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

for the six-month period ended 30 June 2012

CONTENTS Page Management Report 3-4 The Council and the Board 5 Statement of Management s Responsibility 6 Independent Auditors Report 7 Interim Condensed Financial Statements of the Bank: Interim Condensed Statement of Comprehensive Income 8 Interim Condensed Statement of Financial Position 9 Interim Condensed Statement of Changes in Equity 10 Interim Condensed Statement of Cash Flows 11 Notes to the Interim Condensed Financial Statements 12 29 2

MANAGEMENT REPORT Dear customers, cooperation partners and shareholders! The management of AS Latvijas pasta banka (hereinafter also the Bank) is proud to announce that the Bank has closed the first half of the year 2012 and successfully retained and enhanced its position and business profile on the local financial market. 2012 started with positive trends in the economy; however, the external environmental risks remain related to future development in the euro zone. Because of decrease in economic growth of main trade partners of Latvia, the Latvian export growth may slow down and its positive effect on the economy as a whole can diminish. Latvian economic development is ensured not only by export but also by demand in the domestic market. The increase of private consumption is determined by gradual improvement of labour market employment growth and labour wage increase. The performance of the Bank as a relatively new member of the local financial market is certainly assessed as positive and aproves the Bank's ability to meet challenges and operate in all conditions. The core values of the Bank have not changed, rather they are supplemented with safety, namely, honesty honest and fair attitude to all Bank`s clients, professionalism professional team, responsibility high level of responsibility for decisions made, loyalty equal treatment to all the Bank s clients and colleagues, quality convenient and qualitative Banking services to clients and competitiveness of the Bank s services, flexibility the ability to adjust to the needs of the customers, safety the clients can be sure about their deposits and information provided in cooperation with the Bank. To guarantee the safety of the Bank, in the beginning of 2012 the additional subordinated investment in amount of LVL 352 thousands was made. The range of banking services is constantly extended, maintaining quality, as indicated by the consistently and organically growing number of customers. The Bank fully complies with all regulatory requirements. The capital adequacy ratio of the Bank is 30.55% and it exceeds the minimum rate set by the Financial and Capital Market Commission of the Republic of Latvia (FCMC). The liquidity ratio is 143.03%, which also exceeds the FCMC minimal requirement of 30% for several times. Based on the above mentioned, it appears that the Bank has all the abilities to successfully continue the implementation of its operational strategy. Also in the future the important role in the Bank s strategy is to be played by the administration of wealthy client`s funds and products that meet the individual needs of our clients. 3

MANAGEMENT REPORT (continued) As priority in the Bank s further strategy should be payment card issuing and acceptance in POS terminals and Internet, collaborating with wide-known organizations such as MasterCard, Visa, Tieto, First Data, Global Payment. The Bank's management is constantly monitoring the rapidly changing financial market conditions being aware of their responsibility to clients and potential risks which are evaluated in detail and administrated following prudent precaution principles, maintaining moderate level of general risks. The Bank is able to be a reliable partner for clients economic and personal activities, maintaining stable and professional approach to cooperate on behalf of further development. We thank AS Latvijas pasta banka customers for their loyalty and look forward to further common and beneficial business in the future! Best regards, Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 8 August 2012 4

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

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

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CONDENSED STATEMENT OF COMPREHENSIVE INCOME Notes Six-month period ended 30.06.2012 30.06.2011 Interest and similar income 6 1 106 802 Interest and similar expense 6 (443) (251) Net interest income 663 551 Commission and fee income 7 1 009 430 Commission and fee expense 7 (338) (214) Net commission and fee income 671 216 Net trading income 45 70 Other income 10 25 Net operating income 1 389 862 Administrative expense 8 (512) (379) Amortisation/ depreciation (41) (43) Other expense (150) (125) Operating expense (703) (547) Net provisions for doubtful assets (1) (339) Profit / (loss) before tax 685 (24) Corporate income tax 9 (104) 35 Net profit for the period 581 11 Revaluation reserve 12 (70) Total comprehensive income / (loss) 593 (59) Profit per share (LVL) 0.09 0.01 The accompanying notes on pages 12 to 29 form an integral part of these interim condensed financial statements. The Bank s financial statements set out on pages 8 to 29 were approved by the Board on 8 August 2012 and by the Council on 8 August 2012. Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 8 August 2012 8

