AS Sampo Banka Financial Statements prepared in accordance with International Financial Reporting Standards as adopted by European Union for the years ended 31 December 2007 and 2006 and Independent Auditors report
TABLE OF CONTENTS GENERAL INFORMATION 3 REPORT OF THE SUPERVISORY COUNCIL AND THE BOARD OF DIRECTORS OF THE BANK 4 THE SUPERVISORY COUNCIL AND THE BOARD OF DIRECTORS OF THE BANK 5 STATEMENT OF RESPONSIBILITY OF THE BANK S MANAGEMENT 6 INDEPENDENT AUDITORS REPORT 7 FINANCIAL STATEMENTS: Income Statement 8 Balance Sheet 9 Statement of Changes in Shareholders Equity 10 Cash Flows statement 11 Notes to the Financial Statements 12-45 Page 2
GENERAL INFORMATION 33 Name of the Company Legal status of the Company AS SAMPO BANKA Joint-Stock Company Registration number, place and date 50003316811, Riga, 12 November, 1996 Address Cesu street 31/8, Riga, LV-1012 Reporting year 01.01.2007 31.12.2007 Information of the shareholders Auditor DANSKE BANK AS Address: Holmens Kanal 2 12, DK-1095, Copenhagen, Denmark, Reg. Nr. 61126228 Shareholding: 100 % SIA Ernst & Young Baltic Diāna Krišjāne Chairperson of the Board Kronvalda bulvāris 3 5 Latvian Certified Auditor Riga, LV - 1010 Certificate No. 124 Licence No. 17 3
MANAGEMENT OF THE BANK As at the date of signing the financial statements: The Supervisory Council Name Position Date of appointment Georg Franz Friedrich Chairman of the Council 15.02.2007 (re-elected) Schubiger Sven Erik Lystbaek Deputy Chairman of the 15.02.2007 (re-elected) Council Thomas Mitchell Member of the Council 15.02.2007 (re-elected) Lars Stensgaard Moerch Member of the Council 15.02.2007 (re-elected) During 2007 the following members of the Council have resigned: Name Position Date of appointment Date of resignation Georg Franz Friedrich Chairman of the Council 18.09.2006 15.02.2007 Schubiger Jukka Edvin Ohls Member of the Council 18.09.2006 15.02.2007 Petri Kalervo Niemisvirta Member of the Council 18.09.2006 15.02.2007 Markku Juhano Member of the Council 18.09.2006 15.02.2007 Pehkonen Risto Kalle Kustaa Member of the Council 18.09.2006 15.02.2007 Tornivaara Timo Pekka Vuorinen Member of the Council 18.09.2006 15.02.2007 The Board of Directors Name Position Date of appointment Raivis Kakānis Chairman of the Board, CEO 06.11.2007 Lauris Ozoliņš Member of the Board, Head of 06.11.2007 Retail Department Ģirts Osis Member of the Board, Head of Corporate Department 25.04.2006 During 2007 the following members of the Board have resigned: Name Position Date of appointment Date of resignation Ingus Grasis Ilze Šulce Raivis Kakānis Chairman of the Board, CEO Member of the Board, Head of Legal Department Member of the Board, CFO 07.12.2005 06.11.2007 09.03.2004. 09.03.2007 (representation rights were not prolonged) 26.05.2006 06.11.2007 5
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEARS ENDED 31 DECEMBER 2007 AND 2006 Share Capital Reserves Retained earnings Total As of 31 December 2005 8,500,000 1,607,669 420,984 10,528,653 Unrealized gains on available-to-sale financial investments - 121,429-121,429 Net income recognised directly in equity - 121,429-121,429 Net profit for the year - - 318,132 318,132 Total recognised income and expense for the year - 121,429 318,132 439,561 Appropriations to reserves - 420,984 (420,984) - As of 31 December 2006 8,500,000 2,150,082 318,132 10,968,214 Net profit for the year 1,013,736 1,013,736 Total recognised income and expense for the year - - 1,013,736 1,013,736 Appropriations to reserves (121,429) (121,429) Increase in share capital 3,500,000-3,500,000 As of 31 December 2007 12,000,000 2,028,653 1,331,868 15,360,521 The accompanying notes on pages 12 to 45 form an integral part of these financial statements. 10
CASH FLOW STATEMENT Notes 2007 2006 CASH FLOWS FROM OPERATING ACTIVITIES Profit before taxation 1,163,107 368,287 Depreciation and amortization charge 15, 16 331,972 160,592 (Decrease)/increase of impairment loss allowances 283,770 (39,627) Loss/(gain) on disposal of tangible assets 29,999 (110) (Gain)/loss on disposal of AFS investment (9,225) - (Increase) in deferred expenses and accrued income (1,071,822) (240,465) Increase in deferred income and accrued expenses 107,401 506,317 Operating profit before changes in assets and liabilities 835,202 754,994 Decrease/(Increase) in other assets 107,039 (340,144) Increase in other liabilities 1,207,497 379,656 Decrease in due from credit institutions 76,433,195 81,027,431 (Increase) in loans (60,798,081) (70,851,843) (Decrease) in due to credit institutions (18,459,654) (1,006,460) Increase in customer deposit accounts 30,216,123 3,273,669 Net cash and cash equivalents provided by operating activities 29,541,321 13,237,303 Corporate income tax paid - (54,462) CASH FLOWS FROM INVESTMENT ACTIVITIES Purchase of intangible assets 15 (115,841) (207,763) Purchase of fixed assets 16 (681,482) (296,739) Sale of fixed assets 20,751 18,906 Sale of equity investments and other long-term investments 5,852,218 - Purchase of fixed income securities (4,159,582) (3,954,135) Net cash and cash equivalents provided by investment activities 916,064 (4,439,731) CASH FLOWS FROM FINANCING ACTIVITIES Share capital increase 3,500,000 - Subordinated debt increase 7,028,040 - Net cash and cash equivalents produced by financing activities 10,528,040 - Net increase/ (decrease) in cash and cash equivalents 40,985,425 8,743,110 Cash and cash equivalents at the beginning of the year 16,465,849 7,722,739 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 25 57,451,274 16,465,849 Total interest paid 5,718,593 2,069,058 Total interest received 9,685,535 3,812,295 The accompanying notes on pages 12 to 45 form an integral part of these financial statements. 11
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (1) General information AS Sampo Banka (previously A/S Māras Banka) was registered on 12 November 1996 as a Joint Stock Company. It provides retail and corporate banking services in Latvia. In 2004 Sampo Bank plc (registered in Finland) acquired 100% of A/S Māras Banka shares. The Extraordinary Meeting of the Shareholders on the 17 February 2005 took a decision to change the name of the bank to AS Sampo Banka. Upon the approvals of all relevant authorities (stock exchange announcement No.3 of January 30, 2007), Danske Bank Group completed the purchase of Sampo Bank Group (Finland). Sampo Bank will be incorporated in Danske Bank Group s organisational structure. AS Sampo Banka main areas of operation include accepting deposits from customers and granting short-term and long-term loans mostly to private individuals, as well as issuing payment cards. In December 2005, the Bank opened its first branch, second branch was opened in June 2006 in Riga, and third branch was opened in February 2007 in Riga. Regulatory requirements The Bank is subject to the regulatory requirements of the Financial and Capital Markets Commission of Latvia. These requirements, among others, include maintenance of minimum capital adequacy, minimum share capital requirements, liquidity, foreign currency position and loan concentration by individual customers, group of related customers, and individual related party customers. A summary of principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented. (2) Basis of Preparation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by European Union (EU), effective as for financial years beginning 1 January 2007. Certain disclosures are prepared in the format required by the Financial and Capital Market Commission and employed by domestic banks. The accompanying financial statements are presented in the national currency of Latvia, the Lat ( ). The preparation of financial statements in conformity with IFRS and the Regulations of Financial and Capital Market Commission require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (3) Changes in Accounting Policies In 2007 Sampo Banka has adopted IFRS 7 Financial Instruments: Disclosures, which is effective for annual reporting periods beginning on or after 1 January 2007. The impact of the adoption of IFRS 7 has been to expand the disclosures provided in these financial statements regarding the bank s financial instruments and related risks. IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under IFRS. The amendment to IAS 1 adopted by the Bank introduces disclosures about the level of an entity s capital and how it manages capital. 12
The Standards and Interpretations, which have a direct impact on the Bank s reporting periods beginning on or after 1 January 2008 and which have not been applied early by the Bank are: IFRS 8 Operating segments (effective for annual periods beginning on or after 1 January 2009) IFRIC 11 IFRS 2 - Group and Treasury Share Transactions (effective once adopted by EU, but not earlier than for annual periods beginning on or after 1 March 2007) IFRIC 12 Service Concession Arrangements (effective once adopted by EU, but not earlier than for annual periods beginning on or after 1 January 2008) IFRC 13 Customer Loyalty Programmes (effective for accounting periods beginning on or after 1 July 2008) (not yet endorsed by EU) IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for accounting periods beginning on or after 1 January 2008) (not yet endorsed by EU) Changes to IFRS 2, IFRS 3, IAS 1, IAS 23, IAS 32, and IAS 27. The Bank is still in the process of evaluating the impact on the Bank s financial statements in the period of initial application. (4) Foreign Currencies Transactions denominated in foreign currencies are translated into Latvian lat at the official Bank of Latvia exchange rate on the date of the transaction, which approximates the prevailing market rates. Monetary assets and liabilities, including unmatured commitments to deliver or acquire foreign currencies under spot exchange transactions, if any, are translated at the exchange rate on the balance sheet date. The applicable rates used for the principal currencies as of 31 December were as follows: 2007 2006 USD 0.484 0.536 EUR 0.702804 0.702804 CHF 0.421 0.437 All realised gains and losses are recorded in the income statement in the period in which they arise. Unrealised gains and losses on exchange rate translation are credited or charged at foreign exchange rates prevailing at the year-end to the income statement. 13
