MORTGAGE AND LAND BANK OF LATVIA
Annual Report for the year ended 31 December 2010
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
CONTENTS Page
Report of the Supervisory Council and the Board of Directors 2 - 4
The Supervisory Council and the Board of Directors of the Bank 5
Statement of Responsibility of the Supervisory Council and the Board of Directors 6
Auditors’ Report 7
Financial Statements:
Income Statement 8
Statement of Comprehensive Income 8
Statement of Financial Position 9
Statement of Changes in Shareholder’s Equity 10 - 11
Statement of Cash Flows 12
Notes to the Financial Statements 13 - 76
V a/s „Latvijas Hipot ēku un zemes banka” Doma laukums 4 Rīga, LV-1977, Latvia phone: + 37167222945 facsimile: + 37167820143 Registration number: LV 40003132437
V a/s „Latvijas Hipot ēku un zemes banka” (Bank) is a joint-stock company incorporated in the Republic of Latvia. The holder of 100% of the Bank’s shares is the Ministry of Finance of the Republic of Latvia. The Bank and its subsidiaries (the Group) are engaged in banking and financial services business. Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
Report of the Supervisory Council and the Board of Directors
On 3 December 2009, the concept for “Transformation of the State-owned JSC “Mortgage and Land Bank of Latvia” into Development Bank” was approved by decree No 820 issued by the Cabinet of Ministers of the Republic of Latvia. The concept stipulates that Mortgage Bank be transformed into a development bank through phasing out the transactions characteristic to a commercial bank and focusing the activities of the Bank onto the branches crucial for the national economy. Year 2010 highlights a significant step for the state-owned JSC “Mortgage and Land Bank of Latvia” on its way to development bank. The purpose of transformation is to establish a development bank for implementation of the state aid programmes by making maximum use of the infrastructure of the Mortgage Bank, its intellectual and financial potential, effecting the transformation to the best for the state and maintaining implementation continuity of the state aid programmes. In September 2010, in accordance with the decision of the Cabinet of Ministers, a consultant – "SEB Enskilda" was attracted to the transformation. The draft transformation plan of the Mortgage Bank prepared by the financial consultant is being examined by interdepartmental working group on management of the transformation process of the Mortgage Bank headed by M ārti ņš Bi čevskis – state secretary of the Ministry of Finance. The Cabinet of Ministers is to pass a decision on approval of the transformation plan. In the complex economic situation of Latvia the Mortgage Bank proceeded with lending to the local companies operating in the branches identified by state as crucial for the national economy thus replenishing the service range of the commercial banks. In 2010 the proportion of state aid target programmes in the overall loans’ portfolio of the Mortgage Bank has reached 41%. Despite the fact that in 2010 the Mortgage Bank didn’t grant new commercial loans and consumer loans outside the promotional programmes, the number of retail customers remained unchanged. Whereas, the number of corporate customers increased due to implementation of the state aid programmes which testified to high customer confidence in the bank. Also in 2011 the Mortgage Bank will continue to increase the volumes of state aid programmes by lending to entrepreneurs and promoting development of the national economy of Latvia. At the same time the Bank will proceed with improvement of quality of the services of the bank and maintaining high level of customer service.
Financial Sector and its Trends
On 31 December 2010, banking services in the Republic of Latvia were provided by 21 bank and 8 subsidiaries of foreign banks. The state-owned JSC “Mortgage and Land Bank of Latvia” operates as the only 100% state-owned commercial bank. In 2010 the most significant event in the banking sector of Latvia was restructuring of JSC “Parex banka”. A new commercial bank (JSC “Citadele banka”) was established whereto the good assets were transferred leaving the rest of the assets with the so called resolution bank that continues working under the name of Parex banka. During 11 months of 2010, the assets of the banks have decreased by 1%, reaching 21.5 bln lats at the end of November, but capital and reserves of the banks have grown by 2%. In the aforementioned period the unaudited losses of the banks amounted to 327 mln lats which was two times less than recorded in the same period last year. The major cause of losses was provisioning for risky assets. At the end of November, the profit of the banking sector before provisions and taxes amounted to 136 mln lats. Due to prudent credit policy pursued by banks and low demand on the part of customers, the loan portfolio shrunk by 6% during 11 months of 2010. Although banks continued granting new loans, the lending volume of the banking sector in general was still less than the amounts repaid by customers and written off by banks as lost. Meanwhile the volume of deposits grew by 10.5%, due not merely to stabilisation of the economy, but also changes to the bookkeeping of the banks – as of May, the deposits attracted as subordinated obligations are included in the deposits. In 2010 the commercial banks concentrated on quality of the loan portfolio. Although the loan portfolio of the banking sector without late payments shrunk gradually in the first half-year, it stabilised in the second half reaching 72% at the end of November. In the 11 months of 2010, the provisions for doubtful loans rose from 8.6% to 11.4% of the total loan portfolio of the banks. The Bank of Latvia requirements to statutory reserves have not changed since 2008: for liabilities of banks over 2 years – 3%, for all other liabilities included in the reserve base – 5%.
