as latvijas pasta banka statements/eng/2012... · 2015-03-25 · the treasury successfully issued...

AS LATVIJAS PASTA BANKA

Financial statements of the Bank

for the year ended 31 December 2012



000’LVL for the year ended 31 December 2012

2

CONTENTS

Page

Management Report 3-4

The Council and the Board 5

Statement of Management’s Responsibility 6

Auditors’ Report 7-8

Bank’s Financial Statements:

Statement of Comprehensive Income 9

Statement of Financial Position 10

Statement of Changes in Equity 11

Statement of Cash Flows 12-13

Notes to the Financial Statements 14 – 70




3

MANAGEMENT REPORT

Dear customers, cooperation partners and shareholders,

On behalf of the management of AS Latvijas pasta banka allow us to present for your

consideration the annual report of AS Latvijas pasta banka (hereinafter also – the Bank) showing

the Bank’s financial performance for the year ended 31 December 2012.

Another relatively turbulent year, from a global economic perspective, has passed by. 2012

perhaps will not be marked in the annals of history as the year of economic disturbance like

beginning of 2008, however, certain events in the financial markets have marked 2012 with some

unthinkable precedents. In particular, sovereign debt crisis and, in particular, Greece - which

became pressing in year 2011 and was resolved, if it can be called a solution – in year 2012

seriously shook the world`s financial markets. Before that, even probability of any EU member

state and euro area country’s insolvency was not seriously considered. The reliability of

European financial system was seriously undermined.

Second half of 2012 was relatively peaceful. International Monetary Fund experts expect euro

area financial improvement in second half of 2013 as an outcome of strict political exercise. U.S.

politicians have averted a financial bankruptcy, raised the debt ceiling. The economic recovery is

gradually strengthening, but the re-recession risks remain high.

As financial markets stabilize, lat money market interest rates have returned to the level that is

close to euro money market interest rates. Since 2011 Latvian government has successfully

returned to international capital markets by issuing bonds denominated in U.S. dollars with a

maturity of 10 and 5 years. The Treasury successfully issued Latvian government bonds

denominated in lats with a maturity of 10 years, setting the historically low yields.

International lenders and credit rating agencies favourable evaluation of Latvian economy

confirm Latvian business environment stabilization. This may encourage investment inflows,

which may increase the manufacturing and export capacity.

Considering the economic situation and development outlook, the Bank's core values have not

changed, and they are: integrity – fair and equitable treatment to all customers of the Bank,

professionalism - professional team, responsibility - high level of responsibility for decisions,

loyalty - equal treatment of all Bank clients and colleagues, quality - convenient and high-quality

services to customers of the Bank and the Bank's competitiveness, flexibility - the ability to

adapt to clients’ needs, safety - Bank's customers can be confident on their deposits and

information provided to the Bank within co-operation.

Range of banking services is continuously increasing, maintaining quality as evidenced by

consistently and organically growing number of clients.

During the year, despite the difficult situation in the world economy, the Bank's assets have

increased by 25% and reached 57 million lats. Bank’s performance, as a relatively new member

of the local financial market, is undoubtedly valued positively, and approve Bank's ability to

meet challenges and to operate in all circumstances.




4

MANAGEMENT REPORT (continued)

The Bank is in full compliance with all regulatory requirements. The capital adequacy ratio is

30.47%, which exceeds the Financial and Capital Market Commission's minimum requirements.

The liquidity ratio is 111.19%, which also multiple times exceeds the Financial and Capital

Market Commission ratio of 30%.

Based on the above, it is clear that the Bank is well placed to successfully continue its operations

strategy.

In order to promote the further development of the Bank, the Bank's council has decided to

purchase a building in Brivibas Street 54, Riga, moving Bank's central office closer to the city

center.

The Bank’s strategy will keep a major focus on management of assets of wealthy customers and

customised products also in the future.

Another future strategic priority of the Bank is 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.

The Bank’s management keeps pace with the highly volatile situation on the financial market,

being well aware of its responsibility towards the customers and potential risks that are carefully

assessed and managed following the prudence principle, keeping the overall risk exposure

moderate.

The Bank is able to be a reliable partner in the business and private matters of its customers,

keeping to the steady and professional approach to achieve further growth through joint efforts.

In view of the regional and national economic forecasts, we are still optimistic and confident

about the Bank’s prospects for the year 2013 and beyond and we are sure that the Bank will have

then an even steadier position in the Latvian banking sector.

We would like to express our deep gratitude to the customers of AS Latvijas pasta banka for

their confidence and hope to continue our mutually beneficial cooperation also in the future!

Best regards,

Riga, 19 March 2013

Biomins Kajems

Chairman of the Council

Boriss Ulmans

Chairman of the Board




5

THE COUNCIL AND THE BOARD

The Council

The Council of the Bank as at 31 December 2012

Name Position Date of appointment

Biomins Kajems Chairman of the Council 13/10/2008

Jūlija Kozlova Council Member 13/10/2008

Guntars Grīnvalds Council Member 13/10/2008

The Board

The Board of the Bank as at 31 December 2012

Name Position Date of

appointment

Boriss Ulmans Chairman of the Board 05/09/2008

Arnis Kalveršs Board Member 05/09/2008

Dairis Krūmiņš Board Member 27/03/2012

For the Bank’s management:

Biomins Kajems Boriss Ulmans

Chairman of the Council Chairman of the Board

Riga, 19 March 2013




6

STATEMENT OF MANAGEMENT’S RESPONSIBILITY

The management of AS Latvijas Pasta Banka (hereinafter – the Bank) is responsible for the

preparation of the Bank’s financial statements for each financial year.

In preparing the financial statements set out on pages 9 to 70 for the year ended 31 December

2012, the management has applied appropriate accounting principles that are based on prudent

and reasonable judgments and estimates. The financial statements have been prepared in

accordance with International Financial Reporting Standards as adopted by the European Union

and the regulations of the Financial and Capital Market Commission.

The Bank’s management is responsible for maintaining proper accounting records and ensuring

compliance with the Regulations of the Financial and Capital Market Commission, law on credit

institutions and other legislation. Management is also responsible for taking all reasonable efforts

to safeguard the Bank’s assets and the prevention and detection of fraud and other irregularities

in the Bank. Management’s decisions and judgments used in the preparation of these financial

statements were prudent and reasonable.

For the Bank’s management:



Riga, 19 March 2013




7

AUDITORS’ REPORT




8




9

STATEMENT OF COMPREHENSIVE INCOME

Notes 2012 2011

Interest income 4 2 289 1 757

Interest expense 4 (866) (535)

Net interest income 4 1 423 1 222

Commission and fee income 5 2 113 1 688

Commission and fee expense 5 (832) (792)

Net commission and fee income 5 1 281 896

Net trading income

Other income

7

6

130

39

52

97

Operating income 2 873 2 267

Administrative expense 8 (1 234) (855)

Depreciation/ amortisation 16 (77) (87)

Other expense 6 (309) (306)

Total operating expense (1 620) (1 248)

Change in allowances 9 (28) (2 161)

Profit / (loss) before tax 1 225 (1 142)

Corporate income tax 10 (185) 168

Net profit / (loss) for the year 1 040 (974)

Profit/(loss) attributable to owners of the Bank 1 040 (974)

Change in revaluation reserve, net 278 (40)

Total comprehensive income/(expense) 1 318 (1 014)

Total comprehensive income/(expense) attributable to

owners of the Bank

1 318 (1 014)

Earnings/ (loss) per share (LVL) 25 0.168 (0.157)

The accompanying notes on pages 14 to 70 form an integral part of these financial statements.

The Bank’s financial statements set out on pages 9 to 70 were approved by the Board and by the

Council on19 March 2013.



Riga, 19 March 2013




10

STATEMENT OF FINANCIAL POSITION

Notes 31/12/2012 31/12/2011

ASSETS

Cash and balances with the Bank of Latvia 11 3 076 2 658

Due from credit institutions 12 14 040 14 944

Available-for-sale financial assets 14 6 705 3 506

Derivative financial instruments 15 - 95

Loans and receivables 13 8 506 7 095

Held-to-maturity financial investments 14 23 034 16 056

Current tax assets 10 - 1

Deferred tax assets 10 - 136

Property, plant and equipment 16 27 44

Intangible assets 16 367 405

Other assets 17 1 146 324

Prepaid expense and accrued income 66 40

Total assets 56 967 45 304

LIABILITIES

Due to credit institutions 19 - 1 633

Liabilities at amortised cost 49 253 38 209

Deposits from customers 20 47 847 37 155

Subordinated debt 21 1 406 1 054

Derivative financial instruments 15 - 73

Current tax liabilities

Deferred tax liabilities

10

10

3

46

-

Other liabilities 22 1 049 97

Deferred income and accrued expense 23 135 129

Total liabilities 50 486 40 141

EQUITY ATTRIBUTABLE TO

EQUITY HOLDERS OF THE BANK

Paid-in share capital 24 6 200 6 200

Asset revaluation reserve 215 (63)

Retained earnings / (Accumulated deficit) 66 (974)

Total equity attributable to equity holders of

the Bank 6 481 5 163

Total equity 6 481 5 163

Total liabilities and equity 56 967 45 304


The Bank’s financial statements set out on pages 9 to 70 were approved by the Board on and by

the Council on 19 March 2013.

Riga, 19 March 2013






11

STATEMENT OF CHANGES IN EQUITY

Paid-in share

capital

Fair value

revaluation

reserve of

available-for-

sale financial

assets

Retained

earnings Total

Balances as at 31 December

2010 5 000 (23) 179 5 156

Total comprehensive loss - (40) (974) (1 014)

Dividends paid - - (179) (179)

Issue of shares 1 200 - - 1 200

Balances as at 31 December

2011

6 200 (63) (974) 5 163

Total comprehensive income - 278 1 040 1 318

Balance as at 31 December

2012

6 200 215 66 6 481






Riga, 19 March 2013




12

STATEMENT OF CASH FLOWS

2012 2011

CASH FLOWS FROM OPERATING ACTIVITIES

Profit / (loss) before tax 1 225 (1 142)

Amortisation / depreciation 77 87

Increase in impairment allowance for financial assets 26 2 161

Unrealised foreign exchange (gain) / loss (97) 127

Increase in cash and cash equivalents from operating activities

before changes in assets and liabilities 1 231 1 233

(Increase) / decrease in balances due from credit institutions (1 854) 2 058

Increase in loans and receivables (1 437) (1 334)

Increase in other assets (795) (241)

(Decrease) / increase in balances due to credit institutions (1 633) 563

Increase in deposits from customers 10 692 19 677

Increase in other liabilities 885 179

Change in cash and cash equivalents from operating activities 7 089 22 135

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property, plant and equipment (22) (28)

Acquisition of held-to-maturity financial investments (3 011) (1 071)

Acquisition of available-for-sale financial assets (6 845) (9 588)

Decrease in cash and cash equivalents from investing activities (9 878) (10 687)

CASH FLOWS FROM FINANCING ACTIVITIES

Issue of shares - 1 200

Dividends paid - (179)

Decrease of subordinated loan (527) -

Increase of subordinated loan 879 1 054

Cash and cash equivalents from financing activities 352 2 075

Net cash flows for the year (2 437) 13 523

Cash and cash equivalents at the beginning of the year 15 227 1 831

Foreign exchange gain / (loss) 97 (127)

Cash and cash equivalents at the end of the year 12 887 15 227

Cash and cash equivalents are disclosed in note 26.




13

STATEMENT OF CASH FLOWS (continued)

Operating cash flows from interest

2012 2011

Interest paid 814 550

Interest received 2 075 1 593






Riga, 19 March 2013




14

NOTE 1 GENERAL INFORMATION

AS Latvijas pasta banka (hereinafter – the Bank) is a joint stock company registered in the

Republic of Latvia and operating according to the laws of the Republic of Latvia and the licence

issued by the Financial and Capital Market Commission on 12 September 2008.

The registered office of AS Latvijas pasta banka is at Katlakalna iela 1, Riga, LV-1073, Latvia.

The Bank has the head office and two customer service centres. The core business activity of the

Bank comprises local and international payments, attraction of deposits, issue and servicing of

payment cards, issue of loans, securities and foreign exchange transactions.

According to the Commercial Law of the Republic of Latvia, the general shareholders’ meeting

has a right and duty to decide on the approval of the annual report.

NOTE 2 BASIS OF PREPARATION

(a) Statement of compliance

The Bank’s financial statements are 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 is operating pursuant to a

development strategy that is based on an assumption that the initial Pasta Banka project is not

supported and the initial development strategy cannot be implemented. This strategy will be

pursued until it is confirmed legally that the initial strategy is or is not feasible. The Bank’s

operating strategy is aimed at further creating a 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.