(5) Comparative figures Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current year. Reclassification effect has no impact on financial year 2006 profit of the Bank. The effect of reclassifications is presented in the table below. 2006 (comparative) figures Restatements As reported Restated Balance sheet Assets Due From credit institution 4,368,614 (34,199) 4,334,415 Demand deposits 3,110,888-3,110,888 Other deposits 1,257,726 (34,199) 1,223,527 Loans 114,810,511 (279,452) 114,531,059 Deferred expenses and accrued income 35,744 313,652 349,396 Current tax assets 77,409 (4,593) 72,816 Other assets 232,146 4,592 236,738 Total 119,524,424-119,524,424 Liabilities Due to credit institution 95,706,481 (442,464) 95,264,017 Term deposits 88,195,801 (442,464) 87,753,337 Due to customer 30,386,891 (33,343) 30,353,548 Demand deposits 12,931,390-12,931,390 Term deposits 17,455,501 (33,343) 17,422,158 Accrued liabilities 29,135 475,807 504,942 Total 126,122,507-126,122,507 (6) Recognitions of revenue and expenses Interest income and expense are recognized on an accrual basis calculated using the effective interest method. Loan origination fees for loans issued to customers are deferred and recognized as an adjustment to the effective yield of the loans. Fees, commissions and other income and expense items are generally recorded on an accrual basis when the service has been provided. Portfolio and other management advisory and service fees are recorded based on the applicable service contracts. (7) Intangible assets Intangible assets include computer software and licences. Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful lives of 1 to 5 years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortisation periods and methods for intangible assets with finite useful lives are reviewed at least at each financial year-end. Costs associated with maintaining computer software programmes are recorded as an expense as incurred. 14
(8) Fixed assets Fixed assets are stated at historical cost, less accumulated depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or are recognised as separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation is calculated using the straight-line method over the estimated useful lives as follows: Furniture 20% Computers 35% Other fixed assets 20% Leasehold improvements are capitalised and depreciated over the remaining lease contract period or the life of the lease asset, whichever is shorter, on a straight-line basis. Gains and losses on disposal of fixed assets are recognised in the income statement in the year of disposal. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset s fair value less costs to sell and value in use. (9) Cash and Cash Equivalents For the purposes of the cash flow statement cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and deposits with the Bank of Latvia and other credit institutions. (10) Financial assets The Bank recognises financial asset on its balance sheet when, and only when, the Bank becomes a party to the contractual provisions of the instrument. Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Bank determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates this classification at each financial year-end. All regular way purchases and sales of investments are recognised using trade date accounting. Financial assets at fair value through profit or loss Financial assets classified as held for trading are included in the category financial assets at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Such assets are initially accounted for at fair value and are subsequently revalued at the fair value, which is market price. Related profit or loss on revaluation is charged directly to the income statement. Interest and dividends on such investments are recognised as interest income and dividend income respectively. Held to maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-tomaturity when the Bank has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. Other long-term investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost. This cost is 15
computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in the income statement when the investments are derecognised or impaired, as well as through the amortisation process. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in income when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Loans and advances are recognised on drawdown. Loan commitments are not recognized unless they are onerous contracts. Loan agreements foresee the possibility of repayment before the maturity date. The management of the Bank cannot estimate reliably how often or when clients would use such an option and therefore the contractual cash flows over the full contractual term of the loans are used in determining the effective interest rate. Non-performing loans Loans are treated as non-performing when loan principal or interest payable is overdue for 90 and more days. Write-offs When the loans and advances cannot be recovered, they are written-off and charged against impairment for possible credit losses. The management of the Bank makes the decision on writing-off loans. Recoveries of loans previously written-off are credited to the income statement. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available-forsale or are not classified in any of the three preceding categories. After initial recognition available-for sale financial assets are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the income statement. The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business on the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm s length market transactions, reference to the current market value of another instrument, which is substantially the same and discounted cash flow analysis. (11) Derecognition of financial assets and liabilities Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised where: the rights to receive cash flows from the asset have expired; or the Bank has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; and 16
the Bank either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Bank has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay. Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Bank s continuing involvement is the amount of the transferred asset that the Bank may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Bank s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss. (12) Offsetting Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a currently enforceable legal right to set off the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. (13) Impairment of financial assets If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows. Future cash flows reflect the cash flows that may result from realisation of collateral whether or not foreclosure is probable. Present value of future cash flows is estimated using the financial asset s original effective interest rate or, in the case of variable rate instruments, the current effective interest rate as the discount factor. The carrying amount of the asset is reduced through use of an impairment account in the income statement. The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed what its amortised cost at the reversal date would have been absent any impairment. 17
(14) Impairment of other assets The Bank assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Bank makes an estimate of the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or cash- generating unit s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses of continuing operations are recognised in the income statement in those expense categories consistent with the function of the impaired asset. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation (if any), had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss. After such a reversal the depreciation charge (if any) is adjusted for future periods to allocate the asset s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. (15) Fair values of financial assets and liabilities For financial instruments traded in active financial markets the fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities. The fair value of interestbearing financial instruments is estimated based on discounted cash flows using the interest rates for items with similar terms and risk characteristics. Where the fair values of financial assets and liabilities differ materially from their book values, such fair values are separately disclosed in the notes to the financial statements. (16) Borrowings The Bank recognises financial liability on its balance sheet on drawdown. In the balance sheet borrowings are recognised initially at fair value amounting to their issue proceeds net of transaction costs. Subsequently borrowings are stated at amortised cost and any difference between net proceeds and value at redemption is recognised in the income statement over the period of borrowings using the effective interest rate. (17) Share capital Share capital is shown in the balance sheet at the amount subscribed. 18
