AS PARITATE BANKA. Consolidated and Bank Annual Report for the year ended 31 December 2006

Transcription

1 Consolidated and Annual Report for the year ended 31 December 2006

2 CONTENTS Page REPORT OF THE COUNCIL AND THE MANAGEMENT BOARD 2 THE SUPERVISORY COUNCIL AND BOARD OF THE BANK 3 STATEMENT OF THE MANAGEMENT S RESPONSIBILITIES 4 AUDITORS REPORT 5-6 FINANCIAL STATEMENTS: STATEMENT OF INCOME 7 BALANCE SHEET 8-9 STATEMENT OF CASH FLOWS STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY

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11 STATEMENT OF CASH FLOWS (all amounts are disclosed in thousands of lats) Note Cash inflow from operating activities Profit before tax Depreciation and amortization Increase in the allowance for impairment (28) Foreign exchange gain/loss (Profit)/loss from disposal of property, plant and equipment and intangible assets (Profit)/loss from revaluation of investments in subsidiaries (4) Increase in cash and cash equivalents from operating activities before changes in assets and liabilities (Increase) in loans and receivables (27 922) (27 146) (25 177) (25 469) Decrease in balances due from banks (Increase) in available for sale financial assets (43) (40) - - (Increase)/ decrease in financial assets held for trading (78) (78) Decrease in financial instruments designated at fair value through profit or loss (Increase) in deferred expenses and accrued income (474) (658) (258) (185) (Increase)/ decrease in other assets (697) (842) (341) (1) Increase/ (decrease) in balances due to banks (1 669) (1 669) Increase in customer deposits (Decrease) in financial liabilities held for trading (20) (20) - - Increase in other liabilities and provisions Increase/ (decrease) in deferred income and accrued expenses (129) (136) Increase/(decrease) in cash and cash equivalents from operating activities before tax (10 436) (10 899) (575) (819) (Corporate income tax paid) (161) (138) (18) (18) Increase/(decrease) in cash and cash equivalents from operating activities (10 597) (11 037) (593) (837) Cash flow from investing activities (Acquisition) of property, plant and equipment and intangible assets (1 471) (956) (1 098) (850) Proceeds from sale of property, plant and equipment (Acquisition) of equity investments (2) (Decrease) in cash and cash equivalents from investing activities (1 232) (792) (1 098) (852) Proceeds from issue of debt securities Increase/(decrease) in cash and cash equivalents from financing activities (Decrease) in cash and cash equivalents (3 454) (3 454) (1 691) (1 689) Cash and cash equivalents at the beginning of the year Loss from revaluation of foreign exchange (9) (9) (8) (10) Cash and cash equivalents at the end of the year

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14 1 GENERAL INFORMATION ( the ) was established on 13 August 1992, when it was incorporated in the Republic of Latvia as a joint stock company. Subject to the banking licence issued by the of Latvia on 31 July 1992 (reissued on 17 September 1998), the is engages in all types of banking activities foreseen by the Credit Institutions Law. The and subsidiaries (together the ) are presented together in these consolidated and financial statements. As at the date of financial statements, the s network of branches consists of 4 branches and 11 cash offices. The provides a wide range of services to its customers via subsidiaries. SIA DigiPro was registered with the Commercial Registry on 18 March 2003 as SIA Paritate-on-line. As of 6 July 2004, the holds 100% of SIA DigiPro shares. The primary activities of SIA DigiPro are sales of electronic products via POS terminals, and ensuring card settlements in POS terminals. In June 2004, the established SIA PARITATE LĪZINGS which is primarily engaged in financial and operating lease activities. In March 2005, the acquired 100% shares of SIA PARITATE CONSULTING. Legislation regulating the s operations The s operations are governed by the laws of the Republic of Latvia On Credit Institutions, Commercial Law, and regulations issued by the Financial and Capital Market Commission. These regulations refer to capital adequacy, minimum equity, liquidity, foreign exchange positions, credit concentration and other applicable requirements. 2 ACCOUNTING AND ASSESSMENT PRINCIPLES (1) Statement of compliance The financial statements of the have been prepared in accordance with International Financial Reporting Standards (IFRSs) and its interpretations as adopted by the European Union, and regulations of the Financial and Capital Market Commission in force as at balance sheet date. (2) Basis of preparation The accounting system of the is organized in accordance with the legislation of the Republic of Latvia, including requirements applicable to credit institutions operating in Latvia. The financial year of the coincides with the calendar year. The financial statements have been prepared under the historical cost convention or based on fair value in accordance with International Financial Reporting Standards, as adopted by the European Union. Assets and liabilities at the fair value include derivative financial instruments, financial assets and liabilities designated at fair value through profit and loss, as well as available for sale assets except those whose fair value cannot be reliably estimated. Other financial assets and liabilities and non-financial assets and liabilities are carried at amortized cost or initial cost. The accounting principles used in the preparation of the 2006 financial statements are consistent with those used in The and the have for the first time implemented Regulations on the preparation of financial statements and consolidated financial statements of banks, investment broker companies and investment management companies issued by Financial and Capital Market Commission (adopted on 24 13

