for the six-month period ended 30 June 2015
CONTENTS Lapa Management Report 3 The Council and the Board 4 Statement of Management s Responsibility 5 Independent Auditors Report 6-7 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 11-12 Notes to the Interim Condensed Financial Statements 13-35 2
MANAGEMENT REPORT Dear customers, cooperation partners and shareholders, Year 2015 has started well as the Bank continues to grow and expand. Compared to the previous half-year, the Bank has significantly increased its profit ratios. In the first half of 2014 profit was 230 thousand euros, while in the first half of 2015 it is 2.1 million euros. Profit growth is mainly attributable to successful card acquiring operations, which is one of the priority directions of the Bank's activities. In the first half of the year, the Bank has participated in the international exhibition Intex Expo in Russia and has organized other marketing activities to enhance the awareness of the Bank, mainly focusing on the non-resident client attraction. The Bank s key financial indicators demonstrate steady growth. The Bank s assets on 30 June 2015 were 170.3 million euro. During the first half of the year assets have increased by 20.3%. The Bank's capital adequacy level as at 30 June 2015 was 15.62%, and the liquidity ratio - 90.99%. The Bank's return on equity (ROE) as at 30 June 2015 was 14.6%, while return on assets (ROA) reached 1.2%. In the first half of the year the Bank has increased share capital - increasing it to 12 million euros. Capital increase strengthens the Bank's capital base, ensures stability and forms the basis for further growth. In the second half of the year 2015, the Bank will continue development of customised products and service technologies, as well as continue active work on brand awareness. We would like to express our deep gratitude to the shareholders and the customers of AS Latvijas pasta banka for their confidence and to all our employees for their contribution to the Bank s development! On behalf of the Bank`s management: Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 17 August 2015 3
The Council The Council of the Bank as at 30 June 2015 Name Position THE COUNCIL AND THE BOARD Date of appointment Biomins Kajems Chairman of the Council 13/10/2008 Mihails Uļmans Deputy Chairman of the Council 20/09/2013 Jūlija Kozlova Council Member 20/09/2013 The Board The Board of the Bank as at 31 December 2014 Name Position Date of appointment Boriss Ulmans Chairman of the Board 05/09/2008 Arnis Kalveršs Board Member 05/09/2008 Jurijs Svirčenkovs Board Member 29/04/2014 On behalf of the Bank`s management: Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 17 August 2015 4
STATEMENT OF MANAGEMENT S RESPONSIBILITY The management of (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 35 are prepared in accordance with the source documents and present fairly the financial position of the Bank as at 30 June 2015 and the results of its operations and cash flows for the six-month period ended 30 June 2015. 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, 17 August 2015 5
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INTERIM CONDENSED STATEMENT OF COMPREHENSIVE INCOME Notes Six-month period ended 30.06.2015 30.06.2014 (unaudited) Interest income 6 2 454 1 826 Interest expense 6 (349) (285) Net interest income 6 2 105 1 541 Provision for loan impairment 11 (4) (439) Net interest income after provision for loan impairment 2 101 1 102 Commission and fee income 7 6 038 2 356 Commission and fee expense 7 (2 867) (1 130) Net commission and fee income 7 3 171 1 226 Net trading income 9 324 135 Other income 8 106 76 Operating income 5 702 2 539 Administrative expense 10 (2 140) (1 661) Depreciation (160) (139) Other expense 8 (1 063) (472) Total operating expense (3 363) (2 272) Profit before tax 2 339 267 Corporate income tax 12 (230) (37) Net profit for the period 2 109 230 Profit attributable to the owners of the Bank 2 109 230 Other comprehensive income Items that may be classified subsequently to profit or loss Change in revaluation reserve of available for sale 351 86 securities Total other comprehensive income 351 86 Total comprehensive income attributable to the owners of the Bank 2 460 316 Earnings per share (EUR) 24 0.176 0.037 The accompanying notes on pages 13 to 35 form an integral part of these financial statements. The Bank s financial statements set out on pages 8 to 35 were approved by the Board and by the Council on 17 August 2015. Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 17 August 2015 8