(18) Corporate income tax Corporate income tax payable is assessed based on the taxable income for the period in accordance with Latvian tax legislation. In the year 2007 the tax rate by Latvian tax legislation is 15 %. Deferred tax is provided based on the balance sheet liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred income tax is determined using tax rates that have been enacted and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the tax assets can be utilised. (19) Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and stand-by letters of credit represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties carry the same credit risk as loans. The guarantees are initially recognized in the financial statements at fair value, as premium received. Subsequent to initial recognition, the Bank s liability under each guarantee is measured at the higher of the amortised premium and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is taken to the income statement. The premium received is recognized in the income statement on a straight line basis over the life of the guarantee. Documentary and commercial letters of credit which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. (20) Provisions Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is presented in the income statement. If the effect of the time value of money is material, provisions are discounted using current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a borrowing cost. Provisions made to guarantees and stand-by facilities. The amount of the loss is recognized when it is probable that the Bank will incur an outflow of economic benefit that can be reliably estimated and represents a present legal or constructive obligation. 19
(21) Contingencies Contingent liabilities are not recognised in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the financial statements but disclosed when an inflow of economic benefits is probable. (22) Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with International Financial Reporting Standards, as published by the International Accounting Standards Board, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingencies. The significant areas of estimation used in the preparation of the accompanying financial statements relate to evaluation of impairment for loans, provisions for loan commitments and stand-by facilities. Below are presented key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. The Bank regularly reviews its loans and receivables to assess impairment. The Bank uses its experienced judgement to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and there are few available historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on the observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans and receivables when scheduling its future cash flows. The Bank uses its experienced judgement to adjust observable data for a group of loans or receivables to reflect current circumstances. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Future events may occur which will cause the assumptions used in arriving at the estimates to change. The effect of any changes in estimates will be recorded in the financial statements, when determinable. (23) Subsequent events Post-year-end events that provide additional information about the Bank s position at the balance sheet date (adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material. 20
2. RISK MANAGEMENT The Bank has developed and follows risk management policies describing and regulating ways to minimize the risk of losses. The Board and Council have approved risk management policies. The Board supervises the risk management system but responsibility over implementation lies with business line managers. The risk management system is under continuous improvement in response to development of the Bank s activities and financial market. Interest rate, foreign exchange and liquidity risk Interest rate risk is the risk of losses because of changes in interest rates. The risk arises from adverse development in fair value or net interest income on Bank s domestic and foreign assets and liabilities. Interest rate risk is measured as the expected loss on interest rate positions that the Bank would incur as a result of a general 1 percentage point increase or decrease in all interest rates. The measurement is made on a currency-bycurrency basis. The chief finance officer controls daily risk management activities. The Board of Directors controls and sets guidelines for departments responsible for interest rate risk monitoring and management. Exchange rate risk is the risk of losses on the Bank's positions in foreign currency because of adverse developments in