15 February 2006), which has resulted in the reclassifications of such balance sheet items as due from and due to credit institutions and loans and deposits. Financial statements are prepared based on the going concern principle which represents sales of assets and fulfilment of liabilities in the course of regular banking operations. The accompanying financial statements do not contain any adjustments for the event that the is unable to continue as a going concern. The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Judgments made by management in the application of IFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year relate to loan loss impairment allowances. (3) Consolidation A subsidiary is a company being under the control of the. Control exists when the has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Subsidiary financial statements are included in consolidation as of the date when the significant influence is obtain until the date it ceases. Intra-group transactions and unrealized profit and loss arising from intra-group transactions are excluded from consolidation. Unrealized losses are eliminated similarly except that such losses are eliminated to the extent that there is no evidence of impairment. (4) Foreign currency revaluation The monetary unit used in the financial statements and the s accounting system is the lat (LVL), the monetary unit of the Republic of Latvia. Foreign exchange transactions are translated to lats (LVL) in accordance with the exchange rate set by the of Latvia on the date of the respective transaction. All assets and liabilities, including off-balance-sheet assets and liabilities denominated in foreign currencies are translated into lats in accordance with the exchange rate set by the of Latvia on the last date of the reporting period. Profit or loss relating to fluctuations in the exchange rate on assets and liabilities denominated in a foreign currency are recognized in the income statement in the period in which the fluctuation occurs. Differences in foreign exchange rates arising from foreign exchange transactions are included in the reports of the payment day in accordance with the exchange rate of the of Latvia set for the transaction date. 14

16 The exchange rates for the most significant currencies used at the year end are as follows: 31 December December USD = LVL USD = LVL EUR = LVL EUR = LVL GBP = LVL GBP = LVL SEK = LVL SEK = LVL DKK = LVL DKK = LVL (5) Financial Instruments Classification At inception, all financial instruments are classified into one of the following categories: Financial instruments designated at fair value through profit or loss are held-for-trading financial instruments and financial assets and liabilities that the initially defines as assets and liabilities designated at fair value through profit or loss. A financial instrument is classified as held for trading if is acquired or incurred principally for the purpose of selling or repurchasing in the near term or it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorised as held for trading unless they are designated as hedging instruments for hedge accounting purposes. A financial instrument may be designated at fair value through profit or loss when either: the assets or liabilities are managed, evaluated and reported internally on fair value basis; the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; or the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. Held-to-maturity financial instruments are non-derivative financial assets with fixed or determinable payments and a fixed term with respect to which the has a positive intent and ability to hold to maturity. Held-to-maturity financial instruments include certain debt securities. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than (a) those that the intends to sell immediately or in the shortterm, (b) those that the upon initial recognition designates as at the fair value through profit or loss or as available for sale; or (c) those for which the holder may not recover substantially all of its initial investments, other than because of credit deterioration. Loans and receivables include amounts due from credit institutions on term, loans and receivables from customers and other financial assets which comply to these classification criteria. Available for sale assets are financial assets classified at inception as available for sale or assets other than classified as held for trading, held to maturity or loans and receivables. Available-for-sale instruments include short term investments and certain debt and equity securities. Generally, this category is assigned by the to financial assets that are held for an indeterminate period of time and may be sold based on liquidity or interest rate needs, or as a result of changes in exchange rates and share prices. Financial liabilities carried at amortized cost represent financial liabilities of the other than financial instruments designated at fair value through profit or loss. This category includes due to credit institutions on term, customer deposits and other financial liabilities corresponding to such a classification. 15