INTERIM CONDENSED STATEMENT OF FINANCIAL POSITION Notes ASSETS Cash and balances with the Bank of Latvia 13 6 343 4 797 Due from credit institutions 14 37 934 36 898 Held for trading financial assets - 14 Available-for-sale financial assets 16 31 412 11 955 Loans and receivables 15 37 838 32 303 Held-to-maturity financial investments 16 46 799 44 214 Property, plant and equipment 7 148 7 237 Intangible assets 467 434 Corporate income tax assets 17 2 156 3 346 Current tax assets - 110 Prepaid expense and accrued income 238 292 Total assets 170 335 141 600 LIABILITIES Held for trading financial assets 1 6 Liabilities at amortised cost 152 681 127 085 Deposits from customers 19 152 681 125 835 Subordinated debt 20-1 250 Corporate income tax liabilities 56 - Deferred tax liabilities 12 246 230 Other liabilities 21 2 311 1 810 Deferred income and accrued expense 22 608 532 Total liabilities 155 903 129 663 EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE BANK Paid-in share capital 23 12 000 10 465 Revaluation reserve of available for sale financial assets (157) (508) Retained earnings 2 589 1 980 Total equity attributable to equity holders of the Bank 14 432 11 937 Total equity 14 432 11 937 Total liabilities and equity 170 335 141 600 The accompanying notes on pages 13 to 35 form an integral part of these financial statements. The Bank s financial statements set out on pages 8 to 35 were approved by the Board and by the Council on 17 August 2015. Biomins Kajems Chairman of the Council Riga, 17 August 2015 Boriss Ulmans Chairman of the Board 9
INTERIM CONDENSED STATEMENT OF CHANGES IN EQUITY Paid in share capital Revaluation reserve of available-forsale financial assets Retained earnings Total Balance as at 31 December 2013 8 822 49 1 643 10 514 Total comprehensive income - 86 230 316 Balance as at 30 June 2014 (unaudited) 8 822 135 1 873 10 830 Increase in share capital 1 643 - - 1 643 Total comprehensive income - (643) 1 750 1 107 Dividends paid - - (1 643) (1 643) Balance as at 31 December 2014 10 465 (508) 1 980 11 937 Increase in share capital 1 535 - - 1 535 Total comprehensive income - 351 2 109 2 460 Dividends paid - - (1 500) (1 500) Balance as at 30 June 2015 12 000 (157) 2 589 14 432 The accompanying notes on pages 13 to 35 form an integral part of these financial statements. The Bank s financial statements set out on pages 8 to 35 were approved by the Board and by the Council on 17 August 2015. Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 17 August 2015 10
INTERIM CONDENSED STATEMENT OF CASH FLOWS Six-month period ended 30.06.2015 30.06.2014 (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax 2 339 268 Amortisation / depreciation 160 139 Increase in impairment allowance for financial assets 4 539 Interest income (2 455) (1 826) Interest expense 349 285 Unrealised foreign exchange gain (464) (360) Decrease in cash and cash equivalents from operating activities before changes in assets and liabilities (67) (955) Decrease / (increase) in balances due from credit institutions (2 992) 1 652 Increase in loans and receivables (5 516) (4 800) Decrease / (increase) in other assets 1 258 (926) Increase in deposits from customers 26 768 4 901 Increase in other liabilities 569 178 Change in cash and cash equivalents from operating activities before income tax 20 020 50 Interest received 2 342 2 129 Interest paid (271) (278) Income tax paid (45) (222) Change in cash and cash equivalents from operating activities 2 026 1 629 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (104) (45) Increase of available-for-sale financial assets (18 928) (658) (Increase) / decrease of held-to-maturity financial instruments (2 725) 781 Change in cash and cash equivalents from investing activities (21 757) 78 CASH FLOWS FROM FINANCING ACTIVITIES Increase of share capital 1 535 - Dividends paid (1 500) - Decrease of subordinated loan (1 250) - Change in cash and cash equivalents from financing activities (1 215) - Net cash flows for the period (926) 1 757 Cash and cash equivalents at the beginning of the period 37 165 10 832 Foreign exchange gain 464 360 Cash and cash equivalents at the end of the period 36 703 12 949 Cash and cash equivalents are disclosed in note 25. 11
STATEMENT OF CASH FLOWS (continued) The accompanying notes on pages 13 to 35 form an integral part of these financial statements. The Bank s financial statements set out on pages 8 to 35 were approved by the Board and by the Council on 17 August 2015. Biomins Kajems Chairman of the Council Boriss Ulmans Chairman of the Board Riga, 17 August 2015 12
NOTE 1 GENERAL INFORMATION AS Latvijas pasta banka (hereinafter the Bank) is a joint stock company registered in the Republic of Latvia and operating according to the laws of the Republic of Latvia and the licence issued by the Financial and Capital Markets Commission on 12 September 2008. The registered office of AS Latvijas pasta banka is at Brivibas iela 54, Riga, LV-1011, Latvia. The Bank has the head office and two customer service centres. The core business activities of the Bank comprise local and international payments, attraction of deposits, issue and servicing of payment cards, issue of loans, securities and foreign exchange transactions. 