities, fair value revaluation and revaluation of foreign currency positions, excluding net interest income or expense and commissions and fees incurred in respect of those transactions. Gains on trading with securities 278,456 Revaluation gains on securities 111,360 Gains on trading with foreign exchange 10,486 Foreign exchange revaluation gains 3, , Administrative expense Remuneration paid to the members of the Council and the Board 30,812 Remuneration paid to personnel 54,330 Social insurance payments 22,143 Set-up and maintenance costs of information systems 86,217 Office rent and maintenance 37,399 Advertising and marketing 31,567 Consulting and professional fees 25,571 Sponsorship 25,000 Communication expense 20,593 Other administrative expense 29, ,278 The average number of employees during the reporting period was 14 staff members. 15

16 5. Corporate income tax 15 months 2002 Charge for the period - Provision for deferred tax 6,764 Total corporate income tax 6,764 The Bank s tax charge on profit before tax differs from the theoretical amount that would arise using the basic tax rate as follows: Profit before tax 408,866 Tax calculated at 25% 102,217 Tax effect of: Expenses not deductible for tax purposes 6,667 Revaluation of balance sheet items (28,389) Income not assessable for tax (69,324) Effect from the reduction in tax rates (4,407) Income tax expense 6,764 Income not assessable for tax comprises profit on trading with public securities. As at 31 December 2002 the following future corporate income tax rates had been enacted into the law (which have been used for the calculation of the deferred tax liabilities): For the year % For the year 2004 and further 15% Movement in the deferred income tax account is as follows: Charge for the period 6,764 At the end of the period 6,764 Deferred tax liability: Accelerated tax depreciation 7,105 Revaluation of investments in securities 1,914 Deferred tax asset: Accrued expense (833) Tax loss carried forward (1,422) Total net deferred tax liability 6, Cash and demand deposits with the Bank of Latvia 31/12/2002 Cash 40,791 Correspondent account with the Bank of Latvia 68, ,050 The correspondent account with the Bank of Latvia is non-interest bearing. 16

17 7. Balances due from credit institutions 31/12/2002 Due from credit institutions registered in Latvia 941,653 Due from credit institution registered in a CIS country 297,000 Due from credit institutions registered in OECD area 76,202 1,314,855 At 31 December 2002, the Bank had established correspondent relationships with 5 credit institutions registered in the OECD area, 5 credit institutions registered in Latvia and 1 credit institution incorporated in a CIS country. The largest placement with a single credit institution at the end of the period was 500 thousand representing total outstanding balance held with a bank incorporated in Latvia. The effective interest rates during the reporting period were between 1.6% and 6.75%. 8. Loans and advances to non-banking customers Loans to corporate entities: Mortgages 732,588 Trade finance 433,807 Overdrafts 64,407 Loans to individuals: Mortgages 423,010 Consumer loans 169,781 Gross loans 1,823,593 Specific provisions (13,945) 1,809,648 At 31 December 2002 the top five borrowers represented 73% of the total loan portfolio. The effective interest rates during the reporting period were between 6% and 15%. Industry profile of loans issued to corporate clients as at 31 December 2002 was the following: Real estate 646,600 Trade 388,272 Manufacturing 82,065 Other 113,865 Total loans to corporate entities 1,230,802 The Latvian banking legislation requires that any credit exposure to a non-related entity or group of nonrelated entities may not exceed 25% of a credit institution s equity (see note 20 for the definition of equity under the Latvian banking legislation) and the total credit exposure to all related parties may not exceed 15% of equity. As at 31 December 2002, the Bank was in compliance with the legal requirement set for the total amount of non-zero risk credit exposure. All loans were accruing interest as at the end of the period. Movements in specific provisions for loans and advances to non-banking customers: Charge for the period 13,945 As at the end of the period 13,945 17