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Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
Report of the Supervisory Council and the Board of Directors (continued)
In 2010, the US Federal Reserve System didn’t change the base interest rate of dollar, the European Central Bank also maintained the euro base interest rate unchanged at 1.0%. Nevertheless, the Bank of Latvia decreased the base interest rate for lat from 4% to 3.5%. The decisions of the central banks and fluctuations of the money market have affected the average interest rates of loans granted by commercial banks of Latvia. The average interest rates for loans (in lats) granted to individuals decreased from 18.9% (in January 2010) to 16.5% (in December 2010), and for legal entities – from 10.1% to 5.2% in the respective period. Also, the average interest rates for loans granted in foreign currencies have diminished: for legal entities – from 5.0% to 4.7%, and for individuals – from 5.4% to 5.1%.
Operational Results
In 2010 the gross assets of the Mortgage Bank decreased by 158.4 mln lats or 16%, stopping at 808.2 mln lats (market share – 3.7%) due to repayment of syndicated and other interbank long-term borrowings in the amount of 174.3 mln lats. The loan portfolio (gross) has shrunk by 16% reaching 594.2 mln lats (market share – 4.2%) consisting of the development loan portfolio – 244.5 mln lats (41% of the loan portfolio) and commercial loan portfolio – 349.7 mln lats (59% of the loan portfolio). In the reporting period, the volume of deposits has grown by 36.9 mln lats reaching 363.6 mln lats (market share – 4.1%). In 2010, the Bank accumulated provisions for risky assets in the amount of 81.6 mln lats, as a result of that, the losses were 67.9 mln lats. As at 31 December 2010, the ratio of the Bank’s provisions and loan portfolio was 15.6%. As at the end of December, the capital adequacy ratio was 16.7% that significantly exceeded the statutory minimum of 8% required by the Credit Institution Law. In April 2010, the equity capital of the Bank was increased by 70.28 mln lats. The equity capital was increased as a result of the state taking over the obligations of the Mortgage Bank towards the Nordic Investment Bank and investing the said amount in the equity capital of the Bank. The European Commission (EC) has been notified of the increase of the equity capital. The EC will pass its decision on the issue after analysis of the transformation plan of the Bank. The beginning of 2010 was marked with a positive assessment of the economic development potential of Latvia, acknowledged also by international rating agencies Standard & Poor’s Rating Services and Moody’s Investors Service Ltd through upgrading the credit rating outlook of Latvia to stable from negative. The Mortgage Bank is 100% state-owned bank and its rating is directly linked to the sovereign rating of Latvia. Having upgraded the rating outlook on the Latvian government’s local and foreign currency rating of Baa3 to stable from negative, the Moody’s Investors Service Ltd also changed the outlook on Mortgage Bank’s Baa3 long-term foreign currency deposits rating to stable from negative. The Bank is assigned the following ratings: • long-term foreign currency deposits – Baa3 , • short-term foreign currency deposits – P3 , • financial strength rating – E+ , • rating of mortgage bonds – Baa2 , which are investment grade ratings. At the end of 2010 the Mortgage Bank serviced its customers in 25 branches and 9 sub-branches located in Riga and other cities of Latvia. In 2010, the Mortgage Bank optimised its customer service network, as a result of which one sub-branch was closed in Riga and two branches transformed into sub- branches. The optimisation of the service network outside Riga will continue in 2011.
Implementation of State Aid Programmes
In 2010, the Mortgage Bank proceeded with implementation of the effective state aid programmes and phasing out its commercial loan portfolio. As regards commercial activities, the Bank has ceased lending to new customers. The Bank granted commercial loans only to the existing customers in proportion to the already granted loans and for restructuring of the loans of the current commercial customers of the Bank.
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Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
Report of the Supervisory Council and the Board of Directors (continued)
In 2010, the Mortgage Bank, as commissioned by government, continued to implement the following state aid programmes providing support to specific groups of entrepreneurs and population: – Programme for Improvement of Competitiveness of Businesses; – Micro-lending Programme; – Start-up programme “Support to Self-employment and Business Start-ups”; – SME Growth Programme “Loans for Promotion of Development of Micro, Small and Medium Enterprises and Agricultural Co-operative Unions”; – Working Capital Loans for Farmers.