17 All regular transactions of purchase and sales of financial assets are recognized in the balance sheet on the transaction date representing the date when the has accepted the liabilities of asset purchase or sale. Measurement Financial instruments are initially measured at fair value, including transaction costs. Subsequent to initial measurement, all financial assets and liabilities designed at fair value through profit or loss and all available for sale financial assets are measured at fair value except those instruments which have no quoted market price in an active market or for which no reliable fair value measurement is possible. Such instruments are carried at cost less transaction costs and impairment. All non-trading financial liabilities, originated loans and receivables and held-to-maturity assets are measured at amortized cost in accordance with the effective interest rate method. All instruments are subject to revaluation when impaired. Profit or loss arising from changes to the fair value of financial instruments designated through profit and loss are recognized in the income statement. Profit or loss arising from changes to the fair value of available-for-sale financial instruments is recognized through equity. Derecognition Recognition of a financial asset is discontinued when the has lost control over the rights connected with respective financial instruments. Such control is lost if the realises the rights to benefits specified in the contract, the rights expire, or the surrenders those rights. A financial liability is derecognized when it is extinguished. (6) Income and expense recognition All significant income and expense categories, including interest income and expenses, are recognized on an accrual basis. Interest income and expenses are recognized in the income statement based on the effective interest rate of on the asset/liability. Interest income and expenses include discount or premium amortization or other difference between the book value of an interest bearing instrument and its value on the maturity date calculated based on the effective interest rate method. Recognition of interest income is discontinued in the event when the recoverability of interest or the loan principal becomes uncertain. Accrued interest income is calculated for standard and watch categories of loans. Fees and commissions (excluding commissions for long-term loans issued) are accounted for when collected or incurred. Income and expense that refer to the accounting period are reflected in the income statement regardless of the date of receipt or payment. Commissions for long-term loans issued are recognized according to effective interest method. Income from finance leases is recognized over the period of lease on the net investment basis which reflects a constant periodic rate of return on the net investment amount. Income from operating leases are recognized over the entire period of lease on a straight line basis. (7) Investment in subsidiaries Investments in subsidiaries are carried at cost in the s financial statements. The recognizes income from the investment only to the extent that the receives distributions from accumulated profits of the subsidiary arising after the date of acquisition. 16

18 (8) Allowance for loan loss and other assets Loans are carried at cost, i.e. the amount of issued and outstanding principal less allowance for bad and doubtful loans. Allowances are recognized based on the loan analysis performed on a regular basis. Allowances recognized or cancelled during the reporting year are disclosed in the income statement. The book value of s assets other than deferred tax asset is tested for impairment on each balance sheet date. If impairment indications exist, the recoverable amount of the asset is determined. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. All impairment losses are recognised in the profit and loss statement. (9) Calculation of the recoverable amount The recoverable amount of the s investments in held-to-maturity securities and liabilities is determined as the present value of future cash flows discounted at the effective interest rate. The recoverable amount of financial instruments designated at fair value through profit and loss, and available for sale investments is their fair value. Recoverable amounts of other assets is the largest of their selling price or value in use. The value in use is calculated by discounting the future cash flows by their present value at a pre-tax discount rate which reflects the current market assessment of time value of money and risks characteristic of this asset. The recoverable amount of assets that do not generate cash inflows that are largely independent from those of other assets is determined for the cash-generating unit to which the asset belongs. (10) Impairment of non-financial assets The carrying amounts of the s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, recoverable amount is estimated at each reporting date. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit is the smallest identifiable asset and groups. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of the assets in the unit (group of units) on a pro rata basis. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In respect of assets, other than goodwill, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognised. (11) Interest bearing liabilities Interest bearing loans are initially recognized at fair value less any transaction costs. Subsequent to initial recognition such loans are carried at amortized cost with any excess over the repurchase value being recognized in the income statement over the entire loan period. Upon redeeming or repayment before maturity, the difference between the amount payable and book value is recognized in the income statement. 17