15

Having analysed the key risks related to the present and potential economic situation, the

development of the banking industry as well as the Bank’s existing and potential human and

financial resources, the Bank has selected to pursue the following strategy:

- As a priority, to offer its services to legal entities, forming the customer portfolio based on

customised services;

- Along with legal entities, to offer equal customised services also to high-income and ultra-

high income private individuals;

- To be present in Latvia, Russia, and Ukraine;

- To define as the priority business activity the following:

issue and acceptance of payment cards via POS terminals and the Internet, in

cooperation with renowned organisations, such as MasterCard, Visa, Tieto, First

Data, Global Payment,

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;

Bank for 2012 year set the target capital adequacy ratio of at least 20 per cent.

(c) Functional and presentation currency

These financial statements are reported in thousands of lats (LVL’000), unless otherwise stated.

The functional currency of the Bank is the Latvian lat (LVL).

(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.

Financial assets and financial liabilities are offset and the net amount reported in the statement of

financial position only when there is a legally enforceable right to offset the recognised amounts

and there is an intention to settle on a net basis, or to realise the assets and settle the liability

simultaneously.

Income and expense are not offset in the financial statements unless required or permitted by any

accounting standard or interpretation, as specifically disclosed in the accounting policies of the

Bank.




16

NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Adoption of new and/or changed IAS, IFRS and IFRIC interpretations

The following new and amended IFRS and interpretations come into force in 2012 year, but does

not apply to the Bank's operations and have no impact on these financial statements.

Amendment 7. IFRS „Financial Instruments: Disclosures" for the transfer of assets

(effective for accounting periods beginning in 1 July 2011 or later).

Amendments 1. IFRS "Initial Application" on certain dates and hyperinflation

(effective for accounting periods beginning in 1 July 2011 or later).

Amendment 12. IAS "Corporate Income tax" in respect of deferred tax (effective

for annual periods beginning on 1 January 2012 or later).

A number of new standards and interpretations have been published and come into force on

financial periods beginning in 1 January 2013 or later, and do not relate to the Bank's operations

or are not approved in the European Union.

Amendment 19. IAS 'Accounting for Employee benefits' (effective for accounting

periods beginning in 1 January 2013 or later).

Amendments 1. IAS 'Reflection in financial statements "for the statement of

comprehensive income (effective for annual periods beginning on or 1 January 2012 or

later approved in the EU in June 2012);

9th IFRS "Financial Instruments 1. Part: Classification and measurement '(effective

for annual periods beginning on 1 January 2015 or later, and it is not approved in the

EU).

10th IFRS "Consolidated Financial Statements" (effective for accounting periods

beginning in 1 January 2013 or later, the EU approved it in 2012th December for

reporting periods which start in 1 jauary 2014 or later).

11th IFRS "agreement of cooperation" (effective for accounting periods beginning in

1 january 2013 or later, the EU approved the 2012th December for reporting periods

starting in 1 january 2014 or later).

12. IFRS 'Disclosure of interests in other entities' (effective for accounting periods

beginning in 1 january 2013 or later, the EU approved the 2012th December for

reporting periods starting in 1 January 2014 or later).

Amendment 10., 11. and 12. Application of IFRS (effective for accounting periods

beginning in1 January 2013or later, the EU approved the 2012th December for reporting

periods beginning in 1 January 2013 or later).

13th IFRS "Fair Value Measurement" (effective for accounting periods beginning in 1

January 2013 or later, the EU approved at 2012th December).

27th IAS (revised in 2011.) "Separate Financial Statements" (effective for accounting

periods beginning in 1 january 2013 or later, the EU approved at 2012th December for

reporting periods beginning in 1 January 2014 or later).




17

28th IAS (revised in 2011.) "Associates and joint ventures' (effective for accounting

periods beginning in 1 january 2013 or later, the EU approved at 2012th December for

reporting periods beginning in 1 january 2014 or later).

Amendment 7. IFRS "Financial Instruments: Disclosures" for financial assets and

financial liabilities netting `(effective for accounting periods beginning in 1 january 2013

or later approved in the EU 2012th December).

Amendment 32. IAS 'Financial Instruments: Disclosures "for financial assets and

financial liabilities netting (effective for accounting periods beginning in 1 January 2014

or later approved in the EU 2012th December).

Amendments 1. IFRS "Initial Application" for government loans (effective for

accounting periods beginning in 1 January 2013 or later, is not approved in the EU).

International Financial Reporting Standards Improvements (issued in May 2012,

most of the improvement are effective for reporting periods beginning in 1 january 2013

or later, they are not endorsed by the EU):

- 1. IFRS 'application of standards for the first time ";

- 1. IAS 'Presentation of Financial Statements ";

- 16. SGS "Assets";

- 32. IAS 'Financial Instruments: Disclosures ";

- 34. SGS "Interim Financial Reporting".

Amendment 10. IFRS, 12. IFRS and 27. IAS for investment companies (effective for

accounting periods beginning in 1 January 2014 or later, is not approved in the EU).

20th IFRIC "Waste removal costs The production stage open cast mining"

(effective for accounting periods beginning in 1 january 2013 or later, the EU approved

it in 2012th December).

(b) Significant accounting judgments and estimates

In the process of applying the Bank's accounting policies, management has exercised judgment

and estimates in determining the amounts recognised in the financial statements. The most

significant uses of judgment and estimates are as follows:

Going concern

The Bank’s management has made an assessment of the Bank’s ability to continue as a going

concern and is satisfied that the Bank has the resources to continue in business for the

foreseeable future. Furthermore, the management is not aware of any uncertainties that may cast

doubt upon the Bank’s ability to continue as a going concern. Therefore, the financial statements

continue to be prepared on the going concern basis.

Fair value of financial instruments

Where the fair values of financial assets and financial liabilities recorded in the statement of

financial position cannot be derived from active markets, they are determined using a variety of

valuation techniques that include the use of mathematical models. The inputs to these models are

derived from observable market data where possible, but where observable market data are not




18

available, judgment is required to establish fair values. The judgments include considerations of

liquidity and model inputs.

Impairment losses

The individual impairment allowance is made for credits based on the borrower’s financial

position, value of collateral, and fulfilment of the loan agreement. The level of the allowance is

based on the present value of expected future cash flows considering relevant factors that may

affect the borrowers’ ability to repay, collateral value, and current economic conditions. Ultimate

losses may vary from the current estimates. The value of the collateral held in connection with

loans and advances is based on the estimated fast realisable value of the asset and is taken into

account when determining expected cash flows and accordingly the allowance.

Available-for-sale financial assets are assessed individually for impairment whenever there is

any indication of potential impairment. If there is objective evidence that available-for-sale

financial assets are impaired irreversibly, the related impairment loss is removed from equity and

recognised in the statement of comprehensive income. An objective evidence would also include

a ‘significant’ or ‘prolonged’ decline in the fair value of the investment below its cost. The bank

treats ‘significant’ generally as 20% and ‘prolonged’ generally as greater than six months.

(c) Foreign currency translation

Transactions and balances

Transactions in foreign currencies are recorded in lats at the functional currency rate of exchange

ruling at the date of the transaction set by the Bank of Latvia. Monetary assets and liabilities

denominated in foreign currencies are translated into lats at the official rate set by the Bank of

Latvia of exchange prevailing at the end of the year.

All realised gains and losses are taken to the statement of comprehensive income in the period

when incurred. Unrealised gains and losses resulting from the revaluation of assets and liabilities

are included in the statement of comprehensive income applying the exchange rates prevailing at

the reporting date.

The principal year-end rates of exchange (LVL to one foreign currency unit) used in the

preparation of these financial statements are as follows:

Official exchange rate

31 December 2012 31 December 2011

EUR 0.702804 0.702804

USD 0.531000 0.544000

(d) Financial assets and liabilities

Recognition and derecognition of financial assets

Financial assets are recognised in the statement of financial position when, and only when, the

Bank becomes a party to the contractual provisions of the instrument. A financial asset is




19

derecognised only when the contractual rights to receive cash flows from the asset have expired,

or the Bank has transferred the financial asset and substantially all the risks and rewards of the

asset to the counterparty.

All purchases and sales of financial assets, except for loans issued to non-bank customers, are

recognised and derecognised on the settlement date. Loans to non-bank customers are recognised

in the statement of financial position when cash is transferred to the customer’s current account.

Derivatives recorded at fair value through profit or loss

The Bank uses derivatives such as forward foreign exchange contracts and currency swaps.

Derivatives are recorded at fair value and carried as assets when their fair value is positive and as

liabilities when their fair value is negative. The fair value of derivatives is disclosed in the

statement of financial position as derivative financial instruments. Daily changes in the fair value

of derivatives are included in the statement of comprehensive income in net trading income.

Available-for-sale financial assets

The Bank acquires available-for-sale securities to hold them for an undefined period and

generate interest income and/or profit from the increase in prices of securities. The available-for-

sale portfolio includes fixed income securities.

After initial recognition at fair value, including direct transaction costs, available-for-sale

securities are measured at fair value. The revaluation result is charged through the statement of

comprehensive income to the shareholders’ equity as the fair value revaluation reserve of

available-for-sale financial assets.

For available-for-sale securities acquired at a discount (premium), the respective discount

(premium) amount is amortised on a systematic basis, using the effective interest method.

Amortised amounts are charged to the statement of comprehensive income as interest income

from debt securities.

Any gain or loss resulting from disposal of available-for-sale securities and the fair value

revaluation reserve accrued until such disposal are included in the statement of comprehensive

income as net realised trading gain/ (loss).

Held-to-maturity financial investments Held-to-maturity financial investments are non-derivative financial assets with fixed or

determinable payments and fixed maturities, which the Bank has the intention and ability to hold

to maturity and which do not meet the criteria of loans and receivables. Held-to-maturity

financial investments comprise debt securities. Held-to-maturity financial investments are carried

at amortised cost using the effective interest rate method, less any allowance for impairment.

Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments

that are not quoted in an active market.

Loans are carried at amortised cost using the effective interest method. The amortised cost of a

loan is the amount at the issue of the loan minus principal repayments, plus or minus the




20

cumulative amortisation using the effective interest rate method of any difference between the

initial amount and the maturity amount, and minus any reduction for impairment or

uncollectability.

Finance leases (Bank as a lessor)

For reporting purposes, finance lease receivables are carried as loans and receivables.

Finance lease receivables are recognised as assets at the commencement of the lease term at an

amount equal at the inception of the lease to the net investment in the lease. Finance income is

recognised over the lease term to produce a constant periodic return on the net investments

outstanding in respect of finance leases.

Financial liabilities Financial instruments carried as deposits from customers and subordinated debt are classified as

financial liabilities at amortised cost.

After initial measurement, financial liabilities are subsequently measured at amortised cost using

the effective interest rate method. Amortised cost is calculated by taking into account any

discount on issue and fees that are an integral part of the effective interest rate. The amortisation

is included in interest expense in the statement of comprehensive income.

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 amount is

recognised in profit or loss.

Impairment of financial assets The Bank assesses at each reporting date whether there is any objective evidence that a financial

asset or a group of financial assets is impaired.

The Bank first assesses individually whether objective evidence of impairment exists

individually for financial assets that are individually significant and collectively for all past due

loans regardless of their net carrying amount. 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 there is objective evidence that an impairment loss 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 discounted at the financial asset’s original effective interest rate.

For the purpose of a collective evaluation of impairment, the Bank assumes that contractual cash

will be recovered and the impairment loss is evaluated on the basis of historical loss experience

adjusted for current observable data.




21

The carrying amount of the asset is reduced through the use of an allowance account, and the

decrease or increase of allowances is taken to the statement of comprehensive income for the

reporting year. Loss together with the associated allowance are written off when there is no

realistic prospect of future recovery and all collateral has been realised or has been transferred to

the bank. If, in a subsequent year, the amount of the estimated impairment loss increases or

decreases because of an event occurring after the impairment was recognised, the previously

recognised impairment loss is increased or reduced by adjusting the allowance account. If a

future write–off is later recovered, the recovery is credited to the ’Credit loss expense’.

Fair value of financial assets and liabilities

Fair value is the amount for which an asset could be exchanged, or a liability settled, between

knowledgeable, willing parties in an arm’s length transaction. To determine the fair value of

financial assets and liabilities, the Bank uses quoted market prices, ratings assigned by

independent rating agencies, or relevant valuation techniques. Where quoted prices are not

readily available, fair values are determined by using alternative pricing models considering that

fair value is not the amount that the Bank would receive or pay in a forced transaction,

involuntary liquidation or distress sale. These models are based on the discounted cash flow

analysis where relevant cash flows from the respective financial assets are measured and

discounted at an interest rate based on discount rates applicable to a certain category of assets.

(e) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is

calculated using the straight-line method applying the following rates:

Property, plant and equipment:

Computers and equipment 33 %

Other property, plant and equipment 10-20 %

An item of property, plant and equipment is derecognised upon disposal or when no future

economic benefits are expected from its use. Any gain or loss arising on derecognition of the

asset is calculated as the difference between the net disposal proceeds and the carrying amount of

the item at the disposal date and is included in the statement of comprehensive income.