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 2014 full annual financial statements prepared in accordance with International Financial Reporting Standards ( IFRS ) as adopted by the European Union ( EU ). (b) Going concern The financial statements are prepared on the going concern basis. The Bank s management has analysed the Bank s financial position, availability of financial resources as well as the impact of the financial crisis on the future operations of the Bank. The Bank s operating strategy is aimed at further development of the bank servicing certain customers and developing customised products and service technologies. The Bank s capital adequacy is monitored by the following: - Analysing the report prepared in accordance with the Bank s Procedure for Calculating the Minimum Capital Requirements at least on a monthly basis; - Assessing the capital required to cover all significant risks the Bank is exposed to and the extent of the available capital for a three-year planning period at least once every year and by benchmarking the actual financial performance of the Bank against the target indicators on a monthly basis; - Analysing the asset quality and estimating the required allowances at least on a quarterly basis. Pursuant to the Bank s Crisis Management Plan, in the event of a prolonged crisis of capital the Bank will use its capital reserves, attract subordinated deposits, or seek a shareholders decision to increase the Bank s capital. 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; 13
- Along with legal entities, to offer equal customised services also to high-income and ultrahigh income private individuals; - To be present in Latvia, Russia, other CIS and EEA states; To define as the priority business activities the following: issue and acceptance of payment cards via POS terminals and the Internet, in cooperation with renowned organisations, such as MasterCard, Visa, Tieto, First Data, Global Payment using MasterCard acquiring license for Europe and Visa acquiring license for Europe, thus providing services to Internet merchants throughout Europe, investment of attracted funds in financial instruments, issue of credit lines linked to payment cards to private individuals, issue of loans to legal entities based on the moderately conservative risk approach, especially financing of current assets and transportation flows; The Bank has set a target capital adequacy ratio for 2015 of at least 15 per cent. (c) Functional and presentation currency These financial statements are reported in thousands of euro (EUR 000), unless otherwise stated. The functional currency of the Bank is euro (EUR). (d) Basis of presentation These financial statements are prepared on a historical cost basis, except for assets and liabilities which are reported at fair value: - derivative financial instruments; - available-for-sale financial assets. 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 preparing the 2014 financial statements. 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. 14
(1) The following new and amended IFRS and interpretations come into force in 2015, but do not have significant impact on these financial statements. Annual improvements 2013 (effective for annual periods beginning on or after 1 July 2014, endorsed in the EU for annual period beginning on or after 1 January 2015). (2) A number of new standards and interpretations have been published and come into force on financial periods beginning on or after 1 February 2015, and are not endorsed by the European Union: Amendments to IAS 19 Employee benefits plans regarding defined benefit plans (effective for annual periods beginning on or after 1 July 2014, endorsed in the EU for annual periods beginning on or after 1 February 2015) Annual improvements 2012 (effective for annual periods beginning on or after 1 July 2014, endorsed in the EU for annual periods beginning on or after 1 February 2015). These amendments include changes that affect 7 standards: - IFRS 2 Share-based payment - IFRS 3 Business Combinations - IFRS 8 Operating segments - IFRS 13 Fair value measurement - IAS 16 Property, plant and equipment and IAS 38 Intangible assets - Consequential amendments to IFRS 9 Financial instruments - IAS 37 Provisions, contingent liabilities and contingent assets, and - IAS 39 Financial instruments Recognition and measurement Amendment to IFRS 11 Joint arrangements on acquisition of an interest in a joint operation (effective for annual periods beginning on or after 1 January 2016, not yet endorsed in the EU) Amendments to IAS 16 Property, plant and equipment and IAS 41 Agriculture regarding bearer plants (effective for annual periods beginning on or after 1 January 2016, not yet endorsed in the EU) Amendment to IAS 16 Property, plant and equipment and IAS 38 Intangible assets on depreciation and amortisation (effective for annual periods beginning on or after 1 January 2016, not yet endorsed in the EU) IFRS 14 Regulatory deferral accounts (effective for annual periods beginning on or after 1 January 2016, not yet endorsed in the EU) Amendments to IAS 27 Separate financial statements on the equity method (effective for annual periods beginning on or after 1 January 2016, not yet endorsed in the EU) Amendments to IFRS 10 Consolidated financial statements and IAS 28 Investments in associates and joint ventures (effective for annual periods beginning on or after 1 January 2016, not yet endorsed in the EU) Annual improvements 2014 (effective for annual periods beginning on or after 1 July 2016, not yet endorsed in the EU). The amendments include changes that affect 4 standards: - IFRS 5 Non-current assets held for sale and discontinued operations 15