CONDENSED STATEMENT OF FINANCIAL POSITION Notes ASSETS Cash and balances with the Bank of Latvia 10 2 670 2 658 Due from credit institutions 11 9 002 14 944 Available-for-sale financial assets 13 6 534 3 506 Derivative financial instruments - 95 Loans and receivables 12 7 259 7 095 Held-to-maturity financial investments 13 22 427 16 056 Current tax assets - 1 Deffered tax assets 9 32 136 Property, plant and equipment 33 44 Intangible assets 383 405 Other assets 326 324 Prepaid expense and accrued income 31 40 Total assets 48 697 45 304 LIABILITIES Due to credit institutions 15 4 204 1 633 Liabilities at amortised cost 38 512 38 209 Deposits from customers 16 37 106 37 155 Subordinated liabilities 17 1 406 1 054 Derivative financial instruments 8 73 Other liabilities 111 97 Deferred income and accrued expense 106 129 Total liabilities 42 941 40 141 EQUITY ATTRIBUTABLE TO THE BANK S SHAREHOLDERS Paid-in share capital 18 6 200 6 200 Asset revaluation reserve 13 (51) (63) Accumulated loss (974) (974) Profit for the period 581 - Total equity attributable to the Bank s shareholders 5 756 5 163 Total equity 5 756 5 163 Total liabilities and equity 48 697 45 304 The accompanying notes on pages 12 to 29 form an integral part of these interim condensed financial statements. The Bank s financial statements set out on pages 8 to 29 were approved by the Board on 8 August 2012 and by the Council on 8 August 2012. Biomins Kajems Chairman of the Council Riga, 8 August 2012 Boriss Ulmans Chairman of the Board 9

CONDENSED STATEMENT OF CHANGES IN EQUITY Bank Paid in share capital Fair value revaluation reserve of availablefor-sale financial assets Retained earnings / (Accumulated loss) Total Balance as at 31 December 2010 5 000 (23) 179 5 156 Dividends paid - - (179) (179) New share issue 200 - - 200 Total comprehensive loss - (70) 11 (59) Balance as at 30 June 2011 5 200 (93) 11 5 118 New share issue 1 000 - - 1 000 Total comprehensive loss - 30 (985) (955) Balance as at 31 December 2011 6 200 (63) (974) 5 163 Total comprehensive income - 12 581 593 Balance as at 30 June 2012 6 200 (51) (393) 5 756 The accompanying notes on pages 12 to 29 form an integral part of these interim condensed financial statements. The Bank s financial statements set out on pages 8 to 29 were approved by the Board on 8 August 2012 and by the Council on 8 August 2012. Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 8 August 2012 10

CONDENSED STATEMENT OF CASH FLOWS Six-month period ended 30.06.2012 30.06.2011 CASH FLOWS FROM OPERATING ACTIVITIES Profit / (loss) before tax 685 (24) Amortisation/ depreciation 41 43 Increase in provisions for doubtful debts 1 339 Unrealised foreign exchange gain (51) (18) Increase in cash and cash equivalents from operating activities before changes in assets and liabilities 676 340 (Increase) / decrease in balances due from credit institutions (1 272) 3 424 Increase in loans and receivables (161) (617) Decrease / (increase) in other assets 103 (135) Increase in balances due to credit institutions 54 397 (Decrease) / increase in deposits from customers (49) 6 841 Decrease in other liabilities (74) (4) Cash (used in) / generated from operating activities (723) 10 246 CASH FLOWS USED IN INVESTING ACTIVITIES Purchase of property, plant and equipment (7) (8) Increase in held-to-maturity financial investments (6 299) (2 285) (Increase) / decrease in available-for-sale financial assets (3 093) 2 082 Cash and cash equivalents used in investing activities (9 399) (211) CASH FLOWS FROM FINANCING ACTIVITIES Issue of share capital - 200 Dividends paid - (179) Decrease in subordinated liabilities (527) - Increase in subordinated liabilities 879 - Cash and cash equivalents generated from financing activities 352 21 Net cash flows for the period (9 770) 10 056 Cash and cash equivalents at the beginning of the period 15 227 1 831 Foreign exchange gain 51 42 Cash and cash equivalents at the end of the period 5 508 11 929 The accompanying notes on pages 12 to 29 form an integral part of these interim condensed financial statements. The Bank s financial statements set out on pages 8 to 29 were approved by the Board on 8 August 2012 and by the Council on 8 August 2012. Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 8 August 2012 11