Useful lives and residual values are reviewed annually.

(f) Intangible assets

Intangible assets are identifiable non-monetary assets without physical substance (licences,

software that is not an integral part of the related hardware, etc.) held for supply of services or

otherwise and are recognised as such when it is probable that the expected economic benefits

that are attributable to the asset will flow to the Bank.

Intangible assets are stated at cost less accumulated amortisation and assessed for impairment

whenever there is an indication that the intangible asset may be impaired. The amortisation is




22

included in the statement of comprehensive income on a straight-line basis over the useful life of

the asset. The useful life of each asset is estimated on an individual basis, considering the

contractual provisions and/or the period in which the asset’s future economic benefits are

expected to be consumed by the Bank.

The amortisation period and the amortisation method for an intangible asset with a finite useful

life is reviewed at least at the end of each reporting period. Changes in the expected useful life or

the expected pattern of consumption of future economic benefits embodied in the asset are

accounted for by changing the amortisation period or method, as appropriate, and are treated as

changes in accounting estimates.

The amortisation rates by categories of assets are as follows:

Intangible assets:

Licences 10 %

Software 10 %

(g) Impairment of non-financial assets

The Bank assesses at each reporting date whether there is an indication that non-financial assets

(except for the deferred tax asset) may be impaired. If any such indication exists, the Bank makes

an estimate of the asset’s recoverable amount. An impairment loss is recognised when the

carrying amount of an asset exceeds its recoverable amount. Impairment losses are taken to the

statement of comprehensive income.

(h) Recognition of income and expense

For all financial instruments measured at amortised cost, interest bearing financial assets

classified as available-for-sale and financial instruments designated at fair value through profit or

loss, interest income or expense is recorded in the statement of comprehensive income by using

the EIR, which is the rate that exactly discounts estimated future cash payments or receipts

through the expected life of the financial instrument. The calculation takes into account all

contractual terms of the financial instrument (for example, prepayments, maturity and other

options), but not future credit losses.

Interest income and expense include the amortisation of any difference between the cost of

interest-bearing financial assets or liabilities and their maturity amount calculated applying the

effective interest rate method (discount, premium, etc.).

Interest income comprises coupons earned from debt securities of the Bank’s portfolio.

Accumulated interest income and income from impaired financial assets are included in the

statement of comprehensive income unless the Bank has objective evidence that payments will

not be received in the due term. Once the recorded value of a financial asset has been reduced

due to an impairment loss, interest income continues to be recognised using the rate of interest




23

used to discount the future cash flows for the purpose of measuring the impairment loss.

Commission and fee income from customers is usually recognised on an accrual basis as the

service is supplied based on each particular situation, or on a certain performance.

Fees earned for the provision of services over a period of time are accrued over that period and

taken to income. These fees include account servicing, asset management, commission from

payment card transactions, etc. Loan related fees are taken to income on a systematic basis over

the period of the loan. Loan commitment fees for loans that are likely to be drawn down and

other credit related fees are deferred (together with any incremental costs) and recognised as an

adjustment to the EIR on the loan. When it is unlikely that a loan will be drawn down, the loan

commitment fees are recognised over the commitment period on a straight line basis. Fees that

are due for the provision of certain services are taken to income on completion of the respective

service.

Income and expense attributable to the reporting period are taken to the statement of

comprehensive income regardless of the receipt or payment date.

(i) Cash and cash equivalents

According to IAS 7 Cash flow statements, cash and cash equivalents comprise cash and amounts

due from central banks and other credit institutions on demand with an original maturity of three

months or less. The statement of cash flows reports cash flows during the period classified by

operating, investing and financing activities.

Cash flows from operating activities are reported using the indirect method. Cash flows from

investing and financing activities are presented on the basis of comprehensive income and cash

payments for the year.

(j) Taxation

Corporate income tax is calculated according to the requirements of Latvian tax laws. The

income tax rate applied in 2011 and 2012 is 15%.

Deferred corporate income tax arising from temporary differences in the timing of the

recognition of items in the tax returns and these financial statements is calculated using the

liability method. The deferred corporate income tax is determined based on the tax rates that are

expected to apply when the temporary differences reverse based on tax rates enacted or

substantively enacted by the reporting date. The principal temporary differences arise from

differing rates of accounting and tax depreciation on the Bank’s assets, revaluation of securities,

as well as the treatment of collective impairment allowances, deferred commissions for financial

assets and accruals for unused annual leave.

The carrying amount of the deferred corporate income tax asset, if any, is reviewed at each




24

reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit

will be available to allow all or part of the deferred income tax asset to be utilised.

(k) Off-balance sheet financial commitments and contingent liabilities

In the ordinary course of business, the Bank is involved with off-balance sheet financial

commitments and contingent liabilities comprising commitments to extend loans and receivables

to customers, commitments for unutilised credit lines or credit card limits, and financial

guarantees.

Commitments to extend loans and receivables and commitments for unutilised credit lines or

credit card limits represent contractual commitments to make loans and revolving credits.

Commitments generally have fixed expiration dates or other termination clauses. Since

commitments may expire without being drawn upon, the total contract amounts do not

necessarily represent future cash requirements.

Provisions are recognised when the bank has a present obligation as a result of a past event, and

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 net of any reimbursement.

(l) Trust activities

Funds managed by the Bank on behalf of individuals, corporate customers, trusts and other

institutions are not regarded as assets of the Bank and, therefore, are not separately included in

the statement of financial position. Funds under trust management are presented in these

financial statements only for disclosure purposes. The Bank does not assume any control, risks

and rights with regard to the assets and liabilities under trust management.

(m) Dividends

Dividends on ordinary shares are recognised as a liability and deducted from equity when they

are approved by the Bank’s shareholders. Dividends for the year that are approved after the

reporting date are disclosed as an event after the reporting date.

(n) Employee benefits

The Bank pays State compulsory social security contributions for state pension insurance and to

the state funded pension scheme in accordance with Latvian legislation. State funded pension

scheme is a defined contribution plan under which the Bank pays fixed contributions determined

by the law and it will have no legal or constructive obligations to pay further contributions if the

state pension insurance system or state funded pension scheme are not able to settle their

liabilities to employees. According to the rulings of the Cabinet of Ministers of the Republic of




25

Latvia 76.2% (2011: 72.84%) of the social security contributions are used to finance state funded

pension scheme.

Short-term employee benefits, including salaries and state compulsory social security

contributions, bonuses and paid vacation benefits, are included in Administrative expenses on an

accrual basis.




26

NOTE 4 NET INTEREST INCOME

2012 2011

Interest income

Due from credit institutions 180 140

Loans and receivables 710 522

Incl. impaired loans 30 25

Securities 1 399 1 095

Incl. held to maturity, non-impaired 1 228 702

Incl. held to maturity, impaired - 267

Incl. available for sale 171 126

Total interest income: 2 289 1 757

Interest expense

Due to credit institutions (155) (98)

Non-bank deposits (599) (391)

Payments to the Deposit Guarantee Fund (112) (46)

Total interest expense: (866) (535)

Net interest income 1 423 1 222

NOTE 5 NET COMMISSION AND FEE INCOME

2012 2011

Commission and fee income

Service fee for account maintenance and cash transactions 350 133

Asset management and brokerage services 358 221

Payment card transactions 1 295 1 255

Other bank transactions 110 79

Total commission and fee income: 2 113 1 688

Commission and fee expense

Correspondent bank services (98) (30)

Payment card transactions (673) (707)

Brokerage services (49) (33)

Other bank transactions (12) (22)

Total commission and fee expense: (832) (792)

Net commission and fee income 1 281 896




27

NOTE 6 OTHER INCOME AND EXPENSE

2012 2011

Other income

Penalties collected 19 81

Incl. payment card transactions - 31

early termination of term deposits 1 3

past due loan payments 18 47

Other income 20 16

Total other income 39 97

Other expense

Membership fees to various organisations 19 10

Payment card project implementation and servicing 180 233

Factoring service related expense 45 3

Client attraction related expense 37 6

Other expenses 28 54

Total other expenses 309 306

NOTE 7 NET TRADING INCOME

2012 2011

Net (loss) / gain from transactions with derivative financial

instruments (64) 129

Incl. net trading (loss)/gain (64) 106

net revaluation result - 23

Net gain/ (loss) from transactions with other currency 194 (77)

Incl. net trading gain 97 50

net revaluation result 97 (127)

Net trading gain 130 52




28

NOTE 8 ADMINISTRATIVE EXPENSE

2012 2011

Remuneration expense

Remuneration to the Council and the Board 60 21

Remuneration to personnel 671 427

State compulsory social security contributions 176 107

Total remuneration expense: 907 555

Lease and maintenance of premises 87 80

Non-deductible input tax 56 64

Telephone, communications and mail 25 32

Software maintenance 25 23

Professional and legal fees 50 30

Stationery and other office expense 14 13

Other personnel expense 41 12

Other administrative expense 29 46

Total other expense: 327 300

Administrative expense 1 234 855

As at 31 December 2012, the Bank had 97 employees (2011: 74 employees).

NOTE 9 IMPAIRMENT ALLOWANCE

Loans Held-to-

maturity

financial

investments

Other

assets

Total

Balance as at 31 December 2010 - - - -

Change in allowance 61 2 096 4 2 161

Write-offs - - (4) (4)

Balance as at 31 December 2011 61 2 096 - 2 157

Change in allowance 27 - 1 28

Write-offs (1) (2 096) (1) (2 098)

Balance as at 31 December 2012 87 - - 87




29

NOTE 10 CORPORATE INCOME TAX

Corporate income tax expense comprises the following items:

2012 2011

Current corporate income tax charge for the reporting year (3) -

Deferred corporate income tax (182) 168

Total corporate income tax (expense) / income (185) 168

Below is presented the comparison of corporate income tax and the theoretical tax calculated

applying the 15% statutory rate prescribed by Latvian tax laws (2011: 15%):

2012 2011

Profit/(loss) before tax 1 225 (1 142)

Corporate income tax at the statutory rate of 15% 184 -

Tax adjustment, net 13 25

Current corporate income tax charge 197 -

Utilisation of prior period tax loss (194) -

Current corporate income tax charge for the reporting year 3 -

The movements in deferred corporate income tax can be specified as follows:

31/12/2012 31/12/2011

Deferred corporate income tax liability:

Accumulated excess of tax depreciation over accounting

depreciation 53 59

Deferred corporate income tax asset:

Vacation pay reserve (7) (4)

Unutilised tax loss - (194)

Other deferred tax assets - 3

Deferred corporate income tax liability / (asset) 46 (136)

Unutilised tax loss transferred from year 2011 is 1 286 thousand LVL. According to the tax

laws, the tax loss can be covered in the chronological sequence from the taxable income of the

next taxation periods. The Bank`s taxable income in 2012 of 1 309 thousand LVL was reduced

by prior years' tax losses. There was no tax loss carried forward as at 31 December 2012.




30

NOTE 11 CASH AND BALANCES WITH THE BANK OF LATVIA

31/12/2012 31/12/2011

Cash 532 501

Balances with the Bank of Latvia 2 544 2 157

Total 3 076 2 658

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 31 December 2012, the Bank’s compulsory reserve requirement was LVL 1 922

thousand (2011: LVL 1 409 thousand).

NOTE 12 DUE FROM CREDIT INSTITUTIONS

31/12/2012 31/12/2011

Amounts due on demand 9 811 11 839

Credit institutions registered in Latvia 4 183 7 706

Credit institutions registered in the EU 3 183 3 661

Credit institutions of other countries 2 445 472

Term deposits 4 229 3 105

Credit institutions registered in Latvia 2 430 1 276

Credit institutions of other countries 1 799 1 829

Total 14 040 14 944

The Bank’s average interest rates applicable for the balances due from credit institutions in 2012

are as follows: LVL - 0.28%, USD - 0.22%, EUR - 0.21% (2011: LVL - 0.28%, USD – 0.16%,

EUR - 0.74%).

As at 31 December 2012 term deposits registered in the Republic of Latvia in total value of LVL

1 227 thousand are pledged in favour of guarantee from Mastercard (LVL 571 thousand as at 31

December 2011).




31

NOTE 13 LOANS

(a) By customer profile

31/12/2012 31/12/2011

Private non-financial companies 7 840 6 364

Financial institutions 84 101

Households 669 691

Total loans 8 593 7 156

Allowance for credit losses (87) (61)

Net loans

8 506 7 095

(b) By geographical profile

31/12/2012 31/12/2011

Residents of Latvia 8 285 5 184

Residents of EU Member States 34 1 727

Residents of other countries 274 245



Net loans 8 506 7 095

(c) By type

31/12/2012 31/12/2011

Commercial loans 3 085 3 947

Industrial loans 683 277

Finance leases 542 189

Credit card loans 60 84

Mortgage loans 1 117 1 090

Factoring 556 1 144

Other loans 2 466 324

Cash with financial institutions 84 101



Net loans 8 506 7 095

(d) Significant credit risk concentration

As at 31 December 2012, the Bank had six borrowers or groups of related borrowers whose

aggregate liabilities exceeded 10% of the Bank’s equity (31 December 2011: two borrowers or

groups of related borrowers). As at 31 December 2012, 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 LVL 5,443 thousand, which is 86% of the Bank’s

equity (31 December 2011: LVL 2,211 thousand, or 33% of the Bank’s equity).