- IFRS 7 Financial instruments: Disclosures with consequential amendments to IFRS 1 - IAS 19 Employee benefits - IAS 34 Interim financial reporting Amendments to IAS 1 Presentation of financial statements on the disclosure initiative (effective for annual periods beginning on or after 1 January 2016, not yet endorsed in the EU) Amendments to IFRS 10 Consolidated financial statements and IAS 28 Investments in associates and joint ventures on investment entities applying the consolidation exception (effective for annual periods beginning on or after 1 January 2016, not yet endorsed in the EU) IFRS 15 Revenue from contracts with customers (effective for annual periods beginning on or after 1 January 2017, not yet endorsed in the EU) IFRS 9 Financial instruments (effective for annual periods beginning on or after 1 January 2018, not yet endorsed in the EU) 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 2014 financial statements. NOTE 5 JUDGMENTS AND ESTIMATES The preparation of interim condensed 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 2014 financial statements. 16
NOTE 6 NET INTEREST INCOME Six-month period ended 30.06.2015 30.06.2014 (unaudited) Interest income Due from credit institutions 197 155 Loans and receivables 1 110 911 Incl. impaired loans 22 5 Securities 1 147 760 Incl. held to maturity 347 503 Incl. available for sale 800 257 Total interest income: 2 454 1 826 Interest expense Due to credit institutions (1) (9) Non-bank deposits (212) (204) Payments to the Deposit Guarantee Fund (136) (72) Total interest expense: (349) (285) Net interest income 2 105 1 541 NOTE 7 NET COMMISSION AND FEE INCOME Six-month period ended 30.06.2015 30.06.2014 (unaudited) Commission and fee income Service fee for account maintenance and cash transactions 1 082 483 Asset management and brokerage services 312 258 Payment card transactions 4 528 1 522 Other bank transactions 116 93 Total commission and fee income: 6 038 2 356 Commission and fee expense Correspondent bank services (61) (51) Payment card transactions (2 754) (1 046) Brokerage services (39) (27) Other bank transactions (13) (6) Total commission and fee expense: (2 867) (1 130) Net commission and fee income 3 171 1 226 17
NOTE 8 OTHER INCOME AND EXPENSE Six-month period ended 30.06.2015 30.06.2014 (unaudited) Other income Penalties collected 80 54 Incl. for payment card transactions 23 - Incl. past due loan payments 55 54 Other income 26 22 Total other income 106 76 Other expense Membership fees to various organisations (26) (20) Payment card project implementation and servicing (356) (247) Factoring service related expense (12) (10) Client attraction related expense (647) (169) Other expenses (22) (26) Total other expenses (1 063) (472) NOTE 9 NET TRADING INCOME Six-month period ended 30.06.2015 30.06.2014 (unaudited) Net loss from transactions with derivative financial instruments (559) (291) Incl. net trading loss (558) (290) Net gain from transactions with other currency 804 426 Incl. net trading gain 340 66 Incl. net revaluation result 464 360 Net gain from available-for-sale financial instruments 79 - Net trading gain 324 135 18
NOTE 10 ADMINISTRATIVE EXPENSES Six-month period ended 30.06.2015 30.06.2014 (unaudited) Remuneration expense Remuneration to the Council and the Board 79 49 Remuneration to personnel 1 388 1 047 State compulsory social security contributions 345 257 Total remuneration expense: 1 812 1 353 Lease and maintenance of premises 59 61 Non-deductible input tax 52 59 Telephone, communications and mail 47 37 Software maintenance 24 38 Professional and legal fees 27 7 Stationery and other office expense 18 20 Other personnel expense 32 25 Property tax 22 22 Non-operating expenses 6 4 Other administrative expense 41 35 Total other expense: 328 308 Administrative expense 2 140 1 661 As at 30 June 2015 number of employees in the Bank was 173 (2014: 159 employees). NOTE 11 PROVISION FOR LOAN IMPAIRMENT Loans Other assets Total Balance as at 31 December 2013 110-110 Increase 444-444 Decrease (5) - (5) Balance as at 30 June 2014 (unaudited) 549 549 Increase 3 2 5 Decrease (3) - (3) Write-offs (100) (2) (102) Balance as at 31 December 2014 449-449 Increase 5-5 Decrease (1) - (1) Balance as at 30 June 2015 453-453 19
NOTE 12 CORPORATE INCOME TAX Corporate income tax expense comprises the following items: Six-month period ended 30.06.2015 30.06.2014 (unaudited) Current corporate income tax charge for the reporting year 214 10 Deferred corporate income tax 16 27 Total corporate income tax expense 230 37 Below is presented the comparison of actual income tax charge and the theoretical tax calculated applying the 15% statutory rate prescribed by Latvian tax laws (2014: 15%): Six-month period ended 30.06.2015 30.06.2014 (unaudited) Profit before tax 2 339 267 Corporate income tax at the statutory rate of 15% 351 40 Non-taxable income (121) (30) Corporate income tax expense for the period 230 10 Overall deferred tax movement is as follows: Six-month period ended 30.06.2015 30.06.2014 (unaudited) Deferred tax liability at beginning of the period 230 158 Deferred tax expense for the period 16 27 Deferred tax liability at end of the period 246 185 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 276 248 Other differences - 1 Deferred corporate income tax asset: Vacation pay reserve (30) (19) Deferred corporate income tax liability 246 230 20