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 2008. The registered office of AS Latvijas pasta banka is at Katlakalna iela 1, Riga, LV-1073, Latvia. The Bank has the head office and three customer service centres. The core business activity of the Bank comprises local and international payments, attraction of deposits, issue and servicing of payment cards, issue of loans, securities and foreign exchange transactions. According to the Commercial Law of the Republic of Latvia, the general shareholders meeting has a right and duty to decide on the approval of the annual report. NOTE 2 BASIS OF PREPARATION (a) Statement of compliance These interim condensed financial statements of AS Latvijas pasta banka are prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union. These interim condensed financial statements do not include all the information and disclosures required in the complete financial statements and should be read in conjunction with the Bank s financial statements for the financial year ended 31 December 2011. (b) Going concern The financial statements are prepared on the going concern basis. The Bank s management have analysed the Bank s financial position, availability of financial resources as well as the impact of the financial crisis on the future operations of the Bank. Bank operates using development strategy based on an assumption that the initial Pasta Banka project is not supported and the initial development strategy cannot be implemented. This strategy will be applied until it is confirmed legally that the initial strategy is or is not feasible. The Bank s strategy is aimed at creating a bank servicing certain customers and developing customised products and service technologies. Monitoring of the Bank s capital sufficiency is performed by: - the analysis in accordance with the Bank's minimum capital requirement calculation procedure set out in the reports at least once a month; - evaluating the significant risks to the Bank to cover the amount of capital required and the amount of capital available for 3-year planning period at least once a year and every month, comparing to the actual Bank's financial performance with planned; - performing an active assessment of the quality and the required provision calculations at least once a quarter. In long-term capital crisis, the Bank's capital crisis management plan predicts to use its capital reserves, attract subordinated deposits or to ask shareholders to raise the Bank's capital. The uncertainty in financial markets continues, resulting in increased government securities impairment risk and likelihood that additional capital might be needed, therefore on 23 March 2012 the Bank has received the Bank's shareholders and related parties supporting evidence 12

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

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

Annual improvements 2011 (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU). The Bank evaluates the potential effect, if any, of these new standards and interpretations to the financial statements. NOTE 4 RISK MANAGEMENT All the aspects of the Bank s risk management objectives and policies are consistent with those disclosed in the Bank s financial statements for the period ended 31 December 2011. NOTE 5 JUDGMENTS AND ESTIMATES The preparation of interim financial statements requires the management to make judgments, estimates and assumptions that affect the adoption of accounting policies, the reported amounts of assets, liabilities, income and expense. Accordingly, actual results could differ from those estimates. The significant areas of judgment regarding the adoption of accounting policies and the key sources of estimate uncertainty used in preparing these interim condensed financial statements are consistent with those used in the financial statements for the financial period ended 31 December 2011. NOTE 6 NET INTEREST INCOME Six-month period ended 30.06.2012 30.06.2011 Interest income Due from credit institutions 80 84 Loans and receivables 323 256 Securities 703 462 Incl. held to maturity 628 386 available for sale 75 76 Total interest income: 1 106 802 Interest expense Due to credit institutions 59 43 Non-bank deposits 332 189 Payments to the Deposit Guarantee Fund 52 19 Total interest expense: 443 251 Net interest income 663 551 15