18 9. Trading securities with fixed income 31/12/2002 Latvian government debt securities 2,792,479 CIS region corporate debt securities 891,000 Latvian corporate debt securities 284,300 3,967,779 All securities were purchased for trading purposes and are carried at their fair value. Latvian government debt securities at net book value of 464 thousands as at 31 December 2002 have been pledged as security for short-term repo liabilities (see also note 14). Latvian government debt securities are listed on the Riga stock exchange. Other securities are not listed. The effective interest rates during the reporting period were between 5.5%% and 12.75% and Libor plus 5%. 10. Trading securities with variable income As at 31 December 2002 the Bank owned 2,052 units of a closed investment fund incorporated in Latvia with a nominal value of 100 each. These units were purchased for trading purposes. Carrying value of investment fund units as at 31 December 2002 comprise 217,119 and it is equal to their share of net assets value. These units are not listed. 11. Intangible assets Software Total Cost value Acquisitions 122, ,874 As at 31 December , ,874 Accumulated amortisation Charge for the period 17,094 17,094 As at 31 December ,094 17,094 Net book value as at 31 December , , Property and equipment Computers Office Total equipment Cost value Acquisitions 44,986 34,607 79,593 As at 31 December ,986 34,607 79,593 Accumulated depreciation Charge for the period 7,374 2,817 10,191 As at 31 December ,374 2,817 10,191 Net book value as at 31 December ,612 31,790 69,402 18

19 13. Prepayments and accrued income 31/12/2002 Deferred expense 1,539 Accrued interest 94,477 96, Balances due to credit institutions Borrowings within credit-lines 504,900 Sale and repurchase ( repo ) agreements 475, ,100 Annual interest rate on sale and repurchase agreements as at 31 December 2002 is approximately 1.6%, credit lines 1.57%. All liabilities are payable in January Fixed income securities at net book value of 464 thousands have been pledged as the security for loans received under repo agreements. See also note Deposits from the public Sector profile: Private companies 1,487,455 Private individuals 1,430,765 Non-profit institutions 14,145 2,932,365 Geographical profile: Residents 2,796,987 Non-residents 135,378 2,932,365 The effective interest rates during the reporting period were between 2.5% and 8.2%. 16. Other liabilities Amounts due for intangible assets acquired 24,328 Settlements on behalf of a closed bank 16,852 Accrued expense 11,437 Accrued employee holiday pay 4,383 Other liabilities 2,707 59, Share capital As at 31 December 2002 registered share capital of the Bank was 10,000,000. Issued and fully paid share capital as at 31 December 2002 was 3,300,000. Share capital consists of 3,300,000 ordinary shares with the nominal value of 1 per share of which 3,299,670 are shares with voting rights with the total nominal value of 3,299,670 and 330 are shares assigned to the Board without voting rights with the total nominal value of 330. The Bank s shareholders as at 31 December 2002 were as follows: Number Share A/S Bastions ZS 3,299, % Members of the Board % 3,300, % 19

20 18. Memorandum items General claims From time to time and in the normal course of business claims, against the Bank, are received from customers. Such claims have been reviewed by the management who are of the opinion that no material losses will be incurred. Litigation As at 31 December 2002 there were no legal claims against the Bank. Assets pledged There are no assets pledged as at 31 December 2002, except as mentioned on the notes 9 and 14. Contingent liability The Bank has issued a guarantee on behalf of a Latvian company in the amount of 55 thousands. This guarantee is secured by a pledge of Latvian government debt securities with the market value of 57.6 thousands as at 31 December Commitments The following table indicates the contractual amounts of the Bank s commitments to extend credit. 31/12/2002 Mortgage loans 25,000 Overdrafts 1,690 Credit lines 13,128 39,818 Commitment under operating lease agreement The Bank has entered operating lease agreement for its office premises. The future aggregate minimum lease payments under non-cancellable operating lease agreement due with less than one-year amount to 41.5 thousands and due within 2 years 41.5 thousands. Funds under trust management. The Bank has signed a trust management agreement with one of its clients, who has acquired loans issued by the Bank. The total amounts of loans under trust management is thousands. 19. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise the following balances with less than 90 days original maturity: Cash and deposits with the Bank of Latvia 109,050 Due from other banks 1,314,855 Due to other banks (980,100) 443,805 20

