AS LATVIJAS PASTA BANKA statements/ENG/2012... · 2015-03-25 · The Treasury successfully issued...
Transcript of 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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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:
Biomins Kajems Boriss Ulmans
Chairman of the Council Chairman of the Board
Riga, 19 March 2013
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
7
AUDITORS’ REPORT
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
8
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
Biomins Kajems Boriss Ulmans
Chairman of the Council Chairman of the Board
Riga, 19 March 2013
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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 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 on and by
the Council on 19 March 2013.
Riga, 19 March 2013
Biomins Kajems Boriss Ulmans
Chairman of the Council Chairman of the Board
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
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 on and by
the Council on 19 March 2013.
Biomins Kajems Boriss Ulmans
Chairman of the Council Chairman of the Board
Riga, 19 March 2013
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
13
STATEMENT OF CASH FLOWS (continued)
Operating cash flows from interest
2012 2011
Interest paid 814 550
Interest received 2 075 1 593
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 on and by
the Council on 19 March 2013.
Biomins Kajems Boriss Ulmans
Chairman of the Council Chairman of the Board
Riga, 19 March 2013
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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).
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 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).
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
Total loans 8 593 7 156
Allowance for credit losses (87) (61)
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
Total loans 8 593 7 156
Allowance for credit losses (87) (61)
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).
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
Available-for-sale financial assets
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
Private non-financial companies 23 054 16 141
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%).
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
38
NOTE 20 DEPOSITS FROM CUSTOMERS
(a) By customer profile:
31/12/2012 31/12/2011
Demand deposits 33 568 20 669
Private non-financial companies 19 636 12 992
Households and non-profit organisations serving them 13 046 7 595
Financial institutions 886 82
Term deposits 14 279 16 486
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 Latvia 16 980 13 528
Residents of EU Member States 9 219 3 340
Residents of other countries 7 369 3 801
Term deposits 14 279 16 486
Residents of Latvia 13 383 16 210
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%).
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
Related companies and
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
Related companies and
persons
888
-
888
3 137
-
3 137
Derivative financial
instruments - - - 68 - 68
Related companies and
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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;
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
Held-to-maturity financial
investments 707 10 344 4 372 - 2 730 18 153
Available-for-sale financial
assets 3 506 - - - - 3 506
Derivative financial
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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;
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
Derivative financial
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
instruments 73 - - - - - 73
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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% .
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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)
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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:
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
Held-to-maturity financial
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)
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
Held-to-maturity financial
investments - - - - - 16 056 16 056
Intangible assets and property,
plant and equipment - - - - - 449 449
Derivative financial
instruments 95 - - - - - 95
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
instruments 73 - - - - - 73
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)
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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 -
Held-to-maturity financial
investments 23 034 25 167 (2 133) 16 056 16 216 (160)
Derivative financial
instruments - - - 95 95 -
Available-for-sale financial
assets 6 705 6 705 - 3 506 3 506 -
Loans and receivables 8 506 8 391 115 7 095 7 070 25
Financial liabilities
Derivative financial
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
Derivative financial
instruments - -
- - 95
95
Available-for-sale financial
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
Debt securities issued by
other countries central
governments
568 - 568 - - -
Debt securities issued by
EU credit institutions 1 221 -
1
221 735 - 735
Debt securities issued by
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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.
AS LATVIJAS PASTA BANKA
Financial statements of the Bank
000’LVL for the year ended 31 December 2012
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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