NOTE 7 NET COMMISSION AND FEE INCOME Six-month period ended 30.06.2012 30.06.2011 Commission and fee income Service fee for account maintenance and cash transactions 127 38 Asset management 50 32 Payment card transactions 594 309 Brokerage services 168 - Guarantees, loans, letters of credit 70 51 Total commission and fee income: 1 009 430 Commission and fee expense Correspondent bank services 35 10 Payment card transactions 266 198 Brokerage operations 31 - Other bank transactions 6 6 Total commission and fee expense: 338 214 Net commission and fee income 671 216 NOTE 8 ADMINISTRATIVE EXPENSES Six-month period ended 30.06.2012 30.06.2011 Personnel remuneration expenses Council and Board remuneration 24 8 Personnel remuneration 285 197 State compulsory social insurance contributions 75 49 Total personnel remuneration expenses: 384 254 Rent and expluatation expenses 45 40 Non-refundable value added tax 24 31 Communications (telephone, post) 11 14 IT equipment and software related expenses 11 12 Professional and legal services 11 8 Office supplies and other office expenses 7 9 Other personnel related expenses 14 7 Other administrative expenses 5 4 Total other expenses: 128 125 Administrative expenses 512 379 On 30 June 2012 number of employees in the Bank was 83 (on 30 June 2011 66). 16

NOTE 9 CORPORATE INCOME TAX Corporate income tax expense comprises the following items: Six-month period ended 30.06.2012 30.06.2011 Current corporate income tax charge for the reporting period - - Deferred corporate income tax (104) 35 Total corporate income tax income / (expense) (104) 35 The standard tax rate applied in 2012 is 15%. The movements in deferred corporate income tax can be specified as follows: Deferred corporate income tax liability: Accumulated excess of tax depreciation over accounting depreciation 55 59 Deferred corporate income tax asset: Temporary difference on vacation reserve (6) (4) Tax loss carried forward (80) (194) Other deferred tax assets (1) 3 Deferred income tax asset (32) (136) NOTE 10 CASH AND BALANCES WITH THE BANK OF LATVIA Cash 644 501 Balances with the central bank 2 026 2 157 Total 2 670 2 658 Balances with central bank include cash on the correspondent account and a short-term deposit with the Bank of Latvia. According to the instructions of the Bank of Latvia, the Bank s average monthly balance on its correspondent account may not be less than the compulsory reserve calculated for the balance of liabilities included in the reserve basis on the last day of the month. As at 30 June 2012, the Bank s compulsory reserve requirement was LVL 1 539 thousand (31 December 2011: LVL 1 544 thousand). 17

NOTE 11 DUE FROM CREDIT INSTITUTIONS Amounts due on demand 5 355 11 839 Credit institutions registered in Latvia 2 405 7 706 Credit institutions registered in the EU 1 792 3 661 Credit institutions of other countries 1 158 472 Term deposits 3 647 3 105 Credit institutions registered in Latvia 1 760 1 276 Credit institutions of other countries 1 887 1 829 Total 9 002 14 944 The Bank s average interest rates applicable for the balances due from credit institutions in the first half of 2012 are as follows: LVL 0.317% USD 0.723%, EUR 0.238%. (in the first half of 2011 - LVL 0.265% USD 2.401%, EUR 0.902%.). NOTE 12 LOANS (a) Loans and receivables by customer profile Private non-financial companies 6 819 6 364 Financial institutions 45 101 Households 456 691 Total loans 7 320 7 156 Impairment 61 61 Total net loans 7 259 7 095 (b) Loans and receivables by geographical profile Residents of Latvia 5 361 5 184 Residents of EU Member States 1 718 1 727 Residents of other countries 241 245 Total loans 7 320 7 156 Impairment 61 61 Total net loans 7 259 7 095 18