21 20. Capital adequacy Capital adequacy refers to the sufficiency of the Bank s capital resources to cover the credit risks and market risks arising from the portfolio of assets of the Bank and the memorandum items exposure of the Bank. The Bank s capital adequacy ratio based on the 1988 Basle Committee guidelines as at 31 December 2002 was 128.7%, which is above the minimum ratio recommended by the guidelines of 8%. In accordance with the Finance and Capital Market Commission requirements, the Bank s risk based capital adequacy ratio was 148.7% (the required minimum is 10%). Based on the requirements set forth by the Finance and Capital Markets Commission in respect to equity of banks, the Bank s equity to be utilized in the capital adequacy ratio as at 31 December 2002 has been calculated as follows: 31/12/2002 Tier 1 - paid-in share capital 3,300,000 - profit of the period 402,103 Total Tier 1 3,702,103 Equity to be utilized for the capital adequacy calculation 3,702,103 The calculation of capital adequacy according to the Finance and Capital Market Commission requirements is presented in the following table (in thousands ): Assets 31/12/2002 Risk weighting % Risk weighted assets Balance sheet items Cash and deposits with the Bank of Latvia 109 0% - Balances due from credit institutions within A zone countries 76 20% 15 Demand deposits with credit institutions within Latvia % 88 Term deposits with credit institutions within Latvia % 250 Balances due from credit institutions within B zone countries % 297 Claims on other borrowers, which are not credit institutions, central governments, central banks, municipalities, EU international development banks, excluding claims with lower risk 1, % 1,810 Property and equipment % 69 Other assets % 212 Total assets 3,515 2,741 Memorandum items Credit commitments 40 50% 20 Outstanding guarantees with zero risk weighted 55 0% - Total assets and memorandum items for capital adequacy 2,761 Capital requirement for credit risk of banking book - Capital requirement for position risk of trading book 115 Capital requirement for foreign currency exchange risk - Total capital requirement 2,876 Capital adequacy ratio 128.7% A zone comprises countries which are full members of the OECD and which had not restructured their external debt during the last 5 years and which have concluded special lending arrangements with the IMF associated with the Fund s General Arrangements to Borrow. Investments in trading securities of 4,185 thousands are included in the calculation within the position risk of the trading book. 21

22 21. Capital adequacy (continued) The capital adequacy of the Group under the Basle agreement as of 31 December 2002 is calculated as follows (in thousands ): Assets as of 31/12/2002 Weighted Risk % Risk Weighted Assets Balance sheet items Cash and deposits with the Bank of Latvia 109 0% - Balances due from credit institutions within OECD area 76 20% 15 Balances due from credit institutions within non-oecd area 1,239 20% 248 Claims on other borrowers, which are not credit institutions, central governments, central banks, municipalities, EU international development banks, excluding claims with lower risk 1, % 1,810 Property and equipment % 69 Other assets % 212 Total assets 3,515 2,354 Memorandum items Credit commitments 40 50% 20 Outstanding guarantees with zero risk weighted % - Total assets and memorandum items for capital adequacy 2,374 Capital requirement for credit risk of banking book - Capital requirement for position risk of trading book 115 Capital requirement for foreign currency exchange risk - Total capital requirement 2,489 Capital adequacy ratio 148.7% Investments in trading securities of 4,185 thousands are included in the calculation within the position risk of the trading book. 22

23 22. Financial risk management Strategy in using financial instruments By its nature the Bank s activities are principally related to the use of financial instruments including derivatives. The Bank accepts deposits from customers at fixed rates and for various periods and seeks to earn above average interest margins by investing these funds in high quality assets. The Bank seeks to increase these margins by consolidating short-term funds and lending for longer periods at higher rates whilst maintaining sufficient liquidity to meet all claims that might fall due. The Bank also trades in financial instruments where it takes positions in traded and over the counter instruments including derivatives to take advantage of short-term market movements in the debt securities markets. The Board places trading limits on the level of exposure that can be taken. Currency risk The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. The table below summarises the Bank s exposure to foreign currency exchange rate risk at 31 December Included in the table are the Bank s assets and liabilities at carrying amounts, categorised by currency (in thousands ). USD EUR Other Total Assets Cash and deposits with the Bank of Latvia Balances due from credit institutions ,315 Loans and advances to non-banking customers 433 1, ,810 Trading securities 3, ,185 Intangible and fixed assets Other assets Total assets 4,989 2, ,700 Liabilities Balances due to credit institutions Deposits from the public 1,215 1, ,932 Other liabilities Total liabilities 1,264 2, ,998 Shareholders equity 3, ,702 Total equity and liabilities 4,966 2, ,700 Memorandum items Net open position in respective currency (72) (12) (12) 1 Percent of the equity 1.9% 0.3% 0.3% 0.02% Total short position (96) Total long position 1 Total open position 97 Total open position as percent of the equity 2.6% As of 31 December 2002, the Bank was in compliance with the Law on Credit Institutions regulatory requirements requiring that open positions in any individual foreign currency may not exceed 10% of Bank s equity (see note 20 for the definition of Bank s equity under the Finance and Capital Market Commission s guidelines), and that the total foreign currency open position may not exceed 20% of the Bank s equity. 23