32

The Bank’s credit risk concentration to one customer or a group of related customers may not

exceed 25% of the Bank’s equity. If a customer is a credit institution or an investment brokerage

firm, or a group of related customers including one or several credit institutions or investment

brokerage firms, then the requirement to other credit institutions as a result of Bank`s

investments (secured and usecured term deposits and financial instruments), total exposure may

not exceed 25% of Bank`s equity. In other circumstances, risk concentration with this customer

might not exceed 95% of the Bank’s equity. As at 31 December 2012 and 2011, the Bank was in

compliance with the above requirements.

NOTE 14 FINANCIAL ASSETS

a) Financial assets by portfolios

31/12/2012 31/12/2011


Debt securities issued by EU central governments 2 390 1 994

Debt securities issued by central governments of other

countries 568 -

Debt securities issued by EU credit institutions 1 221 735

Debt securities issued by EU municipalities 791 777

Debt securities issued by EU non credit instiutions 1 735 -

Total available-for-sale financial assets 6 705 3 506

Held-to-maturity financial investments

Debt securities issued by the Latvian government 15 849 7 069

Debt securities issued by EU central governments 3 525 4 025

Debt securities issued by EU Latvian credit institutions - 1 028

Debt securities issued by EU credit institutions 704 708

Debt securities issued by credit institutions of other

countries

2 172 3 226

Debt securities issued by EU credit instiutions 424 -

Debt securities issued by Latvian non credit instiutions 360 -

Total held-to-maturity financial investments 23 034 16 056




33

b) Available-for-sale financial assets by geographical profile

31/12/2012 31/12/2011

Carrying

amount

% of

equity

Re-

valuation

reserve

Carrying

amount

% of

equity

Re-

valuation

reserve

Central governments 2 958 x 146 1 994 x (49)

Poland 735 11.62 2 748 12.87 (2)

Slovenia 737 11.66 3 725 12.47 (15)

Other countries 1 486 23.50 141 521 8.96 (32)

Credit institutions 1 221 X 25 735 x (4)

Sweeden 841 13.30 12 - - -

Other countries 380 6.01 13 735 12.64 (4)

Central governments 791 X 26 777 x (10)

Poland 791 12.51 26 777 13.37 (10)

Private non financial

institutions 1 735 X 18 - x -

Austria 756 11.96 5 - - -

Germany 979 15.48 13 - - -

Total available-for-sale

financial assets 6 705 x 215 3 506 x (63)

c) Held-to-maturity financial investments by geographical profile

31/12/2012 31/12/2011

Carrying

amount

% of

equity

Fair

value

Carrying

amount

% of

equity

Fair

value

Central governments 19 374 x 21 445 11 094 x 11 243

Latvia 15 849 250.66 17 798 7 069 121.63 6 855

Greece - - - 633 10.89 1 035

Ireland 1 438 22.74 1 469 1 378 23.71 1 431

Portugal 2 087 33.01 2 178 2 014 34.65 1 922

Credit institutions 2 876 X 2 936 4 962 x 4 973

Latvia - - - 1 028 17.69 1 047

Russia 2 172 34.35 2 233 3 226 55.50 3 220

Germany 704 11.13 703 708 12.18 706

Other financial

institutions 424 6.70 426 - x -

Private non financial

institutions 360 5.69 360 - x -

Held-to-maturity financial

investments, net 23 034 x 25 167 16 056 x 16 216




34

Debt securities issued by the governments of Ireland, and Portugal mature on 18 April 2013, and

23 September 2013 respectively.

The Bank uses the following hierarchy of three levels of input data for determining and

disclosing the fair value of financial assets and liabilities:

Level 1: Quoted prices in active markets;

Level 2: Other techniques for which all inputs which have a significant effect on the

recorded fair value are observable.

Level 3: Other techniques which use inputs which have a significant effect on the recorded

fair value that are not based on observable market data.

As at 31 December 2012, the fair value of the Bank’s financial assets met the requirements of

Level 1 and Level 2.

The Bank’s portfolio of financial assets chiefly comprises debt securities issued by central

governments of several EU Member States and debt securities issued by credit institutions of the

EU Member States. Investments are made in financial assets according to the Investment

Strategy of the Available-for-Sale Portfolio and the Investment Strategy of the Held-to-Maturity

Portfolio approved by the Bank. The Bank is well aware of the current turbulent situation

persisting on the financial market and, therefore, to avoid high risk exposure, the Bank has set

sub-limits for new investments in financial instruments whereby only investments in low-risk

instruments, i.e., having at least a credit rating of Aa2 and a stable outlook (according to

Moody’s, or Fitch or Standard & Poor’s), are allowed.

To identify, in a timely manner, any changes that could produce an adverse effect on the ability

and/ or willingness of a particular country’s government and/ or residents to meet their financial

liabilities towards the Bank, the Bank keeps pace with the latest news and information about

events occurring in the respective countries. For monitoring purposes, credit ratings assigned by

Moody’s are used (if only credit ratings granted by Fitch or Standard & Poor’s are available, the

relevant equivalent of the Moody’s rating is selected, following the above priority sequence of

rating agencies). The sources of information are mass media, international organisations engaged

in economic analyses and data aggregation as well as rating agencies.

Whenever any events that are likely to produce a material impact on the solvency of any

country’s government and/ or residents are reported, the Risk Control Division:

Informs the Board accordingly,

Performs closer monitoring of the country and, if necessary, makes suggestions to the

Resource Division that no additional investments should be made or country exposure

limits for transactions with residents of the respective country should be reduced.

If the Bank’s exposure to residents of the respective country cannot be reduced within the nearest

three months, the Bank considers and initiates risk mitigation measures, such as allowances and

financial collateral.

In October 2011, the European Commission agreed on the partial Greek debt write-off

programme, which was submitted to the creditors for acceptance. Therefore, as early as at the

end of 2011 the market already had indications that impairment allowances could be necessary

for the Greek bonds. The bank in 2011 created a provision in total of LVL 2 096 thousand for

Greek bonds.




35

To solve the existing situation, in March 2012 the Greek government initiated national debt

restructuring whereby, according to the collective action clauses, the bonds of the Greek

government held by private-sector investors were exchanged for new securities. The

restructuring resulted in the write-off of 53.5% of the face value of the original bonds, while in

exchange for the balance the Bank obtained two-year notes issued by the European Financial

Stability Facility (EFSF) bearing a coupon at market rates (at 15% of the face value of the

original bonds), new bonds issued by the Greek government having a step-up coupon from 2% to

4.5% and a maturity ranging from 11 to 30 years (at 31.5% of the face value of the original

bonds), and six-month EFSF bonds equalling the accrued and outstanding coupon for the original

bonds. The carrying amount of the securities which have been written off as a result of this

exchange exceeded the fair value of the newly acquired securities by LVL 2 096 thousand, which

is the total allowance established by the Bank as at 31 December 2011 for its debt securities

issued by the Greek government.

NOTE 15 DERIVATIVE FINANCIAL ASSETS AND LIABILITIES

The fair value of the Bank’s currency swaps is as follows:

31/12/2012 31/12/2011

Assets Liabilities Assets Liabilities

Notional amount 2 048 2 037 3 285 3 266

Fair value - - 95 73

The notional amount is the amount of a derivative’s underlying asset and is calculated according

to the FCMC capital adequacy requirements. The notional amount indicates the volume of

transactions outstanding as at the year end.

As at 31 December 2011 and 2012, the Bank had foreign exchange transactions, the revaluation

methods and, as a result, the revaluation results of which may affect the Bank’s financial

performance. The Bank determines the value of these transactions based on the prices of

underlying assets at the reporting date, i.e. the currency exchange rates are determined on the

basis of the official exchange rates set by the Bank of Latvia and the interest rates are based on

the respective LIBOR and/or RIGIBOR or RIGIBID rates.

The Bank’s management believes that the revaluation methods applied are correct and

conservative enough to prevent potential significant changes in the Bank’s financial indicators.




36

NOTE 16 INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT

Intangible

assets

Computers

and equipment Other PPE

Total

assets

Acquisition value

As at 31 December 2010

503

95

15

613

Additions 14 9 5 28

As at 31 December 2011 517 104 20 641

Additions 14 5 3 22

As at 31 December 2012 531 109 23 663

Accumulated amortisation/

depreciation

As at 31 December 2010 61 41 3 105

Amortisation/ depreciation

charge for the year

51 33 3 87

As at 31 December 2011 112 74 6 192

Amortisation/ depreciation

charge for the year

52 21 4 77

As at 31 December 2012 164 95 10 269

Net carrying amount

As at 31 December 2010 442 54 12 508

As at 31 December 2011 405 30 14 449

As at 31 December 2012 367 14 13 394

The amortisation / depreciation charge for the year totalling LVL 77 thousand (2011: LVL 87

thousand) has been taken to the Bank’s statement of comprehensive income as depreciation/

amortisation.

NOTE 17 OTHER ASSETS

31/12/2012 31/12/2011

Card operations 958 216

Security deposit for transactions 125 74

Discounted letters of credit 11 17

Input tax 1 3

Other receivables 51 14

Total 1 146 324




37

NOTE 18 FUNDS UNDER TRUST MANAGEMENT

31/12/2012 31/12/2011

Assets 55 342 63 233

Loans to private non-financial companies 23 124 16 054

Loans to households 405 1 405

Investments in debt securities 31 813 45 774

Liabilities 55 342 63 233

Credit institutions 31 784 45 687


Households 504 1 405

The Bank issues loans or makes investments in debt securities 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 is lack of 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 31 December 2012, the accumulated outstanding commission fee for the asset management

was LVL 29 thousand (2011: LVL 23 thousand).

NOTE 19 DUE TO CREDITINSTITUTIONS

31/12/2012 31/12/2011

Term deposits - 1 633

Credit institutions of other countries - 1 633

Total - 1 633

The Bank’s average interest rates applicable for the balances due to credit institutions in 2012

are as follows: LVL - 0.47%, USD – 0.96% (2011: LVL – 0.45% USD – 2.09%, EUR – 1.00%).




38

NOTE 20 DEPOSITS FROM CUSTOMERS

(a) By customer profile:

31/12/2012 31/12/2011

Demand deposits 33 568 20 669


Households and non-profit organisations serving them 13 046 7 595

Financial institutions 886 82


Private non-financial companies 814 825

Households and non-profit organisations serving them 13 465 15 661

Total 47 847 37 155

(b) By geographical profile

31/12/2012 31/12/2011

Demand deposits 33 568 20 669


Residents of EU Member States 9 219 3 340

Residents of other countries 7 369 3 801



Residents of EU Member States 796 276

Residents of other countries 100 -

Total 47 847 37 155

The Bank’s average interest rate in 2012 are as follows: LVL – 1.600%, USD – 1.782%, EUR –

2.171% (2011: LVL – 1.878%, USD – 3.258%, EUR – 3.343%).




39

NOTE 21 SUBORDINATED DEBT

31.12.2012 31.12.2011

Lender Amount Maturity

Annual

interest

rate

Amount Maturity

Annual

interest

rate

Resident household,

related party - - - 527 06.12.2016 7

Resident household,

non-related party 527 06.12.2016 7 527 06.12.2016 7

Resident household,

non-related party 879 23.02.2017 7 - - -

Total subordinated

debt 1 406 x x 1 054 x x

Subordinated loan agreements mature in five years. Interest is paid on a monthly basis, on the

last business day of each month.

According to the terms of these agreements, the lenders may claim loan repayment before the

maturity date only in the event of dissolution 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.

NOTE 22 OTHER LIABILITIES

31/12/2012 31/12/2011

Payment card settlements 913 71

Liabilities under clarification 91 -

Taxes 15 24

Other liabilities 30 2

Total 1 049 97

NOTE 23 ACCRUED EXPENSE

31/12/2012 31/12/2011

Payment card servicing 19 17

Payments to the Deposit Guarantee Fund and the FCMC 32 40

Vacation pay reserve 46 28

Servicing of correspondent and financial instrument accounts 13 12

Other accrued expense 25 32

Total 135 129




40

NOTE 24 PAID-IN SHARE CAPITAL

As at 31 December 2012, the Bank’s registered and paid-in share capital was LVL 6,2 million

(31 December 2011: LVL 6,2 million).

In April 2011, the Bank increased its share capital by LVL 200 thousand and in December 2011

LVL 1 million respectively. In 2012 the Bank did not increased its capital.