(c) Loans and receivables by types Commercial loans 4 574 3 947 Industrial loans 339 277 Finance leases 184 189 Credit card loans 74 84 Mortgage loans 921 1 090 Factoring 312 1 144 Other loans 871 324 Cash with financial institutions 45 101 Total loans 7 320 7 156 Impairment 61 61 Total net loans 7 259 7 095 (d) Signifficant credit risk concentration As at 30 June 2012, the Bank had 1 borrower or group of related borrowers whose aggregate liabilities to the Bank exceeded 10% of the Bank s capital (31 December 2011 2 borrowers or groups of related borrowers). The total liabilities of the borrower or group of related borrowers whose aggregate liabilities to the Bank exceeded 10% of the Bank s share capital on 30 June 2012 was LVL 1 191 thousand or 21% of the Bank s share capital (31 December 2011 LVL 2 211 thousand or 33% of the Bank s share capital). The Bank's credit exposure to one client or client related group may not exceed 25% of the Bank's equity. If the customer is a credit institution or investment firm or group of related clients, which contains one or more credit institutions or investment brokerage, then the Bank's investment capital risk transactions total exposure should not exceed 25% of its equity, but risk exposures used for liquidity needs and settlements, including those outstanding for next business day to be used for currency transactions or the accumulation of capital by customer payments or security deposits for currency transactions, may not exceed 95% of Bank's equity. On 30 June 2012 and 31 December 2011 the Bank was in compliance with these requirements. 19

NOTE 13 FINANCIAL ASSETS a) Investments in financial assets by portfolios Available-for-sale financial assets Debt securities issued by EU central governments 2 159 1 994 Debt securities issued by other country central governments 602 - Debt securities issued by EU credit institutions 1 265 735 Debt securities issued by EU local governments 773 777 Debt securities issued by EU non-finance institutions 1 735 - Total available-for-sale financial assets 6 534 3 506 Held-to-maturity financial investments Debt securities issued by the Latvian government 15 022 7 069 Debt securities issued by Latvian credit institutions - 1 028 Debt securities issued by EU central governments 3 480 4 025 Debt securities issued by EU credit institutions 706 708 Debt securities issued by EU finance institutions 482 - Debt securities issued by credit institutions of other 2 737 3 226 countries Total held-to-maturity financial investments 22 427 16 056 b) available-for-sale financial assets by geographical profile Carrying amount % of equity Revaluation reserve Carrying amount % of equity Revaluation reserve Debt securities issued by central governments 2 761 x (81) 1 994 x (49) Poland 730 12.63 4 748 12.87 (2) Belgium 586 10.13 7 521 8.96 (32) Slovenia 718 12.42 (3) 725 12.47 (15) Qatar 602 10.41 4 - - - Other countries 125 2.16 (93) - - - Debt securities issued by 1 265 x 20 735 x (4) credit institutions Sweden 894 15.46 10 - - - Other countries 371 6.41 10 735 12.64 (4) Debt securities issued by local governments 773 x 21 777 x (10) Poland 773 13.37 21 777 13.37 (10) Debt securities issued by 1 735 x (11) - x - non-finance institutions Netherlands 994 17.19 (5) - - - Austria 741 12.82 (6) - - - Total available-for-sale financial assets 6 534 x (51) 3 506 x (63) 20

c) held-to-maturity financial assets by geographical profile Carrying amount % of equity Fair value Carrying amount % of equity Fair value Debt securities issued by central governments 18 502 x 19 330 11 094 x 11 243 Latvia 15 022 259.81 15 731 7 069 121.63 6 855 Greece - - - 633 10.89 1 035 Ireland 1 372 23.73 1 427 1 378 23.71 1 431 Portugal 2 108 36.46 2 172 2 014 34.65 1 922 Debt securities issued by credit institutions 3 443 x 3 485 4 962 x 4 973 Latvia - - - 1 028 17.69 1 047 Russia 2 737 55.79 2 781 3 226 55.50 3 220 Germany 706 12.21 704 708 12.18 706 Debt securities issued by EU finance institutions 482 8.34 482 - - - Total net held-to-maturity financial investments 22 427 x 23 297 16 056 x 16 216 Maturity of debt securities of Ireland and Portugal are 18 April 2013 and 23 September 2013 respectively. The Bank uses the following hierarchy of three levels of input data for determining and disclosing the fair value of financial assets and liabilities: Level 1: Quoted prices in active markets; Level 2: Other techniques for which all inputs which have a significant effect on the recorded fair value are observable. Level 3: Other techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. As at 30 June 2012, all the Bank s financial assets and liabilities met the requirements of Level 1 and Level 2. Bank s financial assets portfolio mainly consists of debt securities of governments and credit institutions of several European Union countries and Russia. Banks' investments in financial assets are carried out in accordance with the Bank's approved strategies: "Available-for-sale portfolio investment strategy" and "Held-to-maturity financial instruments portfolio investment strategy". The Bank is aware of the current changing situation in the financial instruments market and, therefore, avoiding high-risk transactions, the Bank has set additional restrictions on new investments in financial instruments, determining that the investments should be limited to low-risk instruments, i.e. financial instruments with credit rating Aa2 or higher and at least a stable outlook (Moody's scale or its equivalent by Fitch or Standard & Poor's). The Bank performs regular analysis of the news and information about the events in these countries in order to timely detect changes that may adversely affect certain governments and/or residents' ability and/or willingness to meet their financial obligations to the Bank. For the 21