19 (12) Property, plant and equipment Items of property, plant and equipment are measured at acquisition cost including direct costs, net of accumulated depreciation. Depreciation is calculated on a straight-line basis. Based on the useful life of the respective item of property, plant and equipment, the following annual depreciation rates are applied: Furniture and equipment 20 % Computers and equipment 33 % Network equipment and servers 25 % Software 50 % Vehicles 20 % Gains and losses on disposals of property, plant and equipment are recognised in the income statement in the period of disposal. Repair and maintenance costs are charged to the income statement as incurred. Capital repairs of property, plant and equipment are added to property, plant and equipment at cost. Depreciation methods, useful lives and recoverable amounts are reassessed annually. (13) Taxes Corporate income tax is calculated in accordance with Latvian tax regulations in the amount of 15% (2005:15%) of the taxable profit reported for the taxation period. Deferred tax is provided using the balance sheet method, providing for temporary between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax recognized is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. The principal temporary differences arise from the differing rates and methods used for accounting and tax depreciation on property, plant and equipment, accruals and collective portfolio impairment loss. Deferred tax assets are only recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. (14) Cash and cash equivalents Cash and cash equivalents comprise cash and deposits with the of Latvia and other credit institutions with original maturity of less than 3 months less balances due to the of Latvia and credit institutions with original maturity of less than 3 months. The balances under sale and repurchase agreements are not included in the cash and cash equivalents. (15) Leases Finance lease A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred. When assets are leased out under a finance lease, the net investment in finance lease is recognized as a receivable. The net investment in finance lease represents the difference between the gross receivable and the unearned finance income. Operating lease An operating lease is a lease other than a finance lease. 18

20 Assets leased out an operating lease, are presented within property, plant and equipment in the balance sheet, less accumulated depreciation. They are depreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment. (16) Segment reporting A segment is a distinguishable component of the that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. (17) New standards and interpretations not yet effective A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2006, and have not been applied in preparing these financial statements: IFRS 7 Financial Instruments: Disclosures and the Amendment to IAS 1 Presentation of Financial Statements: Capital Disclosures require extensive disclosures about the significance of financial instruments for an entity's financial position and performance, and qualitative and quantitative disclosures on the nature and extent of risks. IFRS 7 and amended IAS 1, which become mandatory for the s 2007 financial statements, will require extensive additional disclosures with respect to s financial instruments and share capital. IFRIC 7 Applying the Restatement Approach under IAS29 Financial Reporting in Hyperinflationary Economies addresses the application of IAS 29 when an economy first becomes hyperinflationary and in particular the accounting for deferred tax. IFRIC 7 which becomes mandatory for the s 2007 financial statements, is not expected to have any impact on the financial statements. IFRIC 8 Scope of IFRS2 Share-based Payment addresses the accounting for share-based payment transactions in which some or all of goods or services received cannot be specifically identified. IFRIC 8 will become mandatory for the s 2007 financial statements, with retrospective application required. The has not yet determined the potential effect of the interpretation. IFRIC 9 Reassessment of Embedded Derivatives requires that a reassessment of whether embedded derivative should be separated from the underlying host contract should be made only when there are changes to the contract. IFRIC 9, which becomes mandatory for the s 2007 financial statements, is not expected to have any impact on the financial statements. IFRIC 10 Interim Financial Reporting and Impairment prohibits the reversal of an impairment loss recognised in a previous interim period in respect of goodwill, an investment in an equity instrument or a financial asset carried at cost. IFRIC 10 will become mandatory for the s 2007 financial statements, and will apply to goodwill, investments in equity instruments, and financial assets carried at cost prospectively from the date that the first applied the measurement criteria of IAS 36 and IAS 39 respectively. IFRS 8 Operating Segments requires segment disclosure based on the components of the entity that management monitors in making decisions about operating matters. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The expects the new Standard to not significantly alter the presentation and disclosure of its operating segments in the financial statements. IFRIC 11 IFRS 2 and Treasury Share Transactions requires a share-based payment arrangement in which an entity receives goods or services as consideration for its own equityinstruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments needed are obtained. It also provides guidance on whether share-based payment arrangements, in which suppliers of goods or services of an entity are provided with equity instruments of the entity s parent, should be accounted for as cash-settled or equity-settled in the entity s financial 19