NOTE 13 CASH AND BALANCES WITH THE BANK OF LATVIA Cash 2 268 2 324 Balances with the Bank of Latvia 4 075 2 473 Total 6 343 4 797 Balances with the Bank of Latvia include cash on the correspondent account and a short-term deposit with the Bank of Latvia. According to the instructions of the Bank of Latvia, the Bank s average monthly balance on its correspondent account may not be less than the compulsory reserve calculated for the balance of liabilities included in the reserve basis on the last day of the month. As at 30 June 2015, the Bank s compulsory reserve requirement was EUR 1 228 thousand (2014: EUR 945 thousand). NOTE 14 DUE FROM CREDIT INSTITUTIONS Amounts due on demand 30 360 30 901 Credit institutions registered in Latvia 8 521 6 722 Credit institutions registered in the EU 14 829 17 079 Credit institutions of other countries 7 010 7 100 Term deposits 7 574 5 997 Credit institutions registered in Latvia 3 097 2 854 Credit institutions of other countries 4 477 3 143 Total 37 934 36 898 The Bank s average interest rates applicable for the balances due from credit institutions in the first half of 2015 are as follows: USD 0.304% (in the first half of 2014 - USD 0.19%). As at 30 June 2015 term deposits registered in the Republic of Latvia in total value of EUR 3 097 thousand are pledged in favour of guarantee from MasterCard (EUR 2 854 thousand as at 31 December 2014). 21
NOTE 15 LOANS (a) By customer profile Private non-financial companies 27 108 22 969 Financial institutions 2 525 2 226 Households 8 658 7 557 Total loans 38 291 32 752 Allowance for credit losses (453) (449) Net loans 37 838 32 303 (b) By geographical profile Residents of Latvia 33 891 30 466 Residents of EU Member States 2 493 421 Residents of other countries 1 907 1 865 Total loans 38 291 32 752 Allowance for credit losses (453) (449) Net loans 37 838 32 303 (c) By type Commercial loans 11 497 8 728 Industrial loans 5 404 5 543 Finance leases 596 587 Credit card loans 78 81 Mortgage loans 14 001 12 264 Factoring 1 348 1 569 Other loans 4 535 3 874 Cash with financial institutions 832 106 Total loans 38 291 32 752 Allowance for credit losses (453) (449) Net loans 37 838 32 303 (d) Significant credit risk concentration As at 30 June 2015, the Bank had 10 borrowers or groups of related borrowers whose aggregate liabilities exceeded 10% of the Bank s equity (31 December 2014: eight borrowers or groups of related borrowers). As at 30 June 2015, the total liabilities of borrowers or groups of related borrowers whose aggregate liabilities exceeded 10% of the Bank s equity (without taking into account collateral) was EUR 17 018 thousand, which is 144% of the Bank s equity (31 December 2014: EUR 11 576 thousand, or 115% of the Bank s equity). 22
NOTE 16 FINANCIAL ASSETS a) Financial assets by portfolios Available-for-sale financial assets Debt securities issued by Latvian government 1 812 1 648 Debt securities issued by other country central governments 4 917 840 Debt securities issued by EU central governments 5 456 993 Debt securities issued by credit institutions of other 11 059 2 600 countries Debt securities issued by EU credit institutions 3 268 337 Debt securities issued by Latvian non-financial institutions 1 018 - Debt securities issued by EU non-financial institutions 1 303 3 299 Debt securities issued by other country non-financial 2 579 2 238 institutions Total available-for-sale financial assets 31 412 11 955 Held-to-maturity financial investments Debt securities issued by the Latvian government 18 870 18 789 Debt securities issued by EU central governments 2 183 - Debt securities issued by EU credit institutions 5 767 5 458 Debt securities issued by other country credit institutions 14 543 14 835 Debt securities issued by the Latvian non-financial 1 786 1 762 institutions Debt securities issued by other country non-financial 3 650 3 370 institutions Total held-to-maturity financial investments 46 799 44 214 23
b) Available-for-sale financial assets by geographical profile Carrying amount Revaluation equit % of % of Carrying equity amount reserve y Revaluation reserve Central governments 6 729 x 33 2 488 x 9 Latvia 1 812 15.28 29 1 648 13.69 8 USA 4 917 41.47 4 - - - Other countries - - - 840 6.97 1 Credit institutions 16 515 x (135) 3 592 x (278) Sweden 4 478 37.77 15 - - - Turkey 1 373 11.58 1 1 283 10.66 9 USA 8 066 68.03 (2) - - - Russia 1 620 13.66 (117) 1 316 10.93 (281) Other countries 978 8.25 (32) 993 8.25 (6) Local governments 3 268 x (2) 337 x (30) Luxembourg 3 268 27.56 (2) 337 2.8 (30) Private non-financial institutions 4 900 x (53) 5 538 x (209) Germany 1 303 10.99-1 299 10.79 3 Poland - - - 2 000 16.61 (14) Other countries 3 597 30.34 (53) 2 239 18.59 (198) Total available-forsale financial assets 31 412 x (157) 11 955 x (508) 24
