AS REĢIONĀLĀ INVESTĪCIJU BANKA
CONTENTS Report of the Management 3 The Council and the Board of Directors of the Bank 6 Statement of Responsibility of the Management 7 Auditors Report 8 Financial Statements: Statement of Comprehensive income 9 Statement of Financial Position 10 Statement of Changes in Shareholders Equity 11 Statement of Cash flows 12 Notes to the Financial Statements 13-25 AS Reģionālā investīciju banka J. Alunana Street 2, Riga, LV 1010, Latvia Phone: (371) 67508989 Facsimile: (371) 67508988 Registration number: 4000 356 3375 2
REPORT OF THE MANAGEMENT AS REĢIONĀLĀ INVESTĪCIJU BANKA The first half of 2013 has been a calm period for JSC Regionala investiciju banka (hereinafter the Bank). During this time, the number of Customers has grown by 10.4% compared to the end of 2012. The Bank s operating profit in this period was 2.35 million, however provisions for doubtful debts were established in the first half of the year in the amount of 4.49 million, and consequently the Bank has closed the period with losses in the amount of 2.3 million. The overall economic situation In spite of the global economic stagnation, the economy of Latvia in the beginning of 2013 demonstrated a healthy growth rate. The GDP of Latvia in the first quarter 2013 was up by 3.60% year-on-year. The main contributor to the growth of national economy was increase in private consumption, which, like last year, showed a positive trend and grew by 4.7% in the first quarter 2013. As regards specific industries, it is necessary to highlight the positive growth of construction, transport and financial services, as well as the decline in the overall output of the processing industry. According to the latest forecasts of the Bank of Latvia, the GDP in 2013 could grow by 4.10%, serving as confirmation of the success of the implemented economic policy, the correctness of the decisions made in the post-crisis period, and the most optimistic forecasts of the central bank. A positive push toward continued growth will be Latvia s becoming the 18th Euro zone country, which will be followed by an influx of foreign investment. Owing to positive development of macroeconomic indicators and the upcoming adoption of the euro in 2014, the major credit rating agencies have increased Latvia s rating by one grade in 2013. However, it must be noted that there are also risks to successful continued economic growth. They are associated with stagnation in the European Union and slowing growth of the Russian national economy. In a negative scenario, it could significantly hinder export, which in the post-crisis period has been the foundation of economic growth and has ensured successful development of the manufacturing sector. The Latvian finance sector in the first half of 2013 showed similar trends as in 2012. Bank assets remain stable, liquidity is still significantly above the level stipulated by the law, however the overall amount of issued loans is continuing to decline. However, it must be noted that, seeing as the amount of deposits and the quality of credit portfolios in commercial banks is improving, it can be expected that the Bank credit portfolio in the second half of the year will stop declining or even begin showing positive growth. That, in turn, could allow yield and profitability indicators to return to pre-crisis levels. In contrast to Latvia, a decline in economic activity has been observed in Ukraine in 2013. The GDP of Ukraine fell by 1.10% year-on-year in the first quarter of 2013, and it is the third consecutive quarter when the national economy is showing negative growth indicators. The decline in economic activity is mainly explained by the unfavorable situation in the country s export markets, particularly the weak economic growth in the European Union, which is Ukraine s primary trading partner. The construction sector and processing industry have experienced a decline of 14.8% and 9.5% respectively, while positive growth of 5.7% and 3.9% has been shown by agriculture and financial services. According to the latest forecasts of the World Bank, the GDP of Ukraine in 2013 will show an overall increase of 1% year-on-year, however the forecast may be significantly adjusted due to negative external factors. The main obstacles in the way of successful economic growth of the national economy are the relatively high current account deficit, the large public debt and its high service cost. The overall public debt of Ukraine in the first quarter of 2013 was 76.8% of the GDP, and the budget revenue, which is significantly behind the forecasts, in the first half of 2013 was 0.3% lower than last year in the same period. These factors caution foreign investors who are demanding a high premium for their investments in the country. The yield of 10-year Ukrainian government bonds is close to 10%. The finance sector of Ukraine, like the national economy in general, is going through difficult times. The quality of bank assets remains poor, and problematic loans, like in 2012, comprise approximately 35% of the credit portfolio. Although the bank sector is generally showing positive profitability indicators, profit and interest margins are low making the bank sector very risky and making acquisition of resources in foreign financial markets very difficult and expensive. As a result of these factors, the major credit rating agencies in the first half of 2013 revised the ratings of the biggest banks to a negative outlook. 3