Programme for Improvement of Competitiveness of Businesses To finance the programme the Mortgage Bank borrowed from the Nordic Investment Bank (NIB) 100 mln euros (70 mln lats) in 2009. The programme is also financed by Loan Fund consisting of public financing in the amount of 61.6 mln euros (43.3 mln lats) and Mortgage Bank’s financing in the amount of 21.6 mln euros (15.2 mln lats). By the end of 2010 the Programme for Improvement of Competitiveness of Businesses had granted loans for 146.7 mln lats, including 58.5 mln lats from the Loan Fund. Micro-lending Programme The total financing volume of the programme – 564.8 thsd lats is fully consumed. The Bank keeps granting micro loans from the resources repaid by borrowers. By the end of 2010 the Mortgage Bank had granted 296 micro loans for the sum total of 806 thsd lats. Start –up programme „Support to Self-employment and Business Start-ups” By the end of 2010, 1267 applicants had applied for consultations and training, 610 participants of the programme had completed their training, 498 business plans were submitted to the Bank of which 455 were examined by credit committee and 267 projects were financially supported for the total loan amount of 3.8 mln lats. SME Growth Programme In February 2010 the Bank launched the SME Growth Programme „Loans for Promotion of Development of Micro, Small and Medium Enterprises and Agricultural Co-operative Unions”. The aim of the programme is to enhance access to funding for entrepreneurs registered in Latvia to revive and stimulate the development of the national economy of Latvia. On the 2 nd of October 2009, to implement the programme, the Mortgage Bank concluded a 100 mln euro loan agreement with the European Investment Bank. In February 2010 the Mortgage Bank received the first tranche of the loan in the amount of 50 mln euro. By the end of September the SME Growth Programme had granted loans for 8.9 mln lats. Working Capital Loans for Farmers In May 2010 the Mortgage Bank started to grant working capital loans to farmers. The loans are granted in line with the Cabinet of Ministers Regulation No 403 of 27 April 2010 “Procedure for Granting State Aid for Acquisition of Working Capital for Production of Agricultural Produce”. The total financing volume of the programme is 10 mln lats that the Mortgage Bank will receive from the State Treasury in the form of loans. As at the end of September the programme had granted 200 loans for the total amount of 7.5 mln lats. Credit Fund On 20 July 2010, the Cabinet of Ministers Regulation No 664 “Procedure of administration and monitoring the state and European Union support to agriculture, rural territories and development of fish farming, by establishing a Credit Fund” (hereinafter – Credit Fund) got approved, which provides for granting loans to finance projects approved by the Rural Support Service. Loans are to be granted to investments into agricultural enterprises – construction, procurement of stationary machinery and its equipment, procurement of building material and development of detail design. Loans are granted with maturity up to 15 years, with fixed or variable rate in LVL and EUR currencies. By the end of 2010, the Mortgage Bank had approved 3 projects for the total amount of 1.4 million lats.
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Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
Report of the Supervisory Council and the Board of Directors (continued)
During 2011 we will proceed with realisation of Banks transformation according to the decisions made by the government in order to achive goals of the conception approved on 3December 2009, which stipulates that transformation shall be finalised by 31 December 2013. Taking into consideration that after 31 December 2013 the Bank will be left with certain amount of commercial activities, during 2011. Analyses will be made to assess the most effective solution for servicing commercial activities after transformation phase.
During 2011 the Bank will also continue with internal restructuring and will strengthen its capacity to realise state support programs in the name of the government. To continue previous year traditions, the Bank plan to closely cooperate with established Regional fund in different regions of Latvia to realise socially responsible projects and promote activities and self-initiative of local residents to improve their surrounding environment.
Baiba B āne Rolands Pa ņko Chairman of the Council Chairman of the Board
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Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
Supervisory Council (at 31 December 2010)
Baiba B āne Chairman of the Council Andžs Ūbelis Deputy Chairman of the Council Jānis Pone Member of the Council
During the reporting period Ms. Baiba Brigmane and Mr. Dāvids Tauri ņš resigned from the Council and Mr. Jānis Pone and Andžs Ūbelis were appointed as members of the Council.