21 statements. IFRIC 11 is not expected to have any impact on the financial statements. IFRIC 12 Service Concession Arrangements provides guidance to private sector entities on certain recognition and measurement issues that arise in accounting for public-to-private service concession arrangements. IFRIC 12 is not relevant to the s operations as the has not entered into any service concession arrangements. 3 RISK MANAGEMENT Within the framework of internal control system, the has developed and follows the Risk Management Policy or fundamental principles which are defined below: 1) general guidelines observed by the in its activities aimed at decreasing all types of risks which may lead to losses; 2) description of risk transactions and other risks to which the is exposed; 3) general daily control of risk transactions and management of transaction related risks. The Risk Management Policy describes and determines the aggregate of measures to ensure that the possibility to suffer losses is minimised in the event the invested resources are not repaid in due time or the suffers other losses. The Board and the Council of the have approved the Risk Management Policy. The Board and the Council of the have also approved all other policies listed below related to risk management. The s Board supervises the Risk Management System, but the structural units of the respective sectors are responsible for the daily activities. The Risk Management System controlled by the Internal Audit Division on a regular basis is being continuously developed pursuant to the development of the and activities in the financial markets. Interest Rate, Liquidity and Foreign Currency Risk The is exposed to interest rate risk originating from the possible changes in interest rates for the s domestic and foreign assets and liabilities. The control and management of interest rate risk is defined in the Interest Risks Management Policy. The control and management of interest rate risk is the responsibility of the Financial Market Department. The Financial Market Department co-ordinates the activities of structural units related to the management of interest rate risk and plans the activities of the in this respect. The control and management of liquidity risk is defined in the Liquidity Management Policy elaborated by the, which describes the risks to the s ability to redeem legally valid claims of its customers and creditors. For the purposes of control and management of foreign currency risk, the has developed the Currency Risk Management Policy. The Financial Market Department ensures monitoring in order to avoid losses incurred by changes to currency exchange rates. The Finance, Accounting and Analysis Department constantly supervises whether the established restrictions on foreign currency positions are observed. Credit risk Management and control of credit risk is defined in the Credit Policy of the. Credit risk is the risk of debtors not meeting their liabilities in due time or in full amount. The Board of the and the Credit Committee manage credit risk, whereas the Loans Department constantly monitors the related procedures and limits. 20

22 Other Operational Risks There are also other risks identified in the operation of the, which may result in unexpected losses. The reasons of such risks may be, for example, human mistake or fraud, disturbances in the operation of information systems, insufficient internal control and procedures. The s Board and the respective structural units of the perform supervision and control of the aforementioned risks. The maintains the resources necessary for ensuring operational continuity. 4 INTEREST INCOME Balances due from credit institutions Loans Investments in securities Other interest income INTEREST EXPENSE Customers deposits Due to credit institutions and the of Latvia Issued debt securities Other interest expenses COMMISSION AND FEE INCOME Current account servicing Asset management fees Other commission income COMMISSION AND FEE EXPENSE Current account servicing Commission fee for credit card servicing Other commission expenses

23 8 NET INCOME FROM FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE Gain from securities carried at fair value through profit and loss NET FOREIGN EXCHANGE GAINS Profit from foreign exchange transactions Loss from revaluation of foreign currency (9) (9) (8) (10) 10 OTHER OPERATING INCOME Income from electronic services (SIA DigiPro) Income from seminars and conferences (SIA PARITATE CONSULTING) Lease of fixed assets (SIA PARITATE LĪZINGS) Other operating income ADMINISTRATIVE EXPENSES Salary of members of the Council and the Board Remuneration to staff Social taxes Advertisement and marketing Office maintenance and redecoration Communications and post Transportation and business trips Professional services Legal services Staff training Other operating expenses In 2006, the average number of staff was 297 (2005: 184)

24 12 ALLOWANCE FOR IMPAIRMENT Loans Other assets Total Allocation of impairments losses, as of 31 December Increase in the allowance for doubtful debts Recovery of prior period allowances for doubtful debts (86) (3) (89) Write-off of the allowance for doubtful debts (8) - (8) Allocation of impairments losses, as of 31 December Loans Allocation of impairments losses, as of 31 December Increase in the allowance for doubtful debts 421 Recovery of prior period allowances for doubtful debts (58) Write-off of the allowance for doubtful debts (8) Allocation of impairments losses, as of 31 December CORPORATE INCOME TAX Corporate income tax for the reporting year Deferred tax Total tax expense The table below discloses the difference between the actual and theoretical profits tax using the base rate of 15%. Profit before taxation Expected tax calculation at tax rate 15% Adjustment for expenses not deductible for tax purposes Adjustment for gain from revaluation of public securities (3) (3) (1) (1) Prior year deferred tax not provided Adjustment for foreign withholding tax (5) (5) 5 5 Effect of tax losses not recognized prior years - - (3) - Total tax expense