exchange rates. The management of the risk is described in Bank s exchange rate risk policy. To minimize the risk Chief finance officer is responsible for controlling the limits for each currency position. Liquidity risk is the risk that Bank will encounter difficulties in meeting obligations associated with financial liabilities. The management of operational liquidity risk aims primarily at ensuring that the Bank always has a liquidity buffer that is able, in the short term, to absorb the net effects of transactions made and expected changes in liquidity. Credit risk Credit risk is a risk of losses caused by untimely or incomplete settlements of debtor liabilities. Credit risk management processes in Sampo Banka are based on a credit policy approved by Council and on lending procedures approved by Board. Bank has credit risk limits approved for different types of borrowers, for products and industries. Credit policy is reviewed regularly. Credit risk is managed and controlled by the Board and Credit Committee. Great attention is paid to the control of the decision making authorities. Credit department continuously monitors compliance with related procedures and limits and evaluates the credit risk level on regularly basis as for total credit portfolio, as for individual borrowers. To ensure proper evaluations of the credit risk before entering into any cooperation with the clients, the Bank performs comprehensive review of the clients solvency and collateral. The financial position of borrowers is reviewed at least on annual basis or on more frequent bases if there is suspicion of weakening of financial situation of the customer. Analysis of creditworthiness of corporate customers is based on internal rating methodology which estimates probability of default. For the analysis of private customers internal scoring system is used. The pricing policy of Sampo Banka is based on balance between return and risk. Other risks related to operations The Bank s operations might be exposed to other risks that may result in unexpected losses. The cause of such risks may be, for instance: human errors or fraud, disruption of information systems, insufficient internal control and procedures etc. The Board and respective structural units of the Bank manage these risks. The Bank maintains the resources necessary for continued operations. 21
3. INTEREST REVENUE 2007 2006 Loans 9,101,377 3,953,896 Due from banks 1,343,345 323,520 Financial investments available-to-sale 289,045 105,119 Total 10,733,767 4,382,535 4. INTEREST EXPENSE 2007 2006 Due to credit institutions 4,961,911 1,492,526 Due to customers 1,627,061 929,340 Subordinated debt 206,178 - Payments to deposit guarantee fund 57,664 55,687 Total 6,852,814 2,477,553 5. NET FEES AND COMMISSION REVENUE 2007 2006 Account maintenance and money transfers 101,775 77,776 Credit related fees 106,518 50,721 Brokerage fees 8,534 4,375 Other 39,998 29,148 Total fees and commission revenue 256,825 162,020 Credit related fees paid 141,657 99,250 Brokerage fees paid 39,702 31,661 Other fees paid 99,478 3,311 Total fees and commission expenses 280,837 134,222 Net fees and commission income (24,012) 27,798 6. NET GAIN FROM OPERATIONS WITH FOREIGN CURRENCIES AND TRADING SECURITIES 2007 2006 Currency exchange operations, net 304,279 134,076 Foreign currency revaluation, net 3,908 4,193 Trading portfolio and investment securities (9,225) 11,630 Total 298,962 149,899 The increase of the profit from currency exchange operations is mainly due to the rapidly growing volumes of the bank's lending business related foreign exchange transactions. 22
7. PERSONAL EXPENSES Salaries and related social expenses include compensation to employees and related social security and other benefits. In 2007 the Bank employed an average of 87 (2006: 58) employees. 2007 2006 Staff salaries 910,850 574,766 Board members remuneration 143,689 147,175 Council member remuneration - 6,837 Social security costs 233,662 149,396 Total 1,288,201 878,174 8. ADMINISTRATIVE EXPENSES 2007 2006 Rent and other maintenance costs 394,197 187,555 Communication and office supplies 215,491 152,054 Sponsorship and marketing 168,646 152,399 Professional fees 50,967 57,372 Other 270,645 153,422 Total 1,099,946 702,802 9. OTHER EXPENSES 2007 2006 Payments for FCMC financing 24,064 14,347 Payments to associations of commercial banks 7,347 6,929 Other expenses 286 184 Total 31,697 21,460 10. CORPORATE INCOME TAX 2007 2006 Current corporate income tax 167,169 53,440 Changes in deferred corporate income tax (17,798) (3,285) Total 149,371 50,155 Reconciliation of the net profit before tax to the tax charge: 2007 2006 Profit before tax 1,163,107 368,287 Expected tax charge, applying current tax rate of 15% 174,466 55,243 Tax effect of: Permanent differences 15,514 8,264 Sponsorship (40,609) (13,360) Other - 8 Corporate income tax charge 149,371 50,155 23