Board of Directors (at 31 December 2010)
Rolands Pa ņko Chairman of the Board Jēkabs Krievi ņš Deputy Chairman of the Board Jānis B ērzi ņš Member of the Board Baiba Brigmane Member of the Board Gints Ābolti ņš Member of the Board
During the reporting period Andris Rieksti ņš resigned from the Board and Baiba Brigmane and Gints Ābolti ņš as were appointed as members of the Board.
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Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
Statement of Responsibility of the Supervisory Council and the Board of Directors
Riga 9 February 2011
The Supervisory Council and the Board of Directors (Management) are responsible for preparing the financial statements from the books of prime entry of the Group and the Bank for each financial period that present fairly the state of affairs of the Group and the Bank as at the end of the financial period and the results of their operations and cash flows for that period according to the International Financial Reporting Standards as adopted by the European Union. Prudent and reasonable judgments and estimates have been made by the Management in the preparation of the financial statements.
Management confirms that suitable accounting policies have been used and applied consistently and reasonable and prudent judgments and estimates have been made in the preparation of the financial statements on pages 9 to 77 for 2010. Management also confirms that applicable International Financial Reporting Standards as adopted in EU have been used in preparation of the financial statements and that these financial statements have been prepared on a going concern basis. Appropriate accounting policies have been applied on a consistent basis.
Management is responsible for keeping proper accounting records, for taking reasonable steps to safeguard the assets of the Group and the Bank and to prevent and detect fraud and other irregularities. Management is also responsible for managing the Bank in compliance with the Law on Credit Institutions, regulations of the Bank of Latvia and the Financial and Capital Market Commission as well as other legislation of the Republic of Latvia.
On behalf of the management,
Baiba B āne Rolands Pa ņko Chairman of the Council Chairman of the Board
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INDEPENDENT AUDITORS’ REPORT
To the shareholder of VAS Latvijas Hipot ēku un Zemes banka
Report on the financial statements
We have audited the accompanying consolidated financial statements of VAS Latvijas Hipot ēku un Zemes banka and its subsidiaries (hereinafter – the Group) and the accompanying financial statements of VAS Latvijas Hipot ēku un Zemes banka (hereinafter - the Bank), which are set out on pages 9 through 77 of the accompanying 2010 Annual Report, which comprise the financial position as at 30 June 2010, the statement of comprehensive income, changes in equity and cash flows for the year then ended and other explanatory information.
Management’s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the International Financial Reporting Standards as adopted by the European Union and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the financial statements give a true and fair view of the financial position of Group and Bank of 31 December 2010, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.
Emphasis of matter We draw attention to Note 1 in the financial statements, which discusses the uncertainties in the light of the ongoing transformation of the Bank, because the government has not yet taken decision on approval of detailed Bank‘s transformation plan. Our opinion is not qualified in respect of this matter.
Report on other legal and regulatory requirements
Furthermore, we have read the management report for the year ended 31 December 2010 (set out on pages 3 through 5 of the accompanying 2010 Annual Report) and have not noted any material inconsistencies between the financial information included in it and the financial statements for the year ended 31 December 2010.
SIA Ernst & Young Baltic Licence No. 17
Di āna Krišj āne Chairperson of the Board Latvian Certified Auditor Certificate No. 124
Riga, 9 February 2011
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Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
STATEMENT OF FINANCIAL POSITION (all amounts in thousands of Lats)
Notes 2010 2009 Group Bank Group Bank
Interest income 5 46,900 46,413 58,348 55,815 Interest expense 6 (27,953) (27,964) (30,960) (30,551) Net interest income 18,947 18,449 27,388 25,264
Fee and commission income 7 3,912 3,250 3,892 3,557 Fee and commission expense 8 (980) (1,013) (996) (1,025) Net fee and commission income 2,932 2,237 2,896 2,532
Dividend income - - 5 52 Net trading income 9 1,594 1,739 6,166 6,319 Other operating income 10 4,410 2,054 2,075 1,110 27,883 24,479 38,530 35,277
Personnel expenses 11 (8,866) (7,788) (9,625) (8,573) Administrative expenses 12 (6,873) (5,997) (8,112) (7,194) Depreciation and amortisation (1,912) (1,727) (2,036) (1,834) Impairment expenses 13 (76,407) (76,887) (74,101) (72,733) Loss before income tax (66,175) (67,920) (55,344) (55,057)
Income tax expense 14 (33) - 934 1,006
Net loss for the period (66,208) (67,920) (54,410) (54,051)
Net gain from investment securities available-for-sale 39 3,067 3,067 528 528
Total comprehensive loss for the period (63,141) (64,853) (53,882) (53,523)
Net (loss) / profit for the period attributable to: Equity holders of the Bank (66,316) - (54,421) - Non-controlling interest 108 - 11 -
Total comprehensive (loss) / profit for the period attributable to: Equity holders of the Bank (63,249) - (53,893) - Non-controlling interest 108 - 11 -
Earnings per share Equity shareholders of the parent for the year: Basic and dilluted earnings per share 15 (0.38) (0.67) (expressed in LVL per share)
The notes on pages 14 to 77 are an integral part of these financial statements.