25 14 CASH AND BALANCES ON DEMAND WITH THE BANK OF LATVIA Cash Balances on demand with the of Latvia Balances with the of Latvia represent cash on the correspondent account used for clearing purposes and to comply with the requirement for obligatory reserves. In accordance with regulations set by the Financial and Capital Market Commission, the 's cash and current account balance with the Central of Latvia should not be less than the required reserves calculated on basis of the average monthly customer deposits. The was in compliance with this requirement in DEMAND DEPOSITS WITH CREDIT INSTITUTIONS Due to Latvian credit institutions Due from credit institutions registered in OECD countries Due to credit institutions registered in other countries Correspondent accounts include amounts due from Deutche (ers Trust) amounting to USD 170 thousand or LVL 91 thousand which are not included in the calculation of cash and cash equivalents due to such amounts being frozen at 31 December The 's management does not consider the frozen accounts at risk since the frozen customer accounts in deposits exceed the blocked amount in the correspondent account with Deutche (ers Trust) of USD 189 thousand (or LVL 101 thousand). 16 TERM DEPOSITS DUE FROM CREDIT INSTITUTIONS Balances due from Latvian credit institutions Due from the of Latvia Due from OECD credit institutions Due from non-oecd credit institutions Total due from credit institutions and the of Latvia Total held-to-maturity investments Concentration of amounts due from credit institutions As at 31 December 2006, the had amounts due from four credit institutions (2005: 3) where each separate receivable exceeded 10% of deposits and balances in those banks and other credit institutions in total. The gross value of these balances due from credit institutions as at 31 December 2006 was LVL 19,347 thousand (2005: LVL 19,035 thousand). 24

26 17 LOANS AND RECEIVABLES Allocation of loans: (a) by the term of the loan: Until one year More than one year Specific allowances (541) (420) (93) (65) (b) by type of borrower Private enterprises Private individuals Specific allowances (541) (420) (93) (65) (c) by the type Commercial loans Consumer loans Loans to staff Mortgage loans Other Specific allowances (541) (420) (93) (65) (d) by geographic segmentation of the loans: Residents of Latvia Residents of OECD countries Residents of other countries Specific allowances (541) (420) (93) (65) The average loan interest rates in 2006 and 2005 were 7% and 9% respectively. 25

27 18 FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING Derivative financial instruments Notional amount Fair value Assets liabilities Forward currency exchange agreements Total FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS Debt securities and other fixed income securities Central government bonds Total financial instruments at fair value through profit or loss AVAILABLE FOR SALE FINANCIAL ASSETS Investments in non-fixed income securities SWIFT shares Eko Bloks SIA Total available-for-sale financial assets INVESTMENT IN SUBSIDIARIES As at 31 December 2006 and 2005, the had investments in: Holding % LVL 000 Holding % SIA PARITATE LĪZINGS SIA DigiPro SIA PARITATE CONSULTING

28 22 INTANGIBLE ASSETS Historical cost 31 December Additions December Accumulated amortization 31 December Charge for the period December Balance at 31 December December Historical cost 31 December Additions 1 Reclassifications December Accumulated amortization 31 December Charge for the period December Balance at 31 December December Intangible assets include software licenses. 27

29 23 PROPERTY, PLANT AND EQUIPMENT Leasehold improvements Vehicles Office equipment and computers Construction in progress Prepayments Total Historical cost 31 December Additions Disposals (1) (36) (114) (56) (111) (318) Reclassifications (374) (165) - 31 December Accumulated amortization 31 December Charge for the period Disposals (2) (77) (79) 31 December Balance at 31 December December Leasehold improvements Vehicles Office equipment and computers Construction in progress Prepayments Total Historical cost 31 December Additions Disposals - - (74) (55) (109) (238) Reclassifications (355) (157) - 31 December Accumulated amortization 31 December Charge for the period Disposals - - (74) - - (74) 31 December Balance at 31 December December