c) Held-to-maturity financial investments by geographical profile Carrying amount % of equity Fair value Carrying amount % of equity Fair value Central governments 21 053 x 23 507 18 789 x 21 248 Latvia 18 870 159.16 21 391 18 789 156.06 21 248 Lithuania 2 183 18.41 2 116 - - - Credit institutions 20 310 x 20 363 20 292 x 20 118 Russia - - - 1 264 10.50 1 243 Brazil 2 161 18.23 2 128 2 139 17.76 2 036 Sweden 1 807 15.24 1 813 1 666 13.84 1 666 UAE 3 634 30.65 3 661 3 353 27.85 3 328 Turkey 1 353 11.41 1 366 1 246 10.35 1 253 Canada 1 808 15.25 1 812 1 668 13.85 1 662 The Netherlands 1 813 15.29 1 826 1 673 13.90 1 670 China 1 952 16.46 1 999 1 812 15.05 1 811 United Kingdom 2 147 18.11 2 131 2 118 17.59 2 117 USA 2 729 23.02 2 721 2 518 20.91 2 498 Other countries 906 7.64 906 835 6.94 834 Private non-financial 5 436 x 5 528 5 133 x 5 220 institutions Latvia 1 786 15.06 1 862 1 762 14.63 1 845 China 1 800 15.18 1 816 1 659 13.78 1 669 India 1 850 15.60 1 850 1 712 14.22 1 706 Held-to-maturity financial investments, net 46 799 x 49 398 44 214 x 46 586 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 2015, the fair value of the Bank s financial assets met the requirements of Level 1 and Level 2. 25
NOTE 17 OTHER ASSETS Card operations 1 348 2 495 Security deposit for transactions 713 713 Input tax 2 10 Inventory (digipass and card blanks) 47 37 Other receivables 46 91 Total 2 156 3 346 NOTE 18 FUNDS UNDER TRUST MANAGEMENT Assets 85 255 97 024 Loans to private companies 40 812 39 748 Loans to financial institutions 16 648 15 777 Loans to households 278 265 Investments in financial instruments 27 517 41 234 Liabilities 85 255 97 024 Credit institutions 27 248 41 066 Private companies 56 878 54 576 Households 1 128 1 382 The Bank issues loans or makes investments in financial instruments 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 assets, the Bank has no control over these assets and does not received any rewards from these assets. The Bank acts only as an intermediary receiving the management fee. As at 30 June 2015, market price of the clients financial instruments portfolio is 97 418 thousand EUR ( 31 December 2014 117 032 thousand EUR). As at 30 June 2015, the accumulated outstanding commission fee for the asset management was EUR 76 thousand (2014: EUR 104 thousand). 26
NOTE 19 DEPOSITS FROM CUSTOMERS (a) By customer profile: Demand deposits 122 529 104 207 Private companies 85 970 71 693 Households and non-profit public organizations 28 448 22 702 Financial institutions 8 111 9 812 Term deposits 30 152 21 628 Private companies 5 193 360 Households and non-profit public organizations 24 959 21 268 Total 152 681 125 835 (b) By geographical profile Demand deposits 122 529 104 207 Residents of Latvia 27 402 27 111 Residents of EU Member States 43 540 32 134 Residents of other countries 51 587 44 962 Term deposits 30 152 21 628 Residents of Latvia 24 712 21 155 Residents of EU Member States 240 146 Residents of other countries 5 200 327 Total 152 681 125 835 The Bank s average interest rate on customer deposits for the first half of 2015 is 1.486% (USD) and 1.465% (EUR). In the first half of 2014: 1.513% (USD), 1.541% (EUR)). NOTE 20 SUBORDINATED DEBT 31.12.2015 31.12.2014 Annual Annual Lender Amount Maturity interest Amount Maturity interest rate rate Resident household, nonrelated party - - - 1 250 23.02.2017 7 Total subordinated debt - x x 1 250 x x Subordinated loan agreements mature in five years. Interest is paid on a monthly basis, on the last business day of each month. 27
According to the terms of these agreements, the lenders may claim loan repayment before the maturity date only in the event of liquidation of the Bank, and their claims can be met after the claims of all other creditors but before those of the Bank s shareholders are paid. As a result of potential resource and asset price analysis, and regular planning and monitoring of capital adequacy, Bank has concluded, that for more optimal development it would be useful to waive subordinated debt. In January 2015 after receiving authorization from Financial and Capital Market Commission, Bank prematurely terminated the subordinated loan agreement and repaid EUR 1 250 thousand. Subordinated loan was replaced by higher quality capital instruments, i.e., Bank's share capital was increased. NOTE 21 OTHER LIABILITIES Payment card settlements 1 902 1 573 Liabilities under clarification 397 190 Taxes 7 19 Other liabilities 5 28 Total 2 311 1 810 NOTE 22 NEXT PERIOD INCOME AND ACCRUED EXPENSE Payment card servicing 68 62 Payments to the Deposit Guarantee Fund and the FCMC 65 55 Vacation pay reserve 203 127 Servicing of correspondent and financial instrument accounts - 65 Accrued payments to agents 240 192 Other accrued expense 28 27 Accrued income from loans 4 4 Total 608 532 NOTE 23 PAID-IN SHARE CAPITAL As at 30 June 2015, the Bank s registered and paid-in share capital was EUR 12 million (31 December 2014: EUR 10.465 million). In the first half of 2015 Bank increased its share capital by EUR 1 534,9 thousand. Share capital increase was carried out in two stages first during January 2015, simultaneously with repayment of the subordinated debt, share capital was increased by EUR 1 250 thousand and secondly, in May 2015 share capital was increased by EUR 284,9 thousand. The Bank s share capital consists of only ordinary voting shares. The par value of each share is EUR 1. As at 30 June 2015, all shares were fully paid and the Bank did not hold its own shares. 28