purposes of this monitoring the Bank uses Moody s assigned credit ratings (Moody's credit rating equivalent of Fitch or Standard & Poor's (in order specified) is used in case the country doesn t have Moody s credit rating). Information is obtained from the mass media, international organizations dealing with economic analysis and data collection, as well as from rating agencies. In cases when there is information received about the events that could have substantial impact on the solvency of the country's government or on the recovery of the Bank s investment in a country s sovereign debt securities, the Bank s Risk control department: reports to the Board, performs increased monitoring of the affected country, and if necessary proposes to Resources department to avoid future investments or to reduce the country risk limits for transactions with the residents of the country. If the Bank s risk exposure with the residents of the affected country can not be reduced during the next three months, risk exposure mitigating measures such as creation of provisions and attraction of financial security deposits are carried out. Within the risk management process, the Bank constantly follows the events around the European Union countries' economic and financial situation, who have benefited from international lenders - the International Monetary Fund and / or the European Union's financial stabilization program loans. Greece, Ireland, Portugal and the Latvian Central Government Debt securities possessed by the Bank are subject of the enhanced risk management process. Assessing the economic and financial situation in Ireland, Portugal and Latvia, the Bank has concluded that number of objective circumstancesexist, which might help the Bank to fully recover investments from central government securities in countries mentioned above. Therefore, the Bank has not changed the classification of these investments or created provisions, but the Bank continues to follow and keep up to date the information relating to these investments. NOTE 14 FUNDS UNDER TRUST MANAGEMENT Assets 35 555 63 233 Loans to private non-financial companies 19 253 16 054 Loans to households 703 1 405 Investments in finance instruments 15 599 45 774 Liabilities 35 555 63 233 Credit institutions 15 508 45 687 Private non-financial companies 19 308 16 141 Households 739 1 405 The Bank issues loans classified as funds under trust management based on specific requests of asset owners. According to the trust management agreements concluded with customers, the asset owners assume all the risks inherent in these loans and the Bank acts only as an intermediary receiving the management fee. As at 30 June 2012, the accumulated outstanding commission fee for the asset management was LVL 11 thousand (31 December 2011: LVL 23 thousand). 22

NOTE 15 DUE TO CREDIT INSTITUTIONS Term deposits 4 204 1 633 Latvian credit institutions 2 517 - including interbank REPO transactions 2 517 - Credit institutions of other countries 1 687 1 633 Total 4 204 1 633 The Bank s average interest rates applicable for the balances due to credit institutions in the first half of 2012 are as follows: LVL 0.493%, USD 1.218%, (in the first half of 2011: USD 2.091%, EUR 1.010%) NOTE 16 DEPOSITS FROM CUSTOMERS (a) Demand and term deposits by customer profile: Demand deposits 20 277 20 669 Private non-financial companies 11 983 12 992 Households and non-profit organisations serving them 8 055 7 595 Financial institutions 236 82 Local authorities 3 - Term deposits 16 829 16 486 Private non-financial companies 917 825 Households and non-profit organisations serving them 15 912 15 661 Total 37 106 37 155 (b) Demand and term deposits by geographical profile Demand deposits 20 277 20 669 Residents of Latvia 11 653 13 528 Residents of EU Member States 6 701 3 340 Residents of other countries 1 923 3 801 Term deposits 16 829 16 486 Residents of Latvia 15 911 16 210 Residents of EU Member States 843 276 Residents of other countries 75 - Total 37 106 37 155 The Bank s average interest rate on customer deposits for the first half of 2012 is 1.806% (LVL), 2.043% (USD) and 2.770% (EUR). Iin the first half of 2011: 1.405% (LVL), 3.386% (USD), 2.729% (EUR)) 23