24 21. Financial risk management (continued) Credit risk The Bank takes on exposure to credit risk which is the risk that a counterparty will be unable to pay amounts in full when due. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Actual exposures against limits are monitored regularly. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees. Geographical concentration of assets and liabilities as at 31 December 2002 (in thousands ): Latvia OECD countries CIS countries Other Total Assets Cash and deposits with the Bank of Latvia Balances due from credit institutions ,315 Loans and advances to non-banking customers 1, ,810 Trading securities 3, ,185 Intangible and fixed assets Other assets Total assets 6, ,202-7,700 Liabilities Balances due to credit institutions Deposits from the public 2, ,932 Other liabilities Total liabilities 3, ,998 Shareholders equity 3, ,702 Total equity and liabilities 7, ,700 Memorandum items Market risk The Bank takes on exposure to market risks. Market risks arise from open positions in interest rate and currency instruments, all of which are exposed to general and specific market movements. The Board sets limits on the value of risk that may be accepted, which is monitored regularly. Liquidity The Bank is exposed to daily calls on its available cash resources from current accounts, maturing deposits and loan drawdowns. The Bank does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The Board sets limits on the minimum proportion of maturing funds available to meet such calls and on the minimum level of interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. 24

25 21. Financial risk management (continued) The table below analyses assets and liabilities of the Bank into relevant maturity groupings based on the remaining period at balance sheet date to the contractual maturity date (in thousands ). On demand Up to 1 month 1-3 months 3-6 months 6-12 months 1 5 years Over 5 years Total Assets Cash and deposits with the Bank of Latvia Balances due from credit institutions ,315 Loans and advances to nonbanking customers ,810 Trading securities , ,185 Intangible and fixed assets Other assets Total assets ,950 1,206 7,700 Liabilities Balances due to credit institutions Deposits from the public , ,932 Other liabilities Total liabilities 815 1, , ,998 Shareholders equity ,702 3,702 Total equity and liabilities 815 1, , ,006 7,700 Memorandum items Net liquidity gap (217) (260) 26 (170) (562) 3,888 (2,800) Interest rate risk The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The Board sets limits on the level of mismatch of interest rate repricing that may be undertaken, which is monitored regularly. 25

26 21. Financial risk management (continued) The table below summarises the Bank s exposure to interest rate risks. Included in the table are the Bank s assets, liabilities and memorandum items at carrying amounts, categorised by the earlier of contractual repricing or maturity dates (in thousands ). On demand Up to 1 month 1-3 months 3-6 months 6-12 months 1-5 years Over 5 years Total Assets Cash and deposits with the Bank of Latvia Balances due from credit institutions ,315 Loans and advances to nonbanking customers ,810 Trading securities , ,185 Intangible and fixed assets Other assets Total assets ,522 1,031 7,700 Liabilities Balances due to credit institutions Deposits from the public , ,932 Other liabilities Total liabilities 815 1, , ,998 Shareholders equity ,702 3,702 Total equity and liabilities 815 1, , ,006 7,700 Memorandum items Net interest sensitivity gap (217) (260) 629 (170) (562) 3,460 (2,975) 23. Related party transactions The Bank is a subsidiary of an investment company Bastions ZS. Bastions ZS owns 37% of shares of investment management company LVA Ieguldījumu Sabiedrība. The Bank has common members of management with LVA Ieguldījumu Sabiedrība. LVA Ieguldījumu Sabiedrība is the manager of the closed investment funds Vērtspapīru fonds and Naudas fonds. During the reporting period the following transactions were carried out with related parties: The Bank owns 41% of Vērtspapīru fonds units. Trading and revaluation revenue earned on these units during the reporting period comprise 12,269. Interest income on loans issued to the Board members comprises 24. Interest expense on deposits placed by the Board and Council members comprise 2,858. There are the following outstanding balances with related parties as at the end of the reporting period: 31/12/2002 Deposits from the Board and Council members (237,478) Deposits from Vērtspapīru fonds (175,000) Deposits from Naudas fonds (240,000) Mortgage loans issued to the Board members 2,944 Investments in units of Vērtspapīru fonds 217,119 26

27 24. Tax and social security payments Charges for 15 months Paid in 15 months Balance at Corporate income tax (see note 5) (739) Social insurance 27,637 27,637 - Personal income tax 17,705 17,705-45,491 46,230 (739) Amount due for overpaid corporate income tax is included in the balance sheet item Other assets. 25. Post balance sheet events After 31 December 2002 and prior to the approval date of this report there have been no events, which would have a significant effect on the assets and liabilities of the Bank. * * * 27