As at 30 June 2015 and 31 December 2014, the Bank s sole shareholder was SIA Mono, registration No 40003004625, legal address Rīga, Katlakalna iela 1, which is also the ultimate parent of the Bank NOTE 24 EARNINGS PER SHARE Earnings per share are calculated by dividing net profit by the number of shares issued Six-month period ended 30.06.2015 30.06.2014 (unaudited) Net profit 2 109 230 Number of ordinary shares at reporting date ( 000) 12 000 6 200 Earnings per share (EUR) 0.176 0.037 NOTE 25 CASH AND CASH EQUIVALENTS Cash and demand deposits with the Bank of Latvia 6 343 4 797 Balances due from other credit institutions with original maturities of less than three months 30 360 32 368 Total 36 703 37 165 NOTE 26 MEMORANDUM ITEMS Contingent liabilities 1 165 745 Guarantees 1 165 745 Financial commitments 2 683 4 102 Unutilised credit lines 2 243 3 748 Credit card commitments 440 354 Total memorandum items, gross 3 848 4 847 NOTE 27 RELATED PARTY DISCLOSURES Related parties are defined as shareholders that have the ability to control or exercise significant influence over the Bank s management policy, Council and Board members, close members of their families, and entities in which these persons have a controlling interest and a qualifying holding. 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 2015, there were no any loans issued to related parties that would have been past due or impaired. 29
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 Memorandum items Total Carrying amount Memorandum items Assets 312 63 375 320 52 372 Loans and receivables, net 312 63 375 320 52 372 Parent company - - - - - - Council and Board 99 62 161 103 50 153 Related companies and persons 213 1 214 217 2 219 Liabilities 11 272-11 272 8 908-8 908 Deposits 11 272-11 272 8 908-8 908 Parent company 212-212 144-144 Council and Board 5 833-5 822 6 137-6 137 Related companies and persons 5 227-5 227 2 627-2 627 Total The table below presents income and expense on the balances due from/ to related parties: Six-month period ended 30.06.2015 30.06.2014 (unaudited) Interest income 9 20 Interest expense (38) (33) Net interest expense (29) (13) Commission and fee income 138 38 30
NOTE 28 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of liquid financial assets has been determined using bid prices, while offer prices have been used to determine the fair value of financial liabilities. For illiquid financial assets and liabilities, including loans, there are, by definition, no active markets. Accordingly, fair value has been estimated using appropriate valuation techniques. The methods used to determine the fair value of assets and liabilities are as follows: Cash and balances with central banks The fair value of cash and balances with central banks is their carrying amount as these balances may be withdrawn without notice. Balances due from credit institutions The fair value of balances on demand with credit institutions is their carrying amount as these balances may be withdrawn without notice. The fair value of overnight placements is their carrying amount. The fair value of other amounts due from banks is calculated by discounting expected cash flows using current market rates. In many cases, the carrying value is a close representation of fair value due to the short-term maturity profile. Loans The fair value of loans is calculated by discounting expected future cash flows. The discount rate used is the actual interest rate for each particular loan. Held-to-maturity securities Held-to-maturity securities are valued using unadjusted quoted prices in active markets, where available. In other instances, either quotes of market participants are used or the value of securities is determined using valuation models employing observable or non-observable market inputs. Available-for-sale financial assets Available-for-sale financial assets are revalued on a daily basis using the prices quoted by REUTERS and, therefore, their fair value is equal to the carrying amount. Deposits from customers It is assumed that the fair value of customer deposits repayable on demand and short-term deposits is their carrying amount. The fair value of other deposits is calculated by discounting expected cash flows using the interest rate for each particular deposit. Derivative financial instruments Derivative financial instruments are revalued on a daily basis according to the interbank rates and, therefore, the fair value of these instruments equals their carrying amount. 31