The Bank’s share capital consists of only ordinary voting shares. The par value of each share is

LVL 1. As at 31 December 2012, all the shares were paid fully and the Bank did not possess any

of its own shares.

As at 31 December 2011 and 2012, 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 25 EARNINGS / (LOSS) PER SHARE

Earnings / (loss) per share are calculated by dividing net profit / (loss) by the number of shares

issued.

2012 2011

Net profit / (loss) 1 040 (974)

Number of ordinary shares at reporting date (‘000) 6 200 6 200

Earnings / (loss) per share (LVL) 0.168 (0.157)

NOTE 26 CASH AND CASH EQUIVALENTS

31/12/2012 31/12/2011

Cash and demand deposits with the Bank of Latvia 3 076 2 658

Balances due from other credit institutions with original maturities

of less than three months 9 811 12 569

Total 12 887 15 227




41

NOTE 27 MEMORANDUM ITEMS

31/12/2012 31/12/2011

Contingent liabilities 2 563 1 575

Guarantees 2 563 1 575

Financial commitments 2 396 1 527

Unutilised credit lines 2 175 1 334

Credit card commitments 221 193

Total memorandum items, gross 4 959 3 102

In the ordinary course of business, the Bank issues loans and guarantees. The main purpose of

these financial instruments is to ensure that adequate funds are available to customers.

Guarantees that comprise irrevocable commitments are assigned the same risk as loans because

those commit the Bank to paying in the event of a customer’s default. Liabilities arising from

credit lines represent the undrawn balances of credit lines. As regards credit risk, the Bank is

potentially exposed to loss arising also from loan commitments.

NOTE 28 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, their close members

of the 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 31 December 2012, there were no any loans issued to related parties that would have

been past due or impaired.




42

The Bank’s financial statements include the following balances of assets, liabilities and

memorandum items associated with the Bank’s transactions with related parties:

31/12/2012 31/12/2011

Carrying

amount

Memoran-

dum items

Total Carrying

amount

Memoran-

dum items

Total

Assets 253 2 900 3 153 358 294 652

Loans and receivables,

net 253 2 900 3 153 332 294 626

Parent company - 2 412 2 412 - - -

Council and Board - 19 19 2 17 19

Related companies and

persons

253

469

722

330

277

607

Derivative financial

instruments - - - 26 - 26


persons - - - 26 - 26

Liabilities 4 637 - 4 637 6 322 - 6 322

Deposits 4 637 - 4 637 6 254 - 6 254

Parent company 333 - 333 216 - 216

Council and Board 3 416 - 3 416 2 901 - 2 901


persons

888

-

888

3 137

-

3 137


instruments - - - 68 - 68


persons - - - 68 - 68

The table below presents income and expense on the balances due from/ to related parties:

2012 2011

Interest income 9 29

Interest expense (108) (110)

Net interest income (99) (81)

Commission and fee income 57 78




43

NOTE 29 RISK MANAGEMENT

The Bank organises risk management according to the requirements of the Law of the Republic

of Latvia on Credit Institutions and FCMC regulations as well as following the Bank’s strategy

and other documents governing the Bank’s operations. The Bank’s risk management policy

details the Bank’s risk management objectives, goals and principles as well as related

instruments. The Bank’s risk management policy is based on the principle of continuing

profitability or acceptable loss and is aimed at achieving an appropriate balance between risks

assumed by the Bank and returns.

The policy prescribes that various risk mitigation instruments should be used, their selection

depending on the risk type.

The Bank’s risk management objective is as follows:

- To establish and maintain such a system of risk identification and management which

would allow minimisation of the negative effect the risks may produce on the Bank’s

operations and performance;

- To identify and determine the level of risk tolerance which would facilitate achievement

of the Bank’s strategic goals;

- To define the levels of responsibility of the Bank’s risk management system and their

respective functions;

- To define the risk management structure and methods;

- To ensure the Bank’s statutory compliance.

As a result of the regular capital adequacy assessment, the Bank has established that risks

inherent in its current and planned business are as follows: credit risk, concentration risk, country

risk, liquidity risk, operational risk, compliance risk, strategic and business risk, residual risk,

market risk (position risk and foreign currency risk), interest rate risk, reputational risk and

money laundering and terrorist financing risk. Market risk assessment framework was also

evaluated in the settlement risk, the risk faced by certain conditions should be calculated

minimum capital adequacy.

RISK MANAGEMENT STRUCTURE

The Council of the Bank is responsible for establishing and effective functioning of the risk

management system and approving the relevant risk management policies and strategies.

The Board of the Bank has the responsibility for implementing risk management strategies and

policies approved by the Council.

Bank`s Chief Risk Officer:

- Leads a comprehensive risk control function, which also includes the compliance

monitoring and prevention of money laundering and terrorist financing;

- Ensures monitoring and improvement of the Bank's risk management system;

- Ensures the Bank's business strategy and service which are essential to the Bank,

development of new services or changes to the services offered by the Bank, Bank's

structure, the overall risk profile, as well as the restrictions and limits compliance with




44

Bank's risk strategy for regular evaluation of the non-compliance reporting of the Bank

Council and the Board and other officers in accordance with the internal policies;

- Provides a comprehensive and clear information on the Bank's overall risk profile, all

relevant risks and risks compliance with the risk management strategy of regular

communication to the Council and the Board and other officers according to the internal

policies;

- Advises and provides support to the Council and the Board of the Bank to design

operational strategy and support banking risks related decision-making.

Bank's Business Continuity Assurance Commitee regularly identifies and examines risks of

business continuity.

Bank`s Credit Commitee reviews lending issues and makes decisions on any matter relating to

the activities of the Bank's lending process.

Asset and Liability Committee:

- Monitor, plan and manage the Bank's liquidity;

- Monitor, plan and manage the Bank's interest rate risk;

- Monitor, plan and manage the Bank's exposure to market risks;

- Monitor, plan and manage the structure of the Bank's balance sheet and off-balance;

- Monitor and manage the Bank's growth;

- Monitor and manage debt collection and cessation processes;

- Approves opening and closing of the Bank's correspondent accounts;

- Determine the limits on investments in financial instruments of the Bank portfolio;

- Determine the country risk limits;

- Determine the Bank's tariffs.

The Risk Control Division identifies significant risks the Bank is exposed to and formulates the

relevant risk management policies and procedures, ensures monitoring of compliance with the

risk management policies and procedures, including the limits and restrictions set, as well as

reports information about the risks inherent in the Bank`s business to the Bank`s Risk director,

Business Continuity Assurance Committee, the Asset and Liability Committee and the Board on

a regular basis, thereby allowing permanent assessment of risk affecting the Bank`s ability to

achieve its goals and, if necessary, making dcecisions on the relevant corrective actions.

The Resource Division is responsible for managing the Bank’s assets and liabilities and the

overall financial structure as well as ensuring the daily management of liquidity risk, managing

of interest rate risk, currency and market risk as well as the Bank’s financial statement structure

and growth, and analysing of financial and lending resources and the related planning in line

with the Bank’s strategic goals.

The key goal of the Compliance Control Division is identification, measurement, and

management of compliance risk.

The Internal Audit Division carries out the regular review and assessment of the Bank’s

compliance with its risk management strategies, policies and procedures and communicates the

review results as well as the efficiency of the Bank’s risk management system to the Council.

The heads of the Bank’s structural units and other employees of the Bank are aware of their




45

duties and responsibility related to the routine risk management and, within the boundaries of

their competence, report the compliance with the limits and restrictions set to the Risk Control

Division as well as participate in the risk identification, effect assessment, and materiality

determination process.

RISK MEASUREMENT AND REPORTING SYSTEMS

The Bank performs quantitative risk assessment on the basis of the standardised and basic

indicator approaches referred to in Regulations No. 60 on the Calculation of Minimum Capital

Requirements issued by the Financial and Capital Market Commission on 2 May 2007 as well as

the simplified approaches referred to in Regulations No. 38 on the Internal Capital Adequacy

Assessment Process issued by the Financial and Capital Market Commission on 20 March 2009.

The Bank also performs stress testing.

The level of the Bank’s exposure is chiefly controlled by using the early warning system

designed by the Bank, which encompasses the limits approved by the Bank and defines the

parameters of each risk relevant for the moderate risk exposure defined in the Bank’s operational

strategy. The aggregate risk exposure is determined as the weighted average of all components.

The Risk Control Division summarises, analyses and presents to the Bank`s Risk director,

Business Continuity Assurance Committee, the Asset and Liability Committee and the Board its

opinion accompanied with explanatory information on each specific risk and the aggregate risk

exposure on a weekly basis. Any instances when the individual or aggregate risk exposure

exceeds the required moderate level should be reported by the Risk Control Division

immediately to the Bank’s Board.

RISK MITIGATION

For the purposes of risk mitigation, the Bank uses the following methods:

- Risk acceptance. The Bank admits that it is exposed to such risks but does not take any

actions to minimise their effect because those are insignificant and the elimination costs

would exceed the respective benefits;

- Risk avoidance. The Bank conducts an analysis before engaging in any new transactions

and chooses to avoid excessively risky transactions or actions;

- Changing risk probability. The Bank applies this method together with the relevant risk

strategies, Bank’s procedures, and the early warning system in respect of the following

risks: credit risk, operational risk, market price risk, interest rate risk, currency risk,

liquidity risk, IT risk;

- Changing potential risk consequences. The Bank uses credit enhancements and currency

risk hedging instruments as well as establishes a business continuity system;

- Risk sharing. The Bank uses insurance and syndicated transactions; in selecting this

method of risk mitigation, the Bank is aware that it does not change the overall exposure

to transaction and operational risks, affecting only the portion attributable to the Bank.




46

CONCENTRATION RISK

Concentration risk arises from large exposures to individual customers or groups of related

customers or exposures to customers whose creditworthiness is determined by one common risk

factor (industry, geographical location, currency, credit enhancement (homogenous collateral or

one collateral provider)).

The concentration risk management policy covers the Bank’s credit portfolio and other assets,

memorandum items, as well as the deposits attracted by the Bank and balances due to credit

institutions.

The core elements of concentration risk management include risk assessment, setting limits for

individual counterparties as well as industry, geographical and market concentrations and

monitoring exposures in relation to such limits.

For the purposes of additional concentration risk assessment, stress tests are performed on a

regular basis.

CREDIT RISK

Credit risk is the risk that the Bank will incur a loss because its borrowers (debtors) or

counterparties fail or refuse to settle their contractual obligations to the Bank. Credit risk is

inherent in the Bank’s transactions which give rise to the Bank’s claims against another person

and which are reported by the Bank in the statement of financial position or as memorandum

items. Credit risk arises as soon as the Bank’s funds are issued, invested or transferred to other

parties for use based on the contractual provisions.

The objective of managing credit risk is to determine the maximum acceptable exposure to credit

risk and ensure the compliance with the set limits in the normal course of business.

At present the Bank is involved in the following transactions giving rise to credit risk:

- Cash placements with other banks;

- Loans and credit lines to banks;

- Loans and credit lines to customers;

- Guarantees issued to third parties and other contingent liabilities for the benefit of

customers if they may demand settlement of obligations;

- Securities transactions;

- Dealing.

The credit risk management system is composed of the following elements: approval of methods

used to measure credit risk related to counterparties, borrowers and issuers, setting restrictions

for loan types, fixing limits for investments in the securities included in the Bank’s portfolio and

lending by amount and maturity, regular assessment of assets and memorandum items as well as

regular stress testing.

Decision-making on the loans - the issuance, any amendments to the loan, the banks are making

decision (authority) levels (from below):

- Individual;




47

- Credit committee;

- The Board;

- Bank`s Council (if the decision requires a higher level than the Authority of the Board).

The decision making maximum authority is determined by the Bank`s council.

The Bank believes that its exposure to credit risk arises mainly from loans, balances due from

credit institutions and the held-to-maturity portfolio. The maximum exposure of the Bank’s

assets and memorandum items is shown in the credit risk concentration analysis.

MAXIMUM EXPOSURE TO CREDIT RISK

The following table presents the Bank’s maximum credit risk exposure without taking into

account collateral.

Mortgages from private individuals and commercial mortgages, commercial pledges, term

deposits and guarantees were accepted as collateral at the end of the financial year.