REPORT OF THE MANAGEMENT (continued) The Bank s operation in the reporting period AS REĢIONĀLĀ INVESTĪCIJU BANKA A new Board Member was elected on 8 January 2013 Deputy Chairman of the Board Aleksandrs Kovaļskis, who manages all departments connected with Customer service. One of the main tasks of the new Deputy Chairman of the Board is improvement of Customer service and increasing the number of Customers. In the second quarter of2013, the Bank initiated major expansion of the network of correspondent banks, opening several new correspondent accounts in the first half of the year. The Bank has thereby improved the quality of transfer services, ensuring efficient and fast transfer of the Customers funds to the destination. Customers have been appreciative of this innovation, as the number of outgoing transfers in the first half of 2013 compared to the first half of 2012 has grown by 13.6%. The total amount of funds of the Bank s Customers has not changed during the reporting period, however assets have numerically declined compared to the end of the previous year, as the Bank began offering a new service Trust transactions under which funds held with the Bank were transferred off-balance. On 30 June 2013, assets comprised 263.2 million, while the investment portfolio, taking into consideration the accounting of Trust transactions, has numerically declined by 18.25% compared to the end of 2012, and on 30 June 2013 comprised 251.5 million. In the course of improvement of the quality of the Bank s credit portfolio, it has declined by 10% compared to the end of 2012, comprising 74.6 million. The priorities established for lending are financing of Latvian business in the sectors of agriculture, manufacturing and real estate construction. The number of payment cards has increased by 19.4% year-on-year, and payment card turnover has increased by 10.9%, reaching 7.54 million. In addition, the exclusive payment card World Signia was given a new name in the beginning of the year World Elite. The Financial and Capital Market Commission (FCMC) established an individual capital requirement for the Bank in September 2012 17.6%. The Bank fulfilled this requirement also in the first half of 2013. In 2013, the FCMC established for the Bank also an individual liquidity ratio requirement of 60%; the average liquidity ratio in the first half 2013 was 81.28%. In the area of IT, the Bank has modernized several systems and programs. The speed and the generation of reports of the Bank s accounting system have been improved and a gold accounting module has been developed. The Bank s recordkeeping program has been prepared for the use of the e-signature and several document management processes have been automated. An improved unified system has been implemented for registration and administration of IT management processes and new easy-to-use modules have been implemented for the needs of the Anti-Money Laundering Department. In 2012 the process of Bulgarian branch liquidation began and was fully completed on 2 July 2013. During this half-year, the Bank has hired 18 new employees and the total number of employees on 30 June 2013 was 131. Plans for the second half-year and future prospects In the second half of the year, the Bank will continue steady growth with an aim of increasing the number of Customers, placing a particular focus on high-net-worth individuals by offering private banking services. On 1 January 2014, Latvia will adopt the euro which will become Latvia s official transaction currency; because of that, the Bank will carry out a euro implementation project which will require significant human resources and financial investments. In the beginning of 2014, the Bank is planning to implement a payment card acceptance service which will allow Customers of the Bank to accept MasterCard and Maestro, as well as Visa and Visa Electron payment cards at their stores, including online stores. 4
REPORT OF THE MANAGEMENT (continued) AS REĢIONĀLĀ INVESTĪCIJU BANKA One of the main tasks of the Bank in this half-year will be the acquisition and implementation of a new Internet bank with significantly improved functionality, as well as remote communication with Customers. The Bank is also continuing its work on implementation of the e-signature project which will save time and other resources in day-to-day business correspondence. 5
THE COUNCIL AND THE BOARD OF DIRECTORS OF THE BANK As at 30 June 2013 and as at the date of signing the accounts: Date of appointment The Council Jurijs Rodins Marks Bekkers Dmitrijs Bekkers Alla Vanecjancs Irina Buc Chairman of the Council Deputy Chairman of the Council Member of the Council Member of the Council Member of the Council Re-elected 24.02.2012 Re-elected 24.02.2012 Re-elected 24.02.2012 Re-elected 24.02.2012 Re-elected 24.02.2012 The Board Haralds Āboliņš Chairman of the Board, President Re-elected 28.06.2012 Aleksandrs Kovaļskis Deputy Chairman of the Board 08.01.2013 Daiga Muravska Member of the Board Re-elected 28.06.2012 6