30 24 DEFERRED EXPENSES AND ACCRUED INCOME Prepayments Deferred income Prepaid expenses OTHER ASSETS Materials Stock Trade accounts receivable Security deposit Other Impairment allowances - - (3) - 26 DUE ON DEMAND TO CREDIT INSTITUTIONS Credit institutions registered in Latvia Credit institutions registered in OECD countries Credit institutions registered in non-oecd countries Concentration of amounts due to credit institutions As of 31 December 2006 the had one balance due to a credit institution (2005: 3), which comprised more than 10% of due to credit institutions. The gross amount of such payables as at 31 December 2006 was LVL 11,309 thousand (2005: LVL 3,201 thousand). 29

31 27 DEPOSITS AND BALANCES DUE ON TERM TO CREDIT INSTITUTIONS Demand deposits Residents: State companies Private enterprises Private individuals Non-residents: Residents of OECD countries Residents of non-oecd countries Total demand deposits Term deposits Residents: State companies Private individuals Private enterprises Non-residents: Residents of OECD countries Residents of non-oecd countries Credit institutions registered in non-oecd countries Total term deposits Total deposits and balances due on term to credit institutions The maturity structure of customer deposits as per agreement term at 31 December 2006 was as follows: Demand deposits Term deposits: to 3 months from 3 to 6 months from 6 months to one year more than one year Total demand and term deposits The average deposit interest rates in 2006 and 2005 were 3.47% and 4.66% respectively. During each reported period 2006 and 2005 the average interest rate on overnight deposits included in current deposit group was 1.9 % and 2.5%, respectively. 30

32 28 ISSUED MORTGAGE BONDS As at 31 December 2006, the s and had LVL 8,375 thousand of bonds outstanding, including accrued interest of LVL 37 thousand. On 15 May 2006, the issued 3 year mortgage bonds for EUR 4,865 thousand (LVL 3,419 thousand) with accrued interest of LVL 24 thousand. The coupon rate of these bonds is EURIBOR + 1.5%. As at 31 December 2006 coupon rate of these bonds was 5.125%. On 15 December 2006, the issued 5 year mortgage bonds for EUR 7,000 thousand (LVL 4,920) with accrued interest of LVL 13 thousand. The coupon rate of these bonds is EURIBOR + 1.6%. As at 31 December 2006 coupon rate of these bonds was 5.37%. 29 DEFERRED INCOME AND ACCRUED EXPENSES Other accrued expenses PROVISIONS Provision for vacations Other liabilities TAX LIABILITIES Corporate income tax payable Deferred tax liabilities Changes in deferred tax in 2006 and 2005 were as follows: Deferred tax liability at the beginning of the year Increase of deferred tax liability during the year Deferred tax liability at the end of the year

33 31 TAX LIABILITIES (CONTINUED) The temporary differences that increase the deferred tax assets (liabilities) as at 31 December 2006 were as follows: Provision for vacations Collective impairment allowance Tax losses carried forward Provision for bonuses Temporary deductible (taxable) differences related to property, plant and equipment (100) (66) (79) (48) Deferred tax (62) (47) (47) (39) 32 OTHER LIABILITIES Unrealised loss from SPOT transactions Amounts in clearing Trade accounts payable Other liabilities PAID-UP SHARE CAPITAL Share capital consists of common shares entitling equal rights to dividends, liquidation quota and voting rights at the shareholders meeting. Nominal value per share is LVL 1. All shares are fully paid up. The largest shareholder of the is Commercial Privat, (Ukraine). Shareholders as at 31 December 2006 are as follows: Shareholder Country Shares LVL Holding, % Voting rights Closed Joint Stock Commercial Privat Ukraine With voting rights M. Esterovs USA With voting rights J. Aleksandrova (Skvorcova) Latvia With voting rights A. Laško Latvia With voting rights V. Bīriņš Latvia With voting rights O.Trubakov Ukraine With voting rights O. Mekekechko Ukraine With voting rights V. Beļskis Latvia With voting rights R. Pētersons Latvia With voting rights

34 34 CASH AND CASH EQUIVALENTS / Cash and due from the of Latvia Deposits in other credit institutions with maturity less than three months Due to other credit institutions with maturity less than three months (13 499) (13 499) (1 710) (1 710) FUNDS UNDER TRUST MANAGEMENT Assets under management Loans to residents of OECD countries Liabilities under management Deposits of residents of other countries As at 31 December 2006, the held and managed customers funds of LVL 4,133 thousand and invested in fiduciary loans of LVL 4,133 thousand at customers direction. These are not the assets and are not recognized in the balance sheet. The is not exposed to risks relating to such placements, which the ultimate customer bears. 33