NOTE 17 SUBORDINATED LIABILITIES Lender Household resident, Bank`s related party Household resident, not related party to the bank Household resident, not related party to the bank Total subordinated liabilities Carrying value Date Interest Carrying value Date Interest - - - 527 06.12.2016 7 527 06.12.2016 7 527 06.12.2016 7 879 23.02.2017 7 - - - 1 406 x x 1 054 x x Contracts on subordinated loans are agreed for the term of 5 years. Interest on subordinated loan is paid once per month, on the last working day of month. According to the contract terms, lenders has the right to recover the loan ahead of schedule only in case of the Bank's liquidation and the creditor's claim is upheld after all other creditors, but before the Bank's shareholders' claims. NOTE 18 PAID-IN SHARE CAPITAL As at 30 June 2012, the Bank s registered and paid-in share capital was LVL 6,2 million (31 December 2011: LVL 6.2 million). Share capital consists only of ordinary shares with voting rights. The value of one share is 1 Lat, and at 30 June 2012 all shares were fully paid and the Bank did not own any of shares. As at 31 December 2011 and 30 June 2012, the Bank s sole shareholder was SIA Mono, reg.no 40003004625, legal address Riga, Katlakalna street 1, which is Bank`s ultimate parent company. 24

NOTE 19 EARNINGS PER SHARE Earnings per share are calculated by dividing net profit by the weighted average number of shares issued during the reporting period. As at 30 June 2012, basic earnings per share were equal to diluted earnings per share. Six-month period ended 30.06.2012 30.06.2011 Net profit (LVL 000) 581 11 Weighted average number of ordinary shares ( 000) 6 200 5 092 Earnings per share (LVL) 0.09 0.01 NOTE 20 CASH AND CASH EQUIVALENTS Cash and demand deposits with the Bank of Latvia 2 670 2 658 Balances due from other credit institutions with original maturities of less than three months 5 355 12 569 Balances due to other credit institutions with original maturities of less than three months (2 517) - Total 5 508 15 227 NOTE 21 MEMORANDUM ITEMS Contingent liabilities 315 1 575 Guarantees 315 1 575 Financial commitments 1 884 1 527 Unutilised credit lines 1 679 1 334 Credit card commitments 205 193 Total memorandum items, gross 2 199 3 102 In the ordinary course of business, the Bank issues loans and guarantees. The main purpose of these financial instruments is to ensure that adequate funds are available to customers. Guarantees that comprise irrevocable commitments are assigned the same risk as loans because those commit the Bank to paying in the event of a customer s default. Liabilities arising from credit lines represent the undrawn balances of credit lines. As regards credit risk, the Bank is potentially exposed to loss arising also from loan commitments. 25

NOTE 22 RELATED PARTY TRANSACTIONS Related parties are defined as shareholders that have the ability to control or exercise significant influence over the Bank s management policy, Council and Board members, their close members of the families, and entities in which these persons have a controlling interest. In the ordinary course of business, the Bank enters into transactions with related parties. All loans are issued to and financial transactions are made with related parties on an arm s length basis. As at 30 June 2012, there were no any loans issued to related parties that would have been past due or impaired. The Bank s financial statements include the following balances of assets, liabilities and memorandum items associated with the Bank s transactions with related parties: Carrying amount Memoran Total Carrying Memoran dum amount dum items items Total Assets 433 231 664 358 294 652 Loans and receivables, net 433 231 664 332 294 626 Related companies and persons 432 213 645 330 277 607 Council and Board 1 18 19 2 17 19 Derivatives - - - 26-26 Related companies and persons - - - 26-26 Liabilities - - 6 322-6 322 Deposits 9 858-9 858 6 254-6 254 Related companies and persons 6 585-6 585 3 353-3 353 Council and Board 3 273-3 273 2 901-2 901 Derivatives - - - 68-68 Related companies and persons - - - 68-68 The table below presents income and expense on the balances due from/ to related parties: Six-month period ended 30.06.2012 30.06.2011 Interest income 15 11 Interest expense 58 58 Net interest income (43) (47) Commission and fee income 50 99 26