MAXIMUM RISK CONCENTRATION

The Bank places limits on the amount of risk for individual counterparties (groups of related

counterparties) as well as for industry, geographical, exposure and market concentrations. The

exposure to any single counterparty is further restricted by sub-limits. The credit risk

concentration is analysed by estimating the large exposure ratio to equity. According to the Law

on Credit Institutions, the Bank treats as large the credit exposure exceeding 10% of equity. Any

credit exposure to a single customer or a group of related customers may not exceed 25% of the

Bank’s equity. If a customer is a credit institution or an investment brokerage firm, or a group of

related customers including one or several credit institutions or investment brokerage firm, then

the requirement to other credit institutions, as a result of Bank`s investments (secured and

31/12/2012 31/12/2011

Assets 53 497 42 197

Due from credit institutions 14 040 14 944

Held-to-maturity financial investments 23 034 16 056

Available-for-sale financial assets 6 705 3 506

Derivative financial instruments - 95

Loans and receivables 8 506 7 095

Current tax assets - 1

Deferred tax assets - 136

Other assets 1 146 324

Prepaid expense and accrued income 66 40

Memorandum items 4 959 3103

Contingent liabilities 2 563 1 575

Financial commitments 2 396 1 528

Maximum exposure 58 456 45 300




48

usecured term deposits and financial instruments), total exposure may not exceed 25% of

Bank`s equity. In other circumstances, risk concentration with this customer might not exceed

95% of the Bank’s equity. As at 31 December 2012 and 2011, the Bank was in compliance with

the above requirements.

GEOGRAPHICAL ANALYSIS

The following table provides an analysis of the Bank’s assets and memorandum items by

geographical profile without taking into account collateral and other credit enhancements. The

grouping is done based on information about the residence of the respective counterparties.

31/12/2012

Latvia

Eurozone

countries

Other

countries

Total

Assets 32 064 11 224 10 209 53 497

Due from credit institutions 6 612 3 162 4 266 14 040

Loans and receivables 8 196 8 302 8 506

Held-to-maturity financial investments 16 209 4 653 2 172 23 034

Available-for-sale financial assets - 3 390 3 315 6 705

Other assets 1 010 11 125 1 146

Prepaid expense and accrued income 37 - 29 66

Memorandum items 4 740 49 170 4 959

Total 36 804 11 273 10 379 58 456

31/12/2011

Latvia

Eurozone

countries

Other

countries

Total

Assets 22 664 11 217 8 316 42 197

Due from credit institutions 8 981 3 537 2 426 14 944

Loans and receivables 5 128 1 683 284 7 095

Held-to-maturity financial investments 8 096 4 734 3 226 16 056

Available-for-sale financial assets - 1 246 2 260 3 506

Derivative financial instruments 69 - 26 95

Current tax assets 1 - - 1

Deferre tax assets 136 - - 136

Other assets 236 17 71 324

Prepaid expense and accrued income 17 - 23 40

Memorandum items 3 090 12 1 3 103

Total 25 754 11 229 8 317 45 300




49

INDUSTRY ANALYSIS

The following table provides an analysis of the Bank’s assets and memorandum items by

industry without taking into account collateral and other credit enhancements. The grouping is

done based on information about the business of the respective counterparties.

31/12/2012 31/12/2011

Assets 53 497 42 197

Central governments 22 331 13 089

Municipalities 790 777

Credit institutions 18 139 20 709

International organizations 424 -

Private non financial organizations 2 095 -

Private individuals 436 440

Agriculture 401 -

Operations with real estate 1 778 -

Energy - 198

Trade 2 317 3 599

Professional services - 995

Mining and quarrying 100 -

Financial services - 111

Manufacturing 1 857 1 285

Construction 15 29

Information and communication services 47 45

Transport 1 207 -

Other 1 560 920

Memorandum items 4 959 3 103

Total 58 456 45 300

CREDIT QUALITY OF FINANCIAL ASSETS

Credit quality of financial assets is managed by the Bank by employing debtors’ (borrowers’)

financial analysis techniques, analysis of the counterparty’s reputation and historical cooperation

with the counterparty as well as by monitoring international ratings granted to counterparties.

Standard and close-watch grades are assigned to exposures having an investment grade credit

rating granted by international rating agencies, namely A- and higher (by Standard and Poor’s)

and BBB+ to BBB-. The sub-standard grade corresponds to a sub-investment grade credit rating,

i.e. BB+ to B- (by Standard and Poor’s).

The Bank has remained disproportionate historical contribution rates substandard grades of

financial assets.

The table below provides an analysis of the Bank’s asset exposure by internal credit quality

categories without taking into account collateral and other credit enhancements. The Bank’s

financial assets are classified as “standard”, “close-watch”, “substandard”, “doubtful”, and

“loss”, and the table disloses gross amounts, e.g., excluding impairment loss.




50

31/12/2012

Neither past due nor impaired Past

due Impaired

Total

Standard

Close-

watch

Sub-

standard

Doubtful

Assets 24 627 20 677 7 672 364 17 395 53 752

Due from credit

institutions 7 780 2 016 4 244 - - - 14 040

Loans and receivables 8 165 184 - - 17 395 8 761

Held-to-maturity

financial investments 1 129 18 477 3 428 - - - 23 034

Available-for-sale

financial assets 6 341 - - 364 - - 6 705

Other assets 1 146 - - - - - 1 146

Prepaid expense and

accrued income 66 - - - - - 66

Memorandum items 4 959 - - - - - 4 959

Total 29 586 20 677 7 672 364 17 395 58 711

31/12/2011

Neither past due nor impaired Past

due Impaired

Total

Standard

Close-

watch

Sub-

standard

Assets 23 628 12 995 4 704 108 2 932 44 367

Due from credit institutions 12 609 2 335 - - - 14 944

Loans and receivables 6 210 316 332 108 202 7 168


investments 707 10 344 4 372 - 2 730 18 153

Available-for-sale financial

assets 3 506 - - - - 3 506


instruments 95 - - - - 95

Current tax assets 1 - - - - 1

Deferred tax assets 136 - - - - 136

Other assets 324 - - - - 324

Prepaid expense and

accrued income 40 - - - - 40

Memorandum items 3103 - - - - 3 103

Total 26 731 12 995 4 704 108 2 932 47 470




51

EXPOSURE COLLATERAL

The type and amount of collateral depends on an assessment of the credit risk of a customer or a

group of related customers. The collateral types and valuation parameters are defined in the

Credit Policy and the Credit Control Procedure. The main collateral types include mortgage,

commercial pledge, deposits and securities. The Bank also accepts guarantees as additional

(secondary) collateral.

INDICATORS OF LOSS EVENTS

The Banks treats as loss events resulting from exposures the following:

- Delayed settlement of the counterparty’s obligations (for instance, past due principal or

interest payments) for more than 15 days;

- Material financial difficulties of the counterparty;

- Non-compliance with the contractual provisions;

- Loan restructuring;

- Use of borrowed funds for the purposes other than provided in the agreement;

- Default on the project implementation conditions;

- Default on obligations by a person related to the counterparty, which affects the

counterparty's ability to meet its liabilities to the Bank;

- Impairment of the collateral when the settlement of liabilities is directly dependent on the

collateral value.

LIQUIDITY RISK

Liquidity risk represents the Bank’s exposure to significant loss in the event that the Bank does

not have a sufficient amount of liquid assets to meet legally justified claims or overcome

unplanned changes in the Bank’s assets and/or market conditions on a timely basis.

A liquidity crisis may be caused by unexpected events, such as prolonged outflow of cash from

the accounts opened with the Bank without a corresponding cash inflow. This process may be a

consequence of the loss of trust, or a national crisis like a currency crisis. The Bank is basically

exposed to liquidity risk when its cash flows are not balanced in terms of their maturity (maturity

bands) due to the Bank’s activities involving borrowings, loans, capital and other items of assets

and liabilities.

Liquidity problems may be caused also by the lack of liquidity of the financial market.

The objective of liquidity management is to achieve that the Bank’s assets are placed in a manner

enabling the Bank to meet legally justified claims of its creditors at any time.

The liquidity risk management methods (core elements) are as follows:

- Compliance with the statutory liquidity ratio;

- Setting limits for deposits from customers;

- Monitoring of adherence to the limits fixed in the liquidity strategy;

- Employing the early warning system;

- Conducting liquidity stress tests and analysis of results obtained;




52

- Drawing a liquidity contingency plan.

To maintain its liquidity position, the Bank:

- Assesses and plans the maturity structure of its assets and liabilities on a regular basis;

- Maintains sufficient liquid assets to ensure that financial liabilities can be met;

- Ensures that the liquidity ratio (namely, the ratio of liquid assets to current liabilities) is at

least 40%;

- Maintains the negative ratio of liquid assets to current liabilities of no more than 80% of

the Bank’s equity;

- Maintains the total of liquid assets and potential funding sources of 110% of the

forecasted net cash flows for a seven-day period;

- Performs regular stress testing and assesses whether the liquidity reserve is adequate and

sufficient.

The liquidity ratios for the years 2011 and 2012 are as follows:

2012 2011

% %

Year-end 111.19 129.10

Average 128.96 113.52

Maximum 151.89 136.77

Minimum 102.17 100.61

ANALYSIS OF ASSETS AND LIABILITIES BY LIQUIDITY STRUCTURE

The table below summarises the liquidity profile of the Bank’s assets, liabilities and

memorandum items, that was prepared on the basis of the period in which these items can be

recovered, repaid or pledged as collateral for the acquisition of highly liquid assets. Pledged

held-to-maturity financial investments are disclosed as Other.




53

31/12/2012

Less than

1 month

inclusive

1 to 3

months

3 to 6

months

6 to 12

months

1 to 5

years

Other Total

Assets Cash and balances with

the Bank of Latvia 3 076 - - - - - 3 076

Due from credit

institutions 9 812 495 1 257 1 361 - 1 115 14 040

Held-to-maturity

financial investments 22 143 43 241 80 527 - 23 034

Available-for-sale

financial assets 6 705 - - - - - 6 705

Loans and receivables 146 937 867 3 901 2 644 11 8 506 Property, plant and

equipment - - - - 27 - 27

Intangible assets - - - - 367 - 367

Other assets 928 - - - 218 - 1 146 Prepaid expense and

accrued income 10 1 2 53 - 66

Total assets 42 820 1 476 2 365 5 344 3 836 1 126 56 967

Liabilities Liabilities at amortised

cost 33 902 2 499 1 352 9 093 2 407 - 49 253

Deposits from customers 33 902 2 499 1 352 9 093 1 001 - 47 847 Subordinated debt - - - - 1 406 - 1 406 Current tax liabilities 3 - - - - - 3 Deferred tax liabilities - - - - 46 - 46 Other liabilities 1 049 - - - - - 1 049 Deferred income and

accrued expense 135 - - - - - 135

Total liabilities 35 089 2 499 1 352 9 093 2 453 - 50 486 Memorandum items 2 300 55 82 107 - - 2 544

Net liquidity position 5 431 (1 078) 931 (3 856) 1 383 1 126 3 937




54

31/12/2011

Less than

1 month

inclusive

1 to 3

months

3 to 6

months

6 to 12

months

1 to 5

years

Other Total

Assets Cash and balances with

the Bank of Latvia 2 658 - - - - - 2 658

Due from credit

institutions 12 544 - 564 1 265 - 571 14 944


instruments 95 - - - - - 95

Held-to-maturity

financial investments 12 548 42 217 813 2 436 - 16 056

Available-for-sale

financial assets 3 506 - - - - - 3 506

Loans and receivables 186 481 3 176 1 170 2 079 3 7 095 Property, plant and

equipment - - - - 44 - 44

Intangible assets - - - - 405 - 405

Current tax assets 1 - - - - - 1 Deferred tax assets - - - - 136 - 136 Other assets 324 - - - - - 324 Prepaid expense and

accrued income 35 - - - 5 - 40

Total assets 31 897 523 3 957 3 248 5 105 574 45 304

Liabilities Due to credit institutions - 1 1 632 - - - 1 633

Liabilities at amortised

cost 22 887 842 3 167 9 788 1 525 - 38 209

Deposits from customers 22 887 842 3 167 9 788 471 - 37 155 Subordinated debt - - - - 1 054 - 1 054 Derivative financial


Other liabilities 97 - - - - - 97 Deferred income and

accrued expense 129 - - - - - 129

Total liabilities 23 186 843 4 799 9 788 1 525 - 40 141 Memorandum items 2 497 56 82 165 302 - 3 102

Net liquidity position 6 214 (376) (924) (6 705) 3 278 574 2 061




55

The table below analyses the Bank’s financial liabilities as at the year end and related interest

which is payable in the future but has not been assessed yet into relevant maturity bands based

on the remaining period, as at the reporting date, to the contractual maturity date:

Less than

1 month

inclusive

1 to 3

months

3 to 6

months

6 to 12

months

1 to 5

years Total

31/12/2012

Due to credit institutions - - - - - -

Deposits from customers 1 103 2 329 1 046 8 952 1 010 14 440

Total: 1 103 2 329 1 046 8 952 1 010 14 440

31/12/2011

Due to credit institutions 10 19 1 646 - - 1 675

Deposits from customers 2 233 1 046 3 232 10 240 270 17 021

Total: 2 243 1 065 4 878 10 240 270 18 696

MARKET RISK

Market risk is the risk that the Bank will incur a loss as a result of the mark-to-market

revaluation of assets, liabilities and memorandum items caused by changes in market values of

financial instruments, commodities and commodity derivatives due to changes in foreign

exchange rates, interest rates and other factors. Market risks include currency risk, position risk,

commodity risk, settlement risk, and counterparty risk.