These financial statements on pages 9 to 77 have been accepted by the Board of Directors on 3 February 2011 and accepted by the Supervisory Council on 9 February 2011 and are signed by:
Baiba B āne Rolands Pa ņko Chairman of the Council Chairman of the Board 9
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
STATEMENT OF FINANCIAL POSITION (all amounts in thousands of Lats)
Notes 31/12/10 31/12/09 Assets Group Bank Group Bank
Cash and balances with Central Bank 16 68,177 68,177 95,997 95,997 Due from credit institutions 19 20,774 16,692 35,411 35,276 Derivative financial instruments 20 862 862 1,954 1,954 Trading securities 17 2,572 2,374 5,074 4,919 Investment securities – available for sale 17 71,504 77,765 49,892 49,892 Investment securities – held to maturity 17 24,614 24,614 42,984 42,984 Loans to customers 21 491,741 470,534 632,681 639,501 Deferred expenses and accrued income 1,182 2,049 662 532 Investment properties 18 10,574 1,159 1,166 1,166 Property and equipment 25 6,583 6,074 7,536 6,896 Intangible assets 24 1,811 1,447 2,204 1,721 Investments in subsidiaries and associated undertakings 23 - 818 280 1,528 Other assets 26 5,659 2,298 8,896 1,865 Assets held for sale 22 - 30,945 - - Total assets 706,053 705,808 884,737 884,231
Liabilities
Due to credit institutions 27 167,771 167,771 379,512 379,512 Derivative financial instruments 20 13 13 155 155 Due to customers 28 361,163 363,622 326,699 326,761 Issued debt securities 29 32,589 33,046 37,429 38,249 Deferred income and accrued expenses 1,686 1,224 3,997 3,376 Provisions for off-balance sheet commitments 1,054 1,054 189 189 Current income tax liabilities 40 - 43 - Deferred tax liabilities 10 - 27 - Other liabilities 30 24,903 24,308 27,211 26,646 Subordinated liabilities 31 31,089 31,089 31,089 31,089 Total liabilities 620,318 622,127 806,351 805,977
Shareholder’s equity Share capital 32 191,601 191,601 121,321 121,321 Reserve capital 2,524 2,063 2,524 2,063 Revaluation reserve on available for sale investments 33 33 (3,034) (3,034) Accumulated loss (108,781) (110,016) (42,465) (42,096) Total shareholder’s equity attributable to shareholders of the Bank 85,377 83,681 78,346 78,254
Non-controlling interest 358 - 40 -
Total shareholder’s equity 85,735 83,681 78,386 78,254
Total liabilities and shareholder’s equity 706,053 705,808 884,737 884,231
The notes on pages 14 to 77 are an integral part of these financial statements.
These financial statements on pages 9 to 77 have been accepted by the Board of Directors on 3 February 2011 and accepted by the Supervisory Council on 9 February 2011 and are signed by:
Baiba B āne Rolands Pa ņko Chairman of the Council Chairman of the Board 10
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
CONSOLIDATED STATEMENT OF CHANGES IN THE GROUP’S EQUITY (all amounts in thousands of Lats)
Attributable to equity holders Share Reserve Revaluation Retained Minority Total Capital capital deficit on earnings interest equity available for sale investments
Balance as at 31 December 2008 48,513 2,524 (3,562) 12,922 29 60,426
Loss for the period - - - (54,421) 11 (54,410) Other comprehensive expenses - - 528 - - 528 Total comprehensive (loss) / profit for the period - - 528 (54,421) 11 (53,882)
Shareholders cash contribution 72,808 - - - - 72,808 Distribution of profit – payment for use of state capital - - - (966) - (966)
Balance as at 31 December 2009 121,321 2,524 (3,034) (42,465) 40 78,386
Loss for the period - - - (66,316) 108 (66,208) Other comprehensive income - - 3,067 - - 3,067 Total comprehensive (loss) / profit for the period - - 3,067 (66,316) 108 (63,141)
Increase in minority interest (IPS „Hipo Fondi”) - - - - 210 210 