STATEMENT OF RESPONSIBILITY OF THE MANAGEMENT The Council and the Board of Directors (hereinafter - the Management) of the Bank are responsible for the preparation of the financial statements of the Bank. The financial statements on pages 9 to 25 are prepared in accordance with the source documents and fairly present the financial position of the Bank as at 30 June 2013 and the results of its operations and cash flows for the 6 months period ended 30 June 2013. The financial statements are prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting on a going concern basis. Appropriate accounting policies have been applied on a consistent basis. Prudent and reasonable judgements and estimates have been made by the Management in the preparation of the financial statements. The Management of the Bank is responsible for the maintenance of proper accounting records, safeguarding of the Bank s assets and the prevention and detection of fraud and other irregularities in the Bank. They are also responsible for operating the Bank in compliance with the Law on Credit Institutions, regulations of the Financial and Capital Market Commission, Bank of Latvia and other legislation of the Republic of Latvia applicable for credit institutions. 7
AS REĢIONĀLĀ INVESTĪCIJU BANKA AUDITORS REPORT 8
STATEMENT OF COMPREHENSIVE INCOME 6 months ended 30 June 2013 6 months ended 30 June 2012 Interest income 6,912,251 6,945,415 Interest expense (3,757,604) (3,876,004) Net interest income 3,154,647 3,069,411 Provisions for loan impairment (4,490,830) (1,187,681) Net interest (expense)/ income after provision for loan impairment (1,336,183) 1,881,730 Fee and commission income 2,056,001 1,911,123 Fee and commission expense (529,033) (547,828) Net fee and commission income 1,526,968 1,363,295 Profit on securities trading, net 46,934 923 (Loss) / profit on revaluation of securities at fair value through profit or loss, net (203,355) 144,212 Loss on derivative financial instruments revaluation, net (39,530) (274,453) Profit on operation with foreign exchange, net 429,493 563,324 (Loss) / profit from revaluation of foreign exchange, net (124,120) 93,725 Other operating income 37,682 166,132 Administrative expense (2,133,986) (2,040,717) Amortisation and depreciation charge (89,858) (123,670) Other operating expenses (39,518) (29,458) Profit / (loss) before income tax (1,925,473) 1,745,043 Income tax expense (403,163) (378,436) Profit / (loss) for the period (2,328,636) 1,366,607 Total comprehensive income / (loss) for the period attributable to shareholders (2,328,636) 1,366,607 The financial statements on pages 9 to 25 have been approved by the Council and the Board of Directors of the Bank and signed on their behalf by: The accompanying notes on pages 13 to 25 are an integral part of these financial statements. 9
STATEMENT OF FINANCIAL POSITION Notes 30.06.2013 31.12.2012 Assets Cash and balances with the Bank of Latvia 14,642,831 44,440,857 Balances due from banks 3 183,205,854 207,381,802 Loans and advances to customers 4 59,769,783 72,830,308 Financial assets at fair value through profit or loss 5 25,955,394 13,793,922 Derivative financial instruments 100,163 112,637 Intangible assets 191,065 148,716 Property and equipment 184,258 225,108 Other assets 2,426,296 1,477,816 Deferred expenses 51,055 68,459 Total assets 286,526,699 340,479,625 Liabilities Balances due to banks 412,252 1,690,733 Due to customers 6 251,485,062 304,888,231 Derivative financial instruments 184,276 157,219 Other financial liabilities 2,558,764 2,968,887 Deferred income and accrued expenses 527,386 661,491 Deferred income tax liability 6,949 6,949 Subordinated loan 7,998,252 4,423,721 Total liabilities 263,172,941 314,797,231 Equity Share capital 22,725,000 22,725,000 Retained earnings 2,957,394 1,417,546 Comprehensive (loss) / income for the period (2,328,636) 1,539,848 Total equity 23,353,758 25,682,394 Total liabilities and equity 286,526,699 340,479,625 Commitments and contingent liabilities Contingent liabilities - 6,016,694 Liabilities to customers 14,927,304 19,170,535 Assets under management 40,661,256 - The financial statements on pages 9 to 25 have been approved by the Council and the Board of Directors of the Bank and signed on their behalf by: The accompanying notes on pages 13 to 25 are an integral part of these financial statements. 10
STATEMENT OF CHANGES IN SHAREHOLDER`S EQUITY Share capital Retained earnings Total Balance as at 31 December 2011 11,125,000 1,417,546 12,542,546 Increase in share capital 6,400,000-6,400,000 Comprehensive income for the period - 1,366,607 1,366,607 Balance as at 30 June 2012 17,525,000 2,784,153 20,309,153 Increase in share capital 5,200,000-5,200,000 Comprehensive income for the period - 173,241 173,241 Balance as at 31 December 2012 22,725,000 2,957,394 25,682,394 Comprehensive loss for the period - (2,328,636) (2,328,636) Balance as at 30 June 2013 22,725,000 628,758 23,353,758 The accompanying notes on pages 13 to 25 are an integral part of these financial statements. 11