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

Sector concentration risk analysis, Collateral concentration risk analysis, Currency mismatch risk analysis. The total capital needed to cover concentration risk is determined by aggregating the results of all individual calculations. In analysing name concentration risk, the Bank assesses the exposure concentration for the entire loan portfolio and the held-to-maturity portfolio. - Money laundering and terrorist financing risk. The Bank applies the simplified approach according to Regulations No. 38 on the Internal Capital Adequacy Assessment Process issued by the Financial and Capital Market Commission on 20 March 2009 to determine the relevant adequate capital. - Other risks. As other risks which would require an additional capital analysis, the Bank determines country risk, residual risk, compliance risk, reputational risk and strategic and business risks based on the material risk assessment. Pursuant to Regulations No. 38 on the Internal Capital Adequacy Assessment Process issued by the Financial and Capital Market Commission on 20 March 2009, the Bank applies the simplified approach to define the adequate capital, namely the capital to cover other risks is determined as 5% of the total minimum capital requirements. The total capital adequacy is calculated as a total of the capital buffer and the adequate capital to cover all risks involved in the capital adequacy assessment process. The capital buffer is determined on the basis of the general stress testing results. The regulations of the Financial and Capital Market Commission (the bank regulator) require that Latvian banks maintain a capital adequacy ratio based on financial statements prepared under IFRS as adopted by the EU of 8% of risk weighted assets. In fact, the Bank s capital adequacy ratio exceeds the minimum 20% threshold specified in the Bank s strategy approved by a resolution of the Council of the Financial and Capital Market Commission on 24 May 2012. As at 30 June 2012, the Bank s capital adequacy ratio calculated in accordance with the above requirements was 30.55 % (2011: 23.32%). The Bank s eligible capital also exceeds the adequate capital to cover all significant risks defined during the capital adequacy assessment process. The Bank applies the capital definition and the procedure for capital calculation laid down in Regulations No. 60 on the Calculation of Minimum Capital Requirements issued by the Financial and Capital Market Commission on 2 May 2007, which is incorporated in the Bank s Procedure for Calculating the Minimum Capital Requirements relevant for the Bank s instruments. Namely, the eligible capital comprises Tier 1 items, i.e. paid-in share capital, reserve capital, retained earnings, including current year s profit which is not subject to dividend distribution, less negative fair value revaluation reserve of available-for-sale financial assets and intangible assets, and Tier 2 items, i.e. subordinated capital. Capital adequacy assessment is governed by a Bank s internal document named the Capital Adequacy Assessment Policy. 28

The capital adequacy calculation of the Bank can be disclosed as follows: Tier I - paid-in share capital 6 200 6 200 - prior period (accumulated loss) / retained earnings (974) - - audited profit / (loss) - (974) - Available-for-sale financial assets revaluation reserve (51) (63) Less - intangible assets (383) (405) Total Tier I 4 792 4 758 Total Tier II 1 406 1 054 Decrease of Tier I and Tier II capital resulting from specificē regulatory provisions (416) - Total eligible capital 5 782 5 812 Risk capital requirements Total capital charge for credit risk and counterparty risk, incl. the following statutory asset classes: Central governments or central banks 12 12 Regional or local governments 31 31 International organizations 8 - Credit institutions 732 1 177 Commercial institutions 438 368 Other assets 81 84 Other risk capital requirements: Foreign exchange risk capital requirement 13 35 Operational risk capital requirement 199 287 Total capital requirement 1 514 1 994 The capital adequacy ratio (Equity capital / Total capital) x 8% 30.55% 23.32% NOTE 24 EVENTS AFTER REPORTING DATE As of the last day of the reporting period until the date of signing these financial statements there have been no events requiring adjustment of or disclosure in the financial statements or notes. * * * 29