The Bank does not form a trading portfolio and its exposure to market risks is limited to currency

risk and interest rate risk in the banking book.

Considering that the Bank has the available-for-sale portfolio of more than 10% of the total

assets, the Bank believes that its exposure to position risk, or market price risk, is also

significant.

CURRENCY RISK

Currency risk represents the Bank’s exposure in the event that changes in foreign exchange rates

have an adverse effect on the Bank’s income/ expense (and, consequently, also equity) and

economic value. Currency risk is the risk of loss due to the opposite fluctuations of foreign

exchange rates. The transactions include items reported as both assets and memorandum items.

The risk of incurring loss arises from the revaluation of foreign currency positions into the

national currency. When the Bank has an open foreign currency position, the revaluation process

results in a profit or loss, which is the difference arising from the revaluation into the national

currency of assets, liabilities and capital denominated in foreign currencies.

The objective of managing currency risk is to reduce the adverse effect of changes in foreign

exchange rates by minimising the open currency position.




56

Considering the current level of the Bank’s business, the Bank is not striving to maintain the

open foreign currency position to earn profits from speculative transactions.

To assess the compliance of the existing limits with the Bank’s actual positions and situation on

the currency market, stress tests are performed regularly.

The Bank’s total open foreign currency position as at 31 December 2012 was 0.4% (31

December 2011: 33.76%) of the total of Tier 1 and Tier 2.

31/12/2012

LVL USD EUR

Other

currencies

Total

Assets

Cash and balances with the Bank of

Latvia 1 885 121 1 065 5 3 076

Due from credit institutions 24 7 025 3 081 3 910 14 040

Held-to-maturity financial investments 8 149 5 106 9 779 - 23 034

Available-for-sale financial assets - 1 963 4 742 - 6 705

Loans and receivables 4 222 577 3 698 9 8 506

Property, plant and equipment 27 - - - 27

Intangible assets 367 - - - 367

Other assets 21 1 1 124 - 1 146

Prepaid expense and accrued income 43 9 14 - 66

Total assets 14 738 14 802 23 503 3 924 56 967

Liabilities and equity

Due to credit institutions - - - - -

Liabilities at amortised cost 8 907 14 781 22 014 3 551 49 253

Deposits from customers 8 907 14 781 20 608 3 551 47 847

Subordinated debt - - 1 406 - 1 406

Current tax liabilities 3 - - - 3

Deferred tax liabilities 46 - - - 46

Other liabilities 63 12 974 - 1 049

Deferred income and accrued expense 118 4 13 - 135

Total liabilities 9 137 14 797 23 001 3 551 50 486

Equity 6 266 37 178 - 6 481

Total liabilities and equity 15 403 14 834 23 179 3 551 56 967

Net long/ (short) position (665) (32) 324 373 -

Long/ (short) swap position 703 213 (608) (296) 12

Net open long/ (short) currency

position 38 181 (284) 77 12

Percentage of equity as at 31/12/2012 2.9 (4.5) 1.2




57

31/12/2011

LVL USD EUR

Other

currencies

Total

Assets

Cash and balances with the Bank of

Latvia 1 951 94 608 5 2 658

Due from credit institutions 1 062 5 066 7 660 1 156 14 944

Derivative financial instruments 95 - - - 95

Held-to-maturity financial investments 8 097 3 226 4 733 - 16 056

Available-for-sale financial assets - 521 2 985 - 3 506

Loans and receivables 1 720 2 084 3 280 11 7 095

Property, plant and equipment 44 - - - 44

Intangible assets 405 - - - 405

Current tax assets 1 - - - 1

Deferred tax assets 136 - - - 136

Other assets 11 - 313 - 324

Prepaid expense and accrued income 20 - 20 - 40

Total assets 13 542 10 991 19 599 1 172 45 304

Liabilities and equity

Due to credit institutions - 1 633 - - 1 633

Liabilities at amortised cost 7 681 10 578 19 291 659 38 209

Deposits from customers 7 681 10 578 18 237 659 37 155

Subordinated debt - - 1 054 - 1 054

Derivative financial instruments 73 - - - 73

Deferred tax liabilities - - - - -

Other liabilities 45 - 52 - 97

Deferred income and accrued expense 98 1 30 - 129

Total liabilities 7 897 12 212 19 373 659 40 141

Equity 5 226 (32) (31) - 5 163

Total liabilities and equity 13 123 12 180 19 342 659 45 304

Net long/ (short) position 419 (1 189) 257 513 -

Long/ (short) swap position 1 568 698 (1 894) (353) 19

Net open long/ (short) currency

position (1 149) (491) (1 637) 160 19

Percentage of equity as at 31/12/2011 (8.4) (28.16)* 2.8

* The open position has been caused by impairment recognised due to the events that have

occurred after the reporting date (see also Note 14). In recognising impairment, the open

position has been closed by entering into an interbank FX spot contract at the actual date of

impairment. As at 31 December 2011, the Bank’s total open foreign currency position before the

above impairment was 6.37%, incl. open Euro position 4.07% .




58

POSITION RISK

Position risk is a possibility of sustaining a loss due to revaluation of a position in a debt or

equity security when the price of the respective security changes. Position risk may be either

specific or general risk.

Specific risk is a possibility of sustaining a loss if the price of a debt or equity security changes

because of the factors related to the securities issuer or – in case of derivative financial

instruments – to the person issuing the security that is the underlying asset of the derivative.

General risk is a possibility of sustaining a loss if the price of a security changes because of the

factors related to the fluctuations in interest rates (for debt securities) or extensive changes in the

capital market (for equity securities) that are not related to a particular securities issuer.

Position risk associated with the Bank’s available-for-sale portfolio is managed by setting a stop

loss limit for each individual financial instrument, which triggers the sale of the instrument if the

potential loss on its disposal reaches 25% of the acquisition value.

By determining the stop loss limits, the Bank restricts the excessive loss that may be incurred on

impairment of financial instruments.

SETTLEMENT RISK

Settlement risk is the risk to which the Bank is exposed to outstanding transactions in foreign

currencies, securities or commodities, with the exception of repurchase transactions, securities or

commodities lending or borrowing. Settlement risk comprise of settlement / delivery risk and

free deliveries risk.

The Bank settlement / delivery risk and free deliveries of risk capital requirement calculates only

for the period if the risk is registered in the Bank's information system Intranet – section Risks

meeting the definition of the risk characteristics of the relevant event or events. In year 2012 and

2011 the following events are not recorded.

INTEREST RATE RISK

Interest rate risk represents the Bank’s exposure in the event that changes in interest rates have

an adverse effect on the Bank’s income/ expense (and, consequently, also equity) and economic

value. Sources of interest rate risk are as follows:

- Repricing risk, which is a risk of incurring a loss due to changes in interest rates and

timing differences in the remaining or repricing maturities of assets, liabilities and

memorandum items;

- Yield curve risk, which is a probability of a loss due to unexpected changes in the slope

and shape of the yield curve;

- Basis risk, which is a probability of a loss from changes in interest rates of financial

instruments having similar repricing schedules but different base rates;

- Optionality risk, which is a risk of incurring a loss if a financial instrument directly

(options) or indirectly (loans with a prepayment facility, demand deposits, etc.) provides




59

for a possibility of choice for the Bank’s customers.

The objective of managing interest rate risk is to minimise the effect of interest rate risk on the

Bank’s assets and liabilities and income.

To assess interest rate risk, the Bank analyses and plans the repricing maturity structure on a

regular basis, calculates the reduction in the Bank’s economic value due to adverse changes in

interest rates and defines the capital requirement for interest rate risk.

The assessment of the Bank’s exposure to interest rate risk is based on the following key

principles:

- The effect produced by changes in interest rates on the Bank’s financial performance and

economic value is analysed as follows:

Assessment of interest rate risk from the income perspective – analysis of the effect of

changes in interest rates on net interest income and other income and expense items

related to interest rates in the short term;

Assessment of interest rate risk from the economic value perspective – analysis of the

effect of changes in interest rates on the Bank’s economic value in the long term. The

term economic value denotes the present value of net future cash flows, which is

determined by discounting future cash flows by the current market interest rate.

- The Bank establishes the current interest rate risk level as well as identifies situations

when the Bank’s exposure to interest rate risk is or may be excessively large.

- All significant interest rate risks associated with assets, liabilities and memorandum items

- repricing risk, yield curve risk, basis risk, optionality risk – are assessed. Interest rate

risk is assessed and managed by conducting the repricing gap analysis and the duration

analysis and using simulation models.

Simulation models demonstrate potential changes in the Bank’s economic value. With interest

rates changing by +/- 200 basis points for all currencies, the reduction in economic value may

not exceed 8% of the Bank’s equity.

The table below shows the reduction in economic value of the Bank, i.e. the result of applying

the simulation model (the scenario defined by the Financial and Capital Market Commission):

Currency Weighted interest rate risk

position

31/12/2012 31/12/2011

LVL 32 (11)

EUR 13 (154)

USD (76) 21

Other currencies - -

Weighted interest rate risk in the banking book (total) 31 144

Equity 6 323 5 812

Absolute weighted interest rate risk in the banking book

position to equity, % 0.49 2.48




60

The below tables present the calculation of the weighted interest rate risk currency positions:

31/12/2012

EUR EUR USD USD LVL LVL

Weigh

t-ing

factor

%

Net interest

rate risk

position

Weighted

interest

rate risk

position

Net

interest

rate risk

position

Weighted

interest

rate risk

position

Net

interest

rate risk

position

Weighted

interest

rate risk

position

With the remaining

ma maturities of:

Less than 1

month 0.08 (5 835) (5) (4 764) (4) (7 414) (6)

1-3 months 0.32 3 372 11 2 944 9 7 534 24

3-6 months 0.72 5 592 40 2 672 19 1 760 13

6-12 months 1.43 (3 553) (51) (323) (5) 868 12

Total

weighted

interest rate

risk position

(+,-)

(5)

19

43

31/12/2011

EUR EUR USD USD LVL LVL

Weight-

ing

factor

%

Net

interest

rate risk

position

Weighted

interest

rate risk

position

Net

interest

rate risk

position

Weighted

interest

rate risk

position

Net

interest

rate risk

position

Weighted

interest

rate risk

position

With the remaining

ma maturities of:

Less than 1

month 0.08 (1 998) (2) (4 685) (4) (2 788) (2)

1-3 months 0.32 732 2 (55) 0 (252) (1)

3-6 months 0.72 (103) 0 (208) (2) 761 5

6-12 months 1.43 (9 885) (141) 246 4 (441) (7)

Total

weighted

interest rate

risk position

(+,-)

(141)

(2)

(5)




61

The Bank’s exposure to interest rate risk is characterised by the maturity of interest sensitive

assets, liabilities and memorandum items based on the shorter of the remaining maturities of

interest sensitive financial instruments and interest rate repricing periods.

The Bank also determines the effect of interest rate risk on the Bank’s profit or loss and equity

based on the parallel increase in interest rates by 1 per cent (or 100 basis points) and assuming

that interest rates change in the mid-year. The effect on equity is calculated considering potential

changes in the Bank’s available-for-sale portfolio.