STATEMENT OF CASH FLOWS 6 months ended 30 June 2013 6 months ended 30 June 2012 Cash flows from operating activities Interest received 4,968,393 5,226,377 Interest paid (4,113,146) (4,336,764) Fees and commission received 2,056,001 1,911,123 Fees and commission paid (529,033) (547,828) Income on securities trading 46,934 923 Income on foreign exchange 429,493 563,324 Other operating income 37,682 166,132 Personnel expenses paid (1,220,933) (1,219,152) Administrative and other operating expenses paid (952,571) (851,022) Income tax paid (403,163) (378,436) Cash flows from operating activities before changes in operating assets and liabilities 319,657 534,677 Changes in operating assets and liabilities Net increase of securities at fair value through profit or loss (12,191,930) (18,730,700) Net (increase)/ decrease of balances due from banks (27,369,586) 3,840,977 Net (increase)/ decrease of loans and advances to customers 10,003,453 (163,063) Net increase of other assets (931,076) (457,591) Net increase/ (decrease) of balances due to customers (53,378,577) 73,050,164 Net decrease in other liabilities (478,196) (154,318) Net cash and cash equivalents (used in) / generated from operating activities (84,026,255) 57,920,146 Cash flows from investing activities Purchase of intangible assets (83,832) (6,430) Purchase of fixed assets (7,526) (16,405) Net cash and cash equivalents used in investing activities (91,358) (22,835) Cash flows from financing activities Increase in share capital - 6,400,000 Subordinated loan received 3,508,500 1,686,000 Subordinated loan repaid - (3,264,000) Net cash and cash equivalents generated from financing activities 3,508,500 4,822,000 Effect of exchange rates on cash and cash equivalents 547,874 2,909,316 Net increase / (decrease) in cash and cash equivalents (80,061,239) 65,628,627 Cash and cash equivalents at the beginning of the period 227,037,573 129,500,953 Cash and cash equivalents at the end of the period 146,976,334 195,129,580 The accompanying notes on pages 13 to 25 are an integral part of these financial statements. 12
NOTES TO THE FINANCIAL STATEMENTS AS REĢIONĀLĀ INVESTĪCIJU BANKA 1 INCORPORATION AND PRINCIPAL ACTIVITIES A/S Reģionālā Investīciju banka (hereinafter the Bank) provides financial services to corporate clients and individuals. In 2005, the Bank established its representative office in Odessa and, in 2007, in Dnepropetrovsk, Ukraine. At the beginning of 2009, representative office of the Bank was established in Kijev, Ukraine. While in 2010 the representative office of the Bank was established in the capital of Belgium Brussels. The Bank has no other subsidiaries or branches apart from those mentioned above. The Bank is a joint-stock company incorporated and domiciled in Riga, Republic of Latvia. It was registered within the Commercial Register on 28 September 2001. The legal and actual address of the Bank is: J. Alunana Street 2, LV-1010, Riga, Latvia These financial statements have been approved for issue by the Council and the Board of Directors on July 2013. 2 MAIN ACCOUNTING POLICIES A summary of the significant accounting policies, all of which have been applied consistently throughout the years 2013 and 2012, are set out below: (a) Reporting currency The financial statements are reported in Latvian lats (), unless stated otherwise. (b) Basis of preparation These interim condensed financial statements for the 6 month period ended 30 June 2013 are prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting. These interim condensed financial statements should be read in conjunction with the 2012 full annual financial statements prepared in accordance with International Financial Reporting Standards (IFRS) adopted in the European Union. The preparation of interim financial statements in accordance with IAS 34 requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on the Management s best knowledge of current events and actions, actual results may ultimately differ from those estimated. Bank s operating environment: Stagnation of the European Union countries economies and its impact on the Latvian financial sector In 2013 the recovery of the global economy is still not able to obtain the necessary momentum in order to say with certainty that the global economic recession and stagnation phases are overcome. Although there have been positive developments in the U.S. and Japanese macroeconomic data, the euro zone countries whose economies in 1Q 2013 showed a negative GDP growth - 0.3% are still facing the biggest problems. Thanks to the monetary policy conducted by the ECB the central government debt crisis is overcome and the euro rates are close to zero, but a long-term solution to Eurozone budget arrangement is still not found and the central government debt-reduction plan is still not realized. Consequently, most analysts predict that the economic stagnation in the euro zone countries will continue for at least the next two consequent years. The aforementioned facts are also affecting the situation in the financial sector that can be described as unstable with a high possibility of negative further development scenarios. Latvian situation is strongly dependent on economic processes of the European Union Member States. Although Latvia has been able to ensure its economic growth in the recent years despite the stagnation in other EU countries, in the future Latvia will also be subject to the risk of economic downturn and new financial system shocks. 13