The table below shows a comparison, by class, of the carrying amounts and fair values of the Bank s financial instruments reported in the financial statements. Carrying amount Financial assets Financial assets at amortised cost Cash and balances with the Bank of Latvia Due from credit institutions Held-to-maturity financial Fair value Difference Carrying Fair value Difference amount 6 343 6 343-4 797 4 797-37 934 37 934-36 898 36 898-46 799 49 398 (2 599) 44 214 46 586 (2 372) investments Loans and receivables 37 838 37 759 79 32 303 31 988 315 Financial assets at fair value Available-for-sale 31 412 31 412-11 955 11 955 - financial assets Financial liabilities Financial liabilities at amortised cost Deposits from customers 152 681 152 674 7 125 835 123 997 1 838 Subordinated debt - - - 1 250 1 250 - Total difference x x (2 513) x x (219) 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: Level 2: Level 3: Quoted prices in active markets; Other techniques for which all inputs which have a significant effect on the recorded fair value are observable. 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 31 December 2014 and 30 June 2015, the fair value of the Bank s financial assets and financial liabilities met the requirements of Level 1 and Level 2. 32
30.06.2015. Financial assets Financial assets at amortised cost Carrying amount Level 1 input Fair value Level 2 input Level 1 input Due from credit institutions 37 934-37 934 37 934 Held-to-maturity financial investments 46 799 49 398-49 398 Loans and receivables 37 838-37 759 37 759 Financial assets at fair value Available-for-sale financial assets 31 412 31 412-31 412 Financial liabilities Financial liabilities at amortised cost Deposits from customers 152 681-152 674 152 674 31.12.2014. Financial assets Financial assets at amortised cost Carrying amount Level 1 input Fair value Level 2 input Level 1 input Due from credit institutions 36 898-36 898 36 898 Held-to-maturity financial investments 44 214-46 586 46 586 Loans and receivables 32 303-31 988 31 988 Financial assets at fair value Available-for-sale financial assets 11 955 11 955-11 955 Financial liabilities Financial liabilities at amortised cost Deposits from customers 125 835-123 997 123 997 Subordinated debt 1 250-1 250 1 250 Considering the short-term nature of cash and cash equivalents, fair value for receivables and payables equals their carrying amount. The methods employed in classifying the assets by the levels of the fair value hierarchy as at 30 June 2015 are consistent with those of the prior year. 33
NOTE 29 CAPITAL MANAGEMENT The capital adequacy calculation of the Bank can be disclosed as follows 30.06.2015. 31.12.2014. 1. Equity (1.1.+1.2.) 11 856 12 040 1.1. 1. level capital (1.1.1.+1.1.2.) 11 856 11 503 1.1.1. First level base capital 11 856 9 523 1.1.2. First level additional capital - 1 980 1.2. 2. level capital - 537 2. Total risk exposure value (2.1.+2.2.+2.3.+2.4.+2.5.+2.6.+2.7.) 75 889 64 891 2.1. Risk- weighted exposure amount for credit risk, counterparty credit risk, dilution risk and unpaid delivery risk 64 490 56 335 (2.1.1.+ 2.1.2.+2.1.3.+2.1.4.+2.1.5.) 2.1.1. Central goverments and central banks 1 351 1 240 2.1.2. Authorities 8 340 8 637 2.1.3. Companies 40 950 31 186 2.1.4. Secured by real iestate morgage 3 314 2 901 2.1.5. Other assets 10 535 12 371 2.2. Total exposure value of settlement / delivery - - 2.3. Total exposure value for position risk, foreign exchange risk and commodity risk 610 474 2.4. Total exposure value for operational risk 10 789 8 082 2.5. Total exposure value of credit value adjustments - - 2.6. Total exposure value associated with large exposures in the trading portfolio - - 2.7. Other risk values - - 3. Ratio of capital and capital levels 3.1. 1.level base capital ratio (1.1.1./2.*100) 15.62 % 14.68 % 3.2. 1.level base capital surplus (+)/ deficit (-) (1.1.1.-2.*4.5%) 8 441 6 603 3.3. 1. level ratio (1.1./2.*100) 15.62 % 17.73 % 3.4. 1. level surplus (+)/deficit (-) (1.1.-2.*6%) 7 303 7 610 3.5. Total capital ratio (1./2.*100) 15.62 % 18.55 % 3.6. Total capital surplus (+)/ deficit (-) (1.-2.*8%) 5 785 6 849 4. The capital adequacy ratio 2.5 % 2.5 % (4.1.+4.2.+4.3.+4.4.+4.5.) 4.1. The capital conservation buffer (%) 2.5 % 2.5 % 4.2. Specific countercyclical capital buffer (%) - - 4.3. Systemic risk capital buffer (%) - - 4.4. Systemically relevant institution's capital buffer (%) - - 4.5. Other systemically relevant institution's capital buffer (%) - - 34
NOTE 30 LIQUIDITY RATIO CALCULATION 1. Liquid assets (1.1.+1.2.+1.3.+1.4.) 115 201 90 194 1.1. Cash 2 268 2 324 1.2. Balances with the Bank of Latvia 4 075 2 473 1.3. Balances with solvent credit institutions 33 854 32 360 1.4. Liquid securities 75 004 53 037 2. Current liabilities (with residual maturity up to 30 days) 126 608 110 127 (2.1.+2.2.+2.3.+2.4.+2.5.+2.6.) 2.1. Due to credit institutions - - 2.2. Deposits 120 655 103 380 2.3. Debt securities issued - - 2.4. Cash in transit - 18 2.5. Other current liabilities 2 295 2 010 2.6. Memorandum items 3 658 4 719 3. Liquidity ratio (1.:2.) (%) 90.99 % 81.90 % 4. The minimum liquidity ratio 30% 30% NOTE 32 EVENTS AFTER REPORTING DATE During the period between the last day of the reporting period and the date of signing the financial statements there have not been events that require adjustment to the financial statements. * * * 35