10. CORPORATE INCOME TAX (continued) Deferred tax (asset)/liabilities: 31.12.2007 31.12.2006 Deferred tax liabilities: Temporary difference due to accelerated tax depreciation 81,490 59,385 Deferred tax assets: Deferred loan origination fees (122,867) (99,074) Accruals for bonuses (18,588) (11,625) Accruals for unused vacations (7,050) (3,867) Accruals for other expenses (5.964) - Net deferred tax (asset)/liability (72,979) (55,181) Allowance for realisation Net deferred tax (asset)/liability (72,979) (55,181) 11. CASH AND BALANCES DUE FROM THE BANK OF LATVIA 31.12.2007 31.12.2006 Current account with the Bank of Latvia 19,195,439 12,700,276 Cash on hand 627,363 437,618 Total 19,822,802 13,137,894 In 2007 and 2006 the average interest rate on the correspondent account in the Bank of Latvia was 2.0 % and 2.0 % respectively. The Bank is required to meet minimum reserve requirements set by the Bank of Latvia. Balance with Central Bank includes an obligatory reserve in amount of 15,641,876 as of 31 December 2007 (2006: 8,707,032 ). The Bank s monthly average correspondent account balance with Bank of Latvia should exceed the specified minimum; however, the funds in each particular day could be used in unrestricted manner. 12. DUE FROM CREDIT INSTITUTIONS Balances due from credit institutions are composed as follows: 31.12.2007 31.12.2006 Latvian credit institutions 577,034 214,439 OECD area credit institutions 56,513,766 4,199,814 Other area credit institutions 3,786 162 Due from credit institutions 57,094,586 4,334,415 Balances due from Latvian credit institutions were as follows: 31.12.2007 31.12.2006 Hansabanka 357,981 71,160 SEB Unibanka 173,239 84,842 Latvijas Krājbanka 45,814 58,437 Total 577,034 214,439 24
12. DUE FROM CREDIT INSTITUTIONS (continued) Balances due from OECD and other area credit institutions were as follows: 31.12.2007 31.12.2006 Danske Bank 47,199,377 - Sampo Bank plc 9,072,242 3,644,979 JP Morgan Chase Bank 84,057 250,824 Deutsche Bank 82,181 151,216 HSBC Bank plc 75,909 72,795 Sampo Pank 1,582 - Sampo Bankas UAB 2,204 162 Total 56,517,552 4,119,976 Average interest rates on deposits placed with other banks at the end of 2007 and 2006 were 8.6 % and 5.20 % respectively. 13. LOANS Loans are composed as follows: 31.12.2007 31.12.2006 Private companies 28,243,069 11,406,893 Total gross loans to corporate customers 28,243,069 11,406,893 Loans to private individuals 145,948,194 102,194,305 Non-profit organizations 90,760 81,640 Bank staff and their relatives 1,113,849 937,220 Total gross loans to private individuals and other customers 147,152,803 103,213,165 Total loans to customers 175,395,872 114,620,058 Allowance for loan impairment (350,503) (88,999) Total loans, net 175,045,369 114,531,059 The composition of the gross loan portfolio by profile is as follows: 31.12.2007 31.12.2006 Residential mortgages 137,281,378 98,804,166 Other mortgage loans 6,763,598 7,490,057 Overdrafts 11,391,489 4,309,932 Credit cards loans 749,442 384,514 Other loans 19,209,965 3,631,389 Total loans 175,395,872 114,620,058 Allowance for loan impairment (350,503) (88,999) Total loans, net 175,045,369 114,531,059 1,250,282 (2006: 52,064) of loans are secured by deposits. 25
13. LOANS (continued) The composition of the loan portfolio by geographic profile is as follows: 31.12.2007 31.12.2006 Residents of Latvia 172,540,587 114,294,534 Residents of OECD area 2,698,825 325,524 Other 156,460 - Total loans 175,395,872 114,620,058 Allowance for loan impairment (350,503) (88,999) Net loans 175,045,369 114,531,059 Average interest rates for loans calculated on monthly average outstanding loan balances for 2007 and 2006 were 6.01 % and 5.28 % respectively. The following table provides an analysis of movement in the impairment loss allowance balance for credit losses: 2007 2006 1 January 88,999 156,539 Impairment allowance charge for the year 326,527 128,390 Reversal (64,911) (162,226) Write-off (63) (33,704) Foreign currency translation (29) - 31 December 350,523 88,999 14. FINANCIAL INVESTMENTS AVAILABLE-FOR-SALE In year 2006 the Bank acquired 10-year Latvian Government bonds with nominal value 4 million and coupon rate 5.125%. In year 2007 the Bank sold these 10-year Latvian Government bonds. In year 2007 bank acquired the short term Latvian Government bills with nominal value 300 000 and the short term corporate notes (Kesko OYJ Notes) with nominal value 1.85 million and 200 000. 26