NOTES TO THE FINANCIAL STATEMENTS (continued) 2 MAIN ACCOUNTING POLICIES (continued) (b) Basis of preparation (continued) Impact on borrowers: Debt servicing capacity of Bank's borrowers may be reduced as a result of liquidity decrease. Deterioration in the business environment for borrowers may influence management's cash flow forecasts and estimates on the impairment in the value of financial and non-financial assets. Management has derived its opinion on recoverable value of assets from available information and reflected updated cash flow forecasts in asset impairment evaluation. Impact on collateral: Level of provisions for non-performing loans is based on management's assessment of assets as at the balance sheet date, considering cash flows from the disposal of collateral as reduced by the cost of takeover and sale. Due to possible economy downturn the actual sales value of collateral may differ from the value used in cash flow projections underlying estimate for impairment provisions. The accounting policies used in the preparation of these interim condensed financial statements are consistent with those used in the annual financial statements for the year ended 31 December 2012, except for the changes in accounting policies as a result of new and amended International Financial Reporting Standards (IFRS) that are effective for the accounting periods beginning on or after 1 January 2013 and are relevant to the Bank. (c) Adoption of new or revised standards and interpretations Various new standards and interpretations have been published effective for annual periods beginning on or after 1 January 2013 and which are not relevant to the Bank s operations or they are not endorsed by the EU: - IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU); - Employee benefits Amendment to IAS 19 (effective for annual periods beginning on or after 1 January 2013); - IFRS 13, Fair Value Measurement (effective for annual periods beginning on or after 1 January 2013); - Disclosure - Offsetting Financial Assets and Financial Liabilities Amendments IAS 7, (effective for annual periods beginning on or after 1 January 2013); - Amendment in application of IFRS 10, 11 and 12 (effective for annual periods beginning on or after 1 January 2013; endorsed by the EU for annual periods beginning on or after 1 January 2013); - IFRS 1, First time adoption on government loans (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU); - IFRS 9, Financial Instruments Part 1: Classification and Measurement (effective for annual periods beginning on or after 1 January 2015; not yet endorsed by the EU); - IFRS 10, Consolidated Financial Statements (effective for annual periods beginning on or after 1 January 2013; endorsed by the EU for annual periods beginning on or after 1 January 2014); - IFRS 11, Joint Arrangements (effective for annual periods beginning on or after 1 January 2013; endorsed by the EU for annual periods beginning on or after 1 January 2014); - IFRS 12, Disclosure of Interests in Other Entities` (effective for annual periods beginning on or after 1 January 2013; endorsed by the EU for annual periods beginning on or after 1 January 2014); - Amendment IFRS 10, IFRS 12 and IAS 27 for investment companies (effective for annual periods beginning on or after 1 January 2014, not yet endorsed by the EU); - Offsetting Financial Assets and Financial Liabilities Amendments to IAS 1 (effective for annual periods beginning on or after 1 January 2014; not yet endorsed by the EU); 14
NOTES TO THE FINANCIAL STATEMENTS (continued) 2 MAIN ACCOUNTING POLICIES (continued) (c) Adoption of new or revised standards and interpretations (continued) - Separate Financial Statements - IAS 27 (revised 2011), (effective for annual periods beginning on or after 1 January 2013; endorsed by the EU for annual periods beginning on or after 1 January 2014); - Investments in Associates - IAS 28 (revised 2011), (effective for annual periods beginning on or after 1 January 2013; endorsed by the EU for annual periods beginning on or after 1 January 2014); - Amendment IAS 32, Financial Instruments: Disclosures on financial assets and financial liabilities netting (effective for annual periods beginning on or after 1 January 2014); - Annual improvements of IFRS (issued in 2012) (effective for annual periods beginning on or after 1 January 2013; not yet endorsed by the EU). The Management of the Bank is currently evaluating the impact of these standards and interpretations on financial statements, if there is any at all. (d) Corporate income tax Corporate income tax is recognised in each interim period based on the best estimate of the weighted average effective annual income tax rate expected for the full financial year. If the estimate of the weighted average effective annual income tax rate changes, amounts accrued for income tax expense in one interim period may have to be adjusted in a subsequent interim period of that financial year. Interim period income tax expense is accrued using the tax rate that would be applicable to expected total annual earnings, that is, the estimated average annual effective income tax rate is applied to the pre-tax income of the interim period. 15