The tables below present the repricing maturity analysis of assets, liabilities and memorandum

items based on interest rate changes and the effect of interest rate risk on the Bank’s profit or loss

and equity:




62

31/12/2012

Less than

1 month

1 to 3

months

3 to 6

months

6 to 12

months 1 to 5

years

Non-

interest

bearing

Total

Assets Cash and balances with the

Bank of Latvia 2 544 - - - - 532 3 076

Due from credit institutions 9 792 492 1 234 2 460 - 62 14 040

Loans and receivables 153 4 747 3 475 70 61 - 8 506 Available-for-sale financial

assets 6 705 - - - - - 6 705


investments - 11 716 7 272 3 686 360 - 23 034

Intangible assets and

property, plant and

equipment - - - - - 394 394

Prepaid expense and

accrued income 10 1 - 2 17 36 66

Other assets 928 - - - - 218 1 146

Total assets 20 132 16 956 11

981 6 218 438 1 242 56 967

Due to credit institutions - - - - - - - Liabilities at amortised cost 34 101 2 049 1 024 9 066 2 407 606 49 253 Deposits from customers 34 101 2 049 1 024 9 066 1 001 606 47 847 Subordinated debt - - - - 1 406 - 1 406 Current tax liabilities - - - - - 3 3 Deferred tax liabilities - - - - - 46 46 Other liabilities 29 - - - - 1 020 1 049 Deferred income and

accrued expense - - - - - 135 135

Equity 66 2 - - 213 6 200 6 481

Total liabilities and

equity 34 196 2 051 1 024 9 066 2 620 8 010 56 967

Forward transaction

receivables 2 048 - - - - - 2 048

Forward transaction

liabilities 2 037 - - - - - 2 037

Net interest rate risk

position (gap) (14 053) 14 905

10

957 (2 848) (2 182) (6 768)

Effect on profit or loss (169) 115 63 (8) - - 1

Effect on equity - - (1) - (126) - (127)




63

31/12/2011

Less

than 1

month

1 to 3

months

3 to 6

months

6 to 12

months 1 to 5

years

Non-

interest

bearing

Total

Assets Cash and balances with the

Bank of Latvia 2 156 - - - - 502 2 658

Due from credit institutions 12 541 27 544 1792 - 40 14 944

Loans and receivables 258 1 780 5 007 32 17 1 7 095 Available-for-sale financial

assets - 368 - - 3 138 - 3 506


investments - - - - - 16 056 16 056

Intangible assets and property,

plant and equipment - - - - - 449 449



Prepaid expense and accrued

income 17 - - - - 23 40

Current tax assets 1 - - - - - 1 Deferred tax assets - - - - - 136 136 Other assets 90 - 17 - - 217 324

Total assets 15 158 2 175 5 568 1 824 3 155 17 424 45 304

Due to credit institutions - - 1 633 - - - 1 633 Liabilities at amortised cost 22 872 833 3 133 9 746 1 525 100 38 209 Deposits from customers 22 872 833 3 133 9 746 471 100 37 155 Subordinated debt 1 054 - 1054 Deferred tax liabilities - - - - - - - Derivative financial


Other liabilities 26 - - - - 71 97 Deferred income and accrued

expense - - - - - 129 129

Equity - - - - - 5 163 5 163

Total liabilities and equity 22 971 833 4 766 9 746 1 525 5 463 45 304

Forward transaction

receivables 3 285 - - - - - 3 285

Forward transaction liabilities 3 226 - - - - - 3 226

Net interest rate risk

position (gap) (7 754) 1 342 802 (7 922) 1 630 11 961

Effect on profit or loss (74) 11 5 (20) - - (78)

Effect on equity - (1) - - (59) - (60)




64

Before engaging in any transactions with financial instruments (except for derivatives), the

Resource Division analyses the potential effect of the exposure on the interest rate repricing

maturity and economic value of the Bank.

In preparing the transaction, the Credit Division determines interest rates according to the Bank’s

Interest Rate Setting Guidelines. The loan interest rate should cover all expenses associated with

the loan and compensate the risk assumed by the Bank, namely:

- Interest on borrowed funds or consideration for other exposures;

- Loan servicing expenses;

- Compensation of potential loss (risk premium);

- Guaranteed profit.

The loan interest rate (compensation) for a particular exposure depends on the risk associated

with each individual loan.

In order to assess the impact of adverse changes in interest rates on the Bank's profitability and

economic value during the strained market situation, the Bank conducts regular interest rate risk

stress testing.

OPERATIONAL RISK

Operational risk is the risk of a loss resulting from inadequate or failed internal processes, people

and systems or from external events. Operational risk is defined as the risk of a reduction in the

Bank’s income or incurring of additional costs (and, consequently, a reduction in equity) due to

erroneous transactions with customers/counterparties, information processing, adoption of

ineffective decisions, insufficient human resources or insufficient planning for the influence of

external events. Namely, operational risk comprises information technology risks and legal risks.

The objective of managing operational risk is to identify the sources of risk, determine risk

management methods in order to minimise the potential loss that could be caused by an

operational risk event.

Routine identification of operational risk is the responsibility of all employees of the Bank, and

the core elements of the operational risk management framework are as follows:

- Identification of operational risk;

- Internal operational risk assessment;

- Monitoring of operational risk;

- Control and mitigation of operational risk;

- Operational risk stress testing.

The Board is informed immediately if the event losses exceed LVL 100.00 or events of one type

occur more than five times per week.

If the total amount of operational risk losses per year, as recorded in the operational risk event

and loss database, exceeds 8% of the Bank's equity, the Risk Control Division analyses whether

it would be necessary to maintain an additional capital to cover unexpected operational risk

losses.




65

NOTE 30 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Fair value is the amount for which an asset could be exchanged, or a liability settled, between

knowledgeable and willing parties in an arm’s length transaction. 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 not carried at fair value 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 on-demand balances 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

rates consist of money market rates as at the end of year and credit spread margins, which

are adjusted for current market conditions.

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 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 average market interest rates or rates offered at year-

end. The fair value as at 31 December 2011 and 2012 is calculated by discounting expected

cash flows and using average interest rates.

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.




66

As regards financial assets and liabilities that are stated at a carrying amount differing from the

fair value, the management believes that the value of those financial assets and liabilities

approximates to their carrying amount.

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.

31/12/2012 31/12/2011

Carrying

amount

Fair

value

Difference Carrying

amount

Fair

value

Difference

Financial assets

Cash and balances with the

Bank of Latvia 3 076 3 076 - 2 658 2 658 -

Due from credit institutions 14 040 14 040 - 14 944 14 944 -


investments 23 034 25 167 (2 133) 16 056 16 216 (160)


instruments - - - 95 95 -


assets 6 705 6 705 - 3 506 3 506 -

Loans and receivables 8 506 8 391 115 7 095 7 070 25

Financial liabilities


instruments - - - 73 73 -

Deposits from customers 47 847 47 845 2 37 155 37 149 6

Total difference - - (2 016) - - (129)

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.




67

As at 31 December 2012, the fair value of the Bank’s financial assets met the requirements of

Level 1 and Level 2.

31/12/2012 31/12/2011

Level 1

input

Level 2

input

Total Level

1 input

Level 2

input

Total

Financial assets at fair value


instruments - -

- - 95

95


assets 5 968 737

6

705 2 781 725

3 506

Debt securities issued by

EU central governments 1 653 737

2

390 1 269 725 1 994


other countries central

governments

568 - 568 - - -


EU credit institutions 1 221 -

1

221 735 - 735


EU municipalities 791 - 791 777 - 777

Debt securieties issued by EU

non financial communities 1 735 -

1

735 - - -

The methods employed in classifying the assets by the levels of the fair value hierarchy as at 31

December 2012 are consistent with those of the prior year.

NOTE 31 CAPITAL MANAGEMENT

The primary objective of the Bank’s capital management is to ensure that the Bank complies

with externally imposed capital requirements (i.e. Financial and Capital Market Commission’s

regulations and IFRS) and that the Bank maintains healthy capital ratios and equity, both in

terms of elements and composition, to an extent sufficient for covering significant risks inherent

in the Bank’s current and planned operations.

Capital adequacy refers to the sufficiency of the Bank’s capital resources to cover credit risk,

operational risk and market risks. The Bank applies the standardised approach and the basic

indicator approach to calculate the capital requirement for credit risk and operational risk

respectively.

In assessing its overall capital adequacy, the Bank calculates the capital adequacy for the

following risks:

- Credit risk. The Bank has estimated that in 2013 the capital required to cover credit risk

should be at least in line with the results of stress tests performed under the basic

scenario.

- Operational risk. In determining the required capital level, the Bank considers the capital

requirement calculated according to the basic indicator approach referred to in




68

Regulations No. 60 on the Calculation of Minimum Capital Requirements issued by the

Financial and Capital Market Commission on 2 May 2007 as well as the results of the

internal operational risk assessment and stress testing.

- Market risks:

• The Bank assumes that for currency risk the Bank will have to maintain capital to the

extent as determined as a result of stress tests performed under the basic scenario

(assuming a change of one-currency’s exchange rate).

• The Bank analyses how the market risk exposure is affected by market liquidity of

financial instruments on a regular basis, once every month. All instruments of the

Bank’s available-for-sale portfolio were traded on liquid markets without applying

any significant discounts and, therefore, the Bank believes that its available-for-sale

portfolio does not affect the capital required to cover market risk. The Bank takes into

consideration the fact that over the next two years the Bank intends neither to

significantly expand its available-for-sale portfolio nor to revise the portfolio maturity

and quality, it is assumed that new investments (due or sold) will be made in financial

instruments with similar maturities and prudent assumptions are made regarding the

quality of these investments; Bank was modelling necessary capital requirements;

• settlement risk capital needed to cover the Financial and Capital Market

Commission, 02.05.2007. regulatory rules No. 60 "Minimum capital adequacy

rules" approach described 31.12.2012. was 0 lats, and the Bank assesses that there is

no need to maintain capital to cover the risk.

- Interest rate risk in the banking book. The Bank assumes that for interest rate risk in the

banking book the Bank will have to maintain capital at least in line with the results of

stress tests performed under the pessimistic scenario.

- Concentration risk. The Bank applies the simplified approach according to Regulations

No. 38 on the Internal Capital Adequacy Assessment Process issued by the Financial and

Capital Market Commission on 20 March 2009 to determine the relevant adequate

capital.

The analysis of concentration risk for the loan portfolio includes:

• Name concentration risk analysis,

• Sector concentration risk analysis,

• Collateral concentration risk analysis,

• Currency mismatch risk analysis.

The total capital needed to cover concentration risk is determined by aggregating the results

of all individual calculations. In analysing name concentration risk, the Bank assesses the

exposure concentration for the entire loan portfolio and the held-to-maturity portfolio.

- Money laundering and terrorist financing risk. The Bank applies the simplified approach

according to Regulations No. 38 on the Internal Capital Adequacy Assessment Process

issued by the Financial and Capital Market Commission on 20 March 2009 to determine

the relevant adequate capital.

- Other risks. As other risks which would require an additional capital analysis, the Bank

determines country risk, residual risk, compliance risk, reputational risk and strategic and

business risks based on the material risk assessment. Pursuant to Regulations No. 38 on

the Internal Capital Adequacy Assessment Process issued by the Financial and Capital

Market Commission on 20 March 2009, the Bank applies the simplified approach to




69

define the adequate capital, namely the capital to cover other risks is determined as 5% of

the total minimum capital requirements.

The total capital adequacy is calculated as a total of the capital buffer and the adequate capital to

cover all risks involved in the capital adequacy assessment process. The capital buffer is

determined on the basis of the general stress testing results.

The regulations of the Financial and Capital Market Commission (the bank regulator) require

that Latvian banks maintain a capital adequacy ratio based on financial statements prepared

under IFRS as adopted by the EU of 8% of risk weighted assets. In 2012 year Bank determined

that the capital is 20 %. As at 31 December 2012, the Bank’s capital adequacy ratio calculated in

accordance with the above requirements was 30.47 % (2011: 23.32%).

The Bank’s eligible capital also exceeds the adequate capital to cover all significant risks defined

during the capital adequacy assessment process.

The Bank applies the capital definition and the procedure for capital calculation laid down in

Regulations No. 60 on the Calculation of Minimum Capital Requirements issued by the

Financial and Capital Market Commission on 2 May 2007, which is incorporated in the Bank’s

Procedure for Calculating the Minimum Capital Requirements relevant for the Bank’s

instruments. Namely, the eligible capital comprises Tier 1 items, i.e. paid-in share capital,

reserve capital, retained earnings, including current year’s profit which is not subject to dividend

distribution, less negative fair value revaluation reserve of available-for-sale financial assets and

intangible assets, and Tier 2 items, i.e. subordinated capital.

Capital adequacy assessment is governed by a Bank’s internal document named the Capital

Adequacy Assessment Policy.




70

The capital adequacy calculation of the Bank can be disclosed as follows:

31/12/2012 31/12/2011

Tier I

- paid-in share capital 6 200 6 200

- retained earnings (974) -

- audited profit for the year 580 (974)

- fair value revaluation reserve of available-for-sale financial

assets - (63)

Less

- intangible assets (367) (405)

Total Tier I 5 439 4 758

Subordinated liabilities 1 406 1 054

Subordinated debt amortization (106) -

Total Tier II 1 300 1 054

Legislation for specific Tier I capital and Tier II capital reduction (416) -

Total eligible capital 6 323 5 812

Risk capital charge

Total capital charge for credit risk and counterparty risk, incl. the

following statutory asset classes:

Central governments or central banks 12 12

Regional or local authorities 32 31

International organizations 7 -

Credit institutions 598 1 177

Commercial companies 692 368

Other assets 99 84

Other risk capital charges:

Capital charge for currency risk 21 35

Capital charge for operational risk 199 287

Total capital charges 1 660 1 994

Capital adequacy ratio

(Equity/Total capital charges) x 8% 30.47% 23.32%

NOTE 32 EVENTS AFTER REPORTING DATE

On 8 February 2013 the Bank has concluded an agreement for acquisition of real estate for

Central office purposes for the total value of LVL 5 027 thousand. As at the date of signing of

the financial statements the contract is paid fully and the ownership rights of the property are

registered in the land register.

Except as mentioned above, during the period from the last day of the reporting period and the

date of signing the financial statements have not been events leading to the financial statements

should be adjusted.

* * *

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