15. INTANGIBLE ASSETS Licenses Software Total intangible assets Historical cost 31 December 2005 84,502 53,456 137,958 Additions 115,110 92,652 207,762 Disposals - - - 31 December 2006 199,612 146,108 345,720 Accumulated amortization 31 December 2005 1,408-1,408 Charge for the year 34,208 13,439 47,647 Disposals - - - 31 December 2006 35,616 13,439 49,055 Net book value 31 December 2005 83,094 53,456 136,550 31 December 2006 163,996 132,669 296,665 31 December 2006 199,612 146,108 345,720 Additions 63,303 72,358 135,661 Disposals 31 December 2007 262,915 218,466 481,381 Accumulated amortization 31 December 2006 35,616 13,439 49,055 Charge for the year 52,323 38,200 90,523 Disposals - - - 31 December 2007 87,939 51,639 139,578 Net book value 31 December 2006 163,798 132,867 296,665 31 December 2007 174,976 166,827 341,803 The most significant item in intangible assets is Bank Information System FORPOST. As of year end its residual value for system and licenses comprise 304,494 ( 268,863 end of 2006). 27
16. FIXED ASSETS Leasehold Improvements Advance payment Total Fixed Assets Office Equipment Historical cost 31 December 2005 273,357 43,685-317,042 Additions 224,660 38,720 18,085 281,465 Disposals (25,374) - - (25,374) 31 December 2006 472,643 82,405 18,085 573,133 Accumulated depreciation 31 December 2005 27,166 1,138-28,304 Charge for the year 100,201 12,745-112,946 Disposals (6,470) - - (6,470) 31 December 2006 120,897 13,883-134,780 Net book value 31 December 2005 246,191 42,457-288,738 31 December 2006 351,746 68,522 18,085 438,353 Historical cost 31 December 2006 490,728 82,405-573,133 Additions 369,238 316,774 13,555 699,567 Disposals 96,351 52,260-148,611 31 December 2007 763,615 346,919 13,555 1,124,089 Accumulated depreciation 31 December 2006 120,897 13,883-134,780 Charge for the year 179,047 62,402-241,449 Disposals 45,354 - - 45,354 31 December 2007 254,590 76,285-330,875 Net book value 31 December 2006 351,746 68,522 18,085 438,353 31 December 2007 509,025 270,634 13,555 793,214 17. DEFERRED EXPENSES AND ACCRUED INCOME 31.12.2007 31.12.2006 Deferred expenses 125,204 35,725 Interest due 1,296,014 313,652 Other accrued income - 19 Total 1,421,218 349,396 28
18. OTHER ASSETS 31.12.2007 31.12.2006 Money in transit 182,729 - Guarantee payments for rental 94,690 94,690 Other receivable 63,090 19,465 Advance payments 14,832 114,155 Prepaid taxes 8,165 4,593 Other assets 983 3,835 Total 364,489 236,738 19. DUE TO CREDIT INSTITUTIONS 31.12.2007 31.12.2006 To Danske Bank 155,000,048 - To Hansabank 4,500,000 4,500,000 To SEB Latvijas Unibanka 2,279,355 4,540,114 To Latu rezerves fonds 2,166,143 963,631 To Latvijas Krājbanka 2,000,000 1,000,000 To Nordea Bank Finland Plc Latvia branch 2,000,000 - To Sampo Bank plc 1,408,784 84,256,795 To Latvijas Hipotēku un Zemes banka 900,000 - To Sampo Pank 857,950 1,502 To Naudas tirgus fonds 457,245 - To Sampo Bankas AB 127,687 1,975 Total 171,697,212 95,264,017 Average interest rates for borrowings from credit institutions calculated on monthly average outstanding borrowing balances for 2007 and 2006 were 5.9 % and 3.0 % respectively. 20. DEPOSITS 31.12.2007 31.12.2006 Private companies 34,434,353 6,106,249 Private persons 20,497,139 20,706,909 Non - residents 4,082,920 3,099,175 Public and religious organisations 1,555,259 441,215 Total 60,569,671 30,353,548 31.12.2007 31.12.2006 Current account 9,387,716 12,931,330 Saving account 6,485,204 1,577,608 Time deposits 44,696,751 15,844,610 Total 60,569,671 30,353,548 Average interest rates for customer deposits calculated on monthly average outstanding volume of deposits for 2007 and 2006 were 4.35 % and 3.1 % respectively. 29
21. ACCRUED LIABILITIES 31.12.2007 31.12.2006 Accrued interest 1,610,028 475,807 Payables 26,523 29,135 Total 1,636,551 504,942 22. ACCRUALS 31.12.2007 31.12.2006 Annual bonuses for staff 123,923 77,498 Accruals for vacations 46,998 25,781 Other 39,759 - Total 210,680 103,279 2007 2006 1 January 103,279 34,592 Arising during the year 190,815 86,901 Utilised 83,414 18,214 31 December 210,680 103,279 23. OTHER LIABILITIES 31.12.2007 31.12.2006 Money in transit 543,331 375,231 Other 84,859 82,055 Total 628,190 457,286 24. SUBORDINATED DEBT Subordinated debt consists of the subordinated loan from Danske Bank AS (Denmark) from 15 May 2007 in the amount of EUR 10 000 000, equivalent to 7 028 040. The subordinated loan bears interest calculated as 3 months EURIBOR plus 0.25 % per annum. There is an option to extend the maturity of subordinated loan from 15 May 2012 to 15 May 2017 at 3 months EURIBOR plus 1.75 % per annum. 25. SHARE CAPITAL The Bank s share capital was increased by 3.5 million on 19 January 2007. The share issue was fully paid by Sampo Bank Plc. Danske Bank AS, registered in Denmark, Commercial Register No 61126228, registered address: Holmens Kanal 2-12, DK-1092, Copenhagen, Denmark, acquired 100 % of AS Sampo Banka at the beginning of 2007. Danske Bank AS owns 100% of AS Sampo Banka shares. As at 31 December 2007 the Bank s issued share capital consists of 120,000 ordinary shares with nominal value of 100. All shares are fully paid. 30