NOTES TO THE FINANCIAL STATEMENTS (continued) 3 BALANCES DUE FROM BANKS 30.06.2013 31.12.2012 Due from Republic of Latvia credit institutions 3,440,309 8,490,321 Due from non-oecd credit institutions 118,144,134 145,223,130 Due from OECD credit institutions 61,621,411 53,668,351 183,205,854 207,381,802 The following table discloses balances due from banks between demand and term deposits: On demand 130,678,491 180,118,610 Balances with maturity of three months or less 2,067,264 4,168,839 Other balances due from banks 50,460,099 23,094,353 183,205,854 207,381,802 4 LOANS AND ADVANCES TO CUSTOMERS Analysis of loans by client and loan types: 30.06.2013 31.12.2012 Loans to legal entities 70,952,568 77,091,807 Loans to private individuals, except for mortgages 1,538,003 1,490,031 Mortgages 2,142,231 2,268,765 Reverse repurchase agreements (reverse repo) - 2,291,143 Loans and advances to customers before provisions for loan impairment 74,632,802 83,141,746 Less: provisions for loan impairment (14,863,019) (10,311,438) Total loans and advances to customers 59,769,783 72,830,308 The following table discloses changes in provisions for loan impairment during the 6 months of 2013: Loans to legal entities Loans to private individuals, except for mortgages Mortgages Total Provisions for loan impairment as at 1 January 2013 9,549,584 553,249 208,605 10,311,438 Increase/ (decrease) in provisions for loan impairment for the period 4,186,999 (811) 304,642 4,490,830 Effect on currency revaluation 60,027-724 60,751 Provisions for loan impairment as at 30 June 2013 13,796,610 552,438 513,971 14,863,019 16
NOTES TO THE FINANCIAL STATEMENTS (continued) 4 LOANS AND ADVANCES TO CUSTOMERS (continued) The following table discloses changes in provisions for loan impairment during 2012: Loans to legal entities Loans to private individuals, except for mortgages Mortgages Total Provisions for loan impairment as at 1 January 2012 8,600,593 330,762 350,435 9,281,790 Increase/ (decrease) in provisions for loan impairment for the period 1,207,415 (30,778) (579) 1,176,058 Written-off loans on accrual basis (285,278) - - (285,278) Effect on currency revaluation 229,016 - - 229,016 Provisions for loan impairment as at 30 June 2012 9,751,746 299,984 349,856 10,401,586 Increase in provisions for loan impairment for the period 1,762,867 260,685 579 2,024,131 Written-off loans on accrual basis (1,630,195) - (149,264) (1,779,459) Effect on currency revaluation (334,834) (7,420) 7,434 (334,820) Provisions for loan impairment as at 31 December 2012 9,549,584 553,249 208,605 10,311,438 The industry concentration of risks in the credit portfolio is as follows: 30.06.2013 31.12.2012 % % Trade and commercial activities 27,309,347 36.59 32,249,466 38.79 Private individuals 3,680,234 4.93 3,758,796 4.52 Agriculture and food industry 1,849,716 2.48 5,011,642 6.03 Construction and operations with real estate 15,750,461 21.10 16,569,359 19.93 Transport and communication 13,139,752 17.61 11,808,650 14.20 Production 3,463,975 4.64 3,953,200 4.75 Tourism and hotel services, restaurant business 978,135 1.31 1,912,167 2.30 Finance and investment 4,777,220 6.40 4,240,886 5.10 Other 3,683,962 4.94 3,637,580 4.38 Loans and advances to customers (before provisions for impairment) 74,632,802 100.00% 83,141,746 100.00% 17
NOTES TO THE FINANCIAL STATEMENTS (continued) 4 LOANS AND ADVANCES TO CUSTOMERS (continued) The following table shows the loans outstanding as at 30 June 2013 by credit quality. Loans to legal entities Loans to private individuals, except for mortgages Mortgages Total Neither past due nor impaired - Loans to big size entities 1,243,877 - - 1,243,877 - Loans to medium size entities 3,788,658 - - 3,788,658 - Loans to small size entities 31,683,159 - - 31,683,159 - Loans to private individuals - 188,959 804,757 993,716 Total neither past due nor impaired 36,715,694 188,959 804,757 37,709,410 Past due but not impaired - past due up to 30 days 6,402,342 - - 6,402,342 - past due 31-90 days 2,525,327 - - 2,525,327 - past due over 360 days - - 82,857 82,857 Total past due, but not impaired 8,927,669-82,857 9,010,526 Individually impaired loans (gross amount) - not past due 8,736,908 8,033-8,744,941 - past due up to 30 days 1,501,631 14,840 788,810 2,305,281 - past due 91 180 days 3,071,321 12,378-3,083,699 - past due 181 360 days 531,414 - - 531,414 - past due over 360 days 11,467,931 1,313,793 465,807 13,247,531 Total individually impaired loans (gross amount) 25,309,205 1,349,044 1,254,617 27,912,866 Less: provisions for loan impairment (13,796,610) (552,438) (513,971) (14,863,019) Total loans and advances to customers 57,155,958 985,565 1,628,260 59,769,783 18