35 36 RELATED PARTY TRANSACTIONS Related parties are shareholders having a significant influence over the, companies which they can control, members of the Council and Board, senior management, their close relatives and companies which they can control, as well as associated companies Annual interest 2005 Annual interest Assets rate rate Loans to the members of the Board and Council % % Privat balance on correspondent account Privat term deposits % % Funds in settlement (Visa, Privatmoney) Moskomprivat bank deposits Annual interest 2005 Annual Liabilities rate interest rate Due to Privat loro account Privat term deposits % % As at 31 December 2006 the had the following transactions with subsidiaries: Assets 2006 Annual interest rate 2005 Annual interest rate Loan to SIA PARITATE LĪZINGS % % Loan to SIA DigiPro % % Loan to SIA PARITATE CONSULTING 5 4% 33 4% Annual interest rate Annual interest rate Liabilities Due to SIA PARITATE LĪZINGS Due to SIA DigiPro Due to SIA PARITATE CONSULTING Income from related party transactions Interest income from SIA PARITATE LĪZINGS Interest income from SIA DigiPro 17 1 Interest income from SIA PARITATE CONSULTIG 1 3 All transactions with related parties have been carried out at an arm s length basis

36 37 CURRENCY ANALYSIS OF ASSETS AND LIABILITIES In accordance with the Financial and Capital Market Commission regulations, total open position in foreign currencies at 31 December 2006 should not exceed 20% of equity determined by the Financial and Capital Market Commission, and the open position in any individual currency should not exceed 10%. The LVL equivalent of monetary assets and liabilities as of 31 December 2006 according by the currencies in which they are denominated is as follows: Liabilities and equity Position arising from foreign exchange forward transactions % of capital and reserves Open Assets position USD (797) EUR (387) (5.69) GBP (40) (0.59) RUB Other Total (99) (1.46) Total long position Total short position (427) (6.28) Total open position LVL (57 787) (57 912) Total (99) (1.46) Liabilities and equity Position arising from foreign exchange forward transactions Open % of Assets position equity USD (797) EUR GBP (40) (0.61) RUB Other Total Total long position Total short position (40) (0.61) Total open position LVL (59 240) (58 930) Total

37 37 CURRENCY ANALYSIS OF ASSETS AND LIABILITIES (CONTINUED) In accordance with the Financial and Capital Market Commission regulations, total open position in foreign currencies (Euro exempted) at 31 December 2005 should not exceed 20% of equity determined by the Financial and Capital Market Commission, and the open position in any individual currency should not exceed 10%. The LVL equivalent of monetary assets and liabilities as of 31 December 2005 according by the currencies in which they are denominated is as follows: Assets Liabilities and equity Position arising from foreign exchange forward transactions Open position % of capital and reserves USD EUR (4 880) GBP (5) (0.09) RUB Other Total Total of the long position Total of the short position (5) (0.09) Total open position LVL (52 459) (56 509) Total Position arising from foreign exchange Assets Liabilities and equity forward transactions Open position % of equity USD EUR (4 880) GBP (5) (0.09) RUB Other Total foreign currency Total of the long position Total of the short position (5) (0.09) Total open position LVL (48 730) (52 800) Total

38 38 ASSETS AND LIABILITIES BY GEOGRAPHIC REGION The assets and liabilities as of 31 December 2006 by geographic region is as follows: OECD countries Non- OECD countries Total Latvia OECD countries Non- OECD countries Latvia Total Assets Cash and balances on demand with the of Latvia Demand deposits with credit institutions Held-to-maturity investments Loans and receivables Shares Derivative financial instruments Financial instruments designated at fair value through profit or loss Investments in subsidiaries Intangible assets Property, plant and equipment Deferred expense and accrued income Other assets Liabilities Due on demand to credit institutions Derivative financial instruments Deposits and balances due on term to credit institutions Deferred income and accrued expenses Bonds issued Provisions Tax liabilities Other liabilities Capital and reserves Off-balance-sheet items The s accounting system does not provide a more detail allocation of segments. 37