NOTES TO THE FINANCIAL STATEMENTS (continued) 4 LOANS AND ADVANCES TO CUSTOMERS (continued) The following table shows the loans outstanding as at 31 December 2012 by credit quality. Loans to legal entities Loans to private individuals, except for mortgages Mortgages Total Neither past due nor impaired - Loans to big size entities 4,569,597 - - 4,569,597 - Loans to medium size entities 4,162,127 - - 4,162,127 - Loans to small size entities 46,817,392 - - 46,817,392 - Loans to private individuals - 136,907 828,351 965,258 Total neither past due nor impaired 55,549,116 136,907 828,351 56,514,374 Past due but not impaired - past due up to 30 days 53,391 - - 53,391 - past due 31 90 days 5,510,074 - - 5,510,074 - past due 91 180 days 523,526 2,796-526,322 - past due 181 360 days 62,367-308,532 370,899 - past due over 360 days - - 895,203 895,203 Total past due, but not impaired 6,149,358 2,796 1,203,735 7,355,889 Individually impaired loans (gross amount) - not past due 6,088,803 12,424-6,101,227 - past due up to 30 days - 16,115-16,115 - past due 31 90 days - - - - - past due 91 180 days 2 - - 2 - past due 181 360 days 3,427,722 3,622 103,909 3,535,253 - past due over 360 days 8,167,949 1,318,167 132,770 9,618,886 Total individually impaired loans (gross amount) 17,684,476 1,350,328 236,679 19,271,483 Less: provisions for loan impairment (9,549,584) (553,249) (208,605) (10,311,438) Total loans and advances to customers 69,833,366 936,782 2,060,160 72,830,308 19
NOTES TO THE FINANCIAL STATEMENTS (continued) 4 LOANS AND ADVANCES TO CUSTOMERS (continued) The fair value of collateral in respect of loans past due but not impaired and in respect of loans individually determined to be impaired as at 30 June 2013 was as follows: Loans to legal entities Loans to private individuals, except for mortgages Mortgages Fair value of collateral - loans past due but not impaired - residential real estate 418,000 - - 418,000 - other real estate 12,206,846-858,000 13,064,846 - other assets 4,561,168 - - 4,561,168 - deposits 2,101,121 - - 2,101,121 Fair value of collateral - individually impaired loans -residential real estate 2,300,038 - - 2,300,038 - other real estate 23,953,357 1,809,900 1,676,246 27,439,503 - other assets 6,034,927 1,022,211-7,057,138 - deposits 26,950 - - 26,950 Total 51,602,407 2,832,111 2,534,246 56,968,764 The fair value of collateral in respect of loans past due but not impaired and in respect of loans individually determined to be impaired as at 31 December 2012 was as follows: Total Loans to legal entities Loans to private individuals, except for mortgages Mortgages Fair value of collateral - loans past due but not impaired - other real estate 5,283,734-2,481,388 7,765,122 - due to customers - - - - - other assets 7,098,977 - - 7,098,977 Fair value of collateral - individually impaired loans - residential real estate 2,663,375 - - 2,663,375 - other real estate 15,634,361 1,809,900 28,400 17,472,661 - due to customers 26,550 - - 26,550 - other assets 5,450,407 1,022,211-6,472,618 Total 36,157,404 2,832,111 2,509,788 41,499,303 Total The balance sheet value of the each category of loans and advances to clients is approximately equal to its fair value as at 30 June 2013 and 31 December 2012. 20
NOTES TO THE FINANCIAL STATEMENTS (continued) 5 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 30.06.2013 31.12.2012 Latvian government securities 5,920,571 11,120,491 OECD government bonds 10,779,964 - Non-OECD government bonds 4,452,648 2,312,350 Non-OECD region corporate debt securities 4,795,762 355,507 Shares unlisted in stock market 4,819 4,748 Shares listed in stock market 1,630 826 25,955,394 13,793,922 Financial assets at fair value through profit or loss are accounted at fair value which also reflects the impairment loss related to credit risk. As the financial assets are accounted at fair value based on the market prices, the Bank does not analyse any impairment indicators. 6 DUE TO CUSTOMERS Analysis of groups by customers 30.06.2013 31.12.2012 Legal entities - current/ settlement accounts 210,471,693 259,628,920 - term deposits 10,704,363 13,532,642 Private individuals - current/settlement accounts 9,062,924 6,896,214 - term deposits 21,246,082 24,830,455 Total customer accounts: 251,485,062 304,888,231 Sector profile: Private companies 221,003,038 271,834,977 Private individuals 30,309,006 31,726,669 Financial institutions 164,120 1,224,784 Non-profit institutions 1,567 98,522 Central government 7,331 3,279 Total customer accounts: 251,485,062 304,888,231 Analysis by place of residence Residents 19,304,196 24,864,343 Non-residents 232,180,866 280,023,888 Total customer accounts: 251,485,062 304,888,231 21
NOTES TO THE FINANCIAL STATEMENTS (continued) 6 DUE TO CUSTOMERS (continued) Economic sector concentration within customer accounts is as follows: 30.06.2013 31.12.2012 % % Manufacturing 9,167,378 3.65 16,201,229 5.31 Construction and real estate 4,397,790 1.75 14,029,662 4.60 Trade and commercial activities 67,784,614 26.95 123,090,266 40.37 Financial and insurance services 91,555,068 36.41 61,034,823 20.02 Transport and communications 32,144,289 12.78 35,880,644 11.77 Agriculture and food industries 1,732,064 0.69 2,067,015 0.68 Private individuals 30,309,005 12.05 31,726,669 10.41 Other 14,394,854 5.72 20,857,923 6.84 Total customer accounts 251,485,062 100.00 304,888,231 100.00 7 RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. Related parties are defined as shareholders, members of the Council and the Board, key management personnel, their close relatives and companies in which they have a controlling interest as well as associated companies. The balances in respect of operations with related parties are as follows as at 30 June 2013: Enterprises under the control of beneficiaries Other related parties Undrawn credit lines 54 4,425 Total amounts of loan commitments issued to and repaid by related parties during the 6 month period ended 30 June 2013 are as follows: Shareholders with Enterprises under the significant control control of beneficiaries Other related parties Issued to related parties 7,954,564,035 178,092 58,220 Repaid by related parties 8,000,819,511 173,518 51,629 22
NOTES TO THE FINANCIAL STATEMENTS (continued) 7 RELATED PARTY TRANSACTIONS (continued) Balances with the related parties were as follows as at 30 June 2013: Shareholders with significant control Enterprises under the control of beneficiaries Other related parties Total loans and advances (interest rate on agreement: 2.1 24%) 38,896,614 1,872,255 27,170 Correspondent account 2,757,139 - - Due to customers (interest rate: 3.65 5.7%) - 13,473,397 1,391,234 Subordinated loan 5,301,021 539,105 - Vostro account 3,440 - - Income and expense from operations with related parties during the 6 months of year 2013 were as follows: Shareholders with Enterprises under the significant control control of beneficiaries Other related parties Interest income 2,591,905 75,023 606 Interest expenses (102,938) (298,318) (30,164) Fee and commission income - 110 428 Fee and commission expense (3,435) - - Administrative and other operating expenses (6,125) - - The balances in respect of operations with related parties are as follows as at 31 December 2012: Enterprises under the control of beneficiaries Other related parties Undrawn credit lines 53 5,414 Total amounts of loan commitments issued to and repaid by related parties during year 2012 are as follows: Shareholders with Enterprises under the significant control control of beneficiaries Other related parties Issued to related parties 14,973,544,949-82,258 Repaid by related parties 14,913,600,363-85,341 23
NOTES TO THE FINANCIAL STATEMENTS (continued) 7 RELATED PARTY TRANSACTIONS (continued) Balances with the related parties were as follows as at 31 December 2012: Shareholders with significant control Enterprises under the control of beneficiaries Other related parties Total loans and advances (interest rate on agreement: 2-24%) 83,609,478 1,844,719 20,576 Correspondent account 2,699,528 - - Due to customers (interest rate: 3.65 8.5%) - 13,185,884 1,373,238 Derivatives 1,343 - - Subordinated loan 1,766,523 531,103 - Vostro account 3,440 - - Income and expense from operations with related parties during the first 6 months of year 2012 were as follows: Shareholders with significant control Enterprises under the control of beneficiaries Other related parties Interest income 2,869,402 76,504 619 Interest expenses (91,703) (135,718) (29,981) Fee and commission income - 110 428 Fee and commission expense (2,885) - - Administrative and other operating expenses (6,981) - - Remuneration to key management personnel is disclosed below: 6 months of year 2013 6 months of year 2012 Short-term benefits: - Salaries 102,674 131,470 Pension benefits: - Expenses to the State Pension Insurance 24,359 30,903 Total 127,033 162,373 24
NOTES TO THE FINANCIAL STATEMENTS (continued) 8 LIQUIDITY RISK AND ANALYSIS OF ASSETS AND LIABILITIES BY MATURITY PROFILE The table below allocates the Bank s assets and liabilities to maturity groupings as at 30 June 2013 based on the time remaining from the balance sheet date to the contractual maturity dates. Overdue Within 1 3 3 6 6 12 1 5 Over Total 1 month months months months years 5 years and undated Assets Cash and balances with the Bank of Latvia - 14,642,831 - - - - - 14,642,831 Balances due from banks 133,244,248 9,958,074 17,512,559 21,305,173 1,185,800-183,205,854 Loans and advances to customers 5,715,742 3,561,576 7,462,818 11,348,398 7,194,528 24,066,447 420,274 59,769,783 Financial assets at fair value through profit or loss - 25,948,945 - - - - 6,449 25,955,394 Intangible assets - - - - - 191,065-191,065 Property and equipment - - - - - - 184,258 184,258 Derivative financial instruments - 67,320 32,843 - - - - 100,163 Deferred expenses - - - - 51,055 - - 51,055 Other assets - 2,426,296 - - - - - 2,426,296 Total assets 5,715,742 179,891,216 17,453,735 28,860,957 28,550,756 25,443,312 610,981 286,526,699 Liabilities and equity Balances due to banks - 412,252 - - - - - 412,252 Due to customers - 206,682,141 8,183,044 10,124,376 9,706,400 16,589,288 199,813 251,485,062 Derivative financial instruments - 183,765 511 - - - - 184,276 Deferred income and accrued expenses - - - - 527,386 - - 527,386 Other liabilities - 2,558,764 - - - - 2,558,764 Deferred income tax liability - 6,949 - - - - - 6,949 Subordinated loan - 2,231 4,807 - - 7,991,214 7,998,252 Equity - - - - - - 23,353,758 23,353,758 Total liabilities and equity - 209,846,102 8,188,362 10,124,376 10,233,786 16,589,288 31,544,785 286,526,699 Net liquidity 5,715,742 (29,954,886) 9,265,373 18,736,581 18,316,970 8,854,024 (30,933,804) - As at 31 December 2012 Total assets - 254,962,396 4,675,470 25,344,856 30,836,850 24,001,557 658,496 340,479,625 Total liabilities and equity - 262,156,784 6,161,215 5,349,559 17,224,087 19,484,480 30,103,500 340,479,625 Net liquidity - (7,194,388) (1,485,745) 19,995,297 13,612,763 4,517,077 (29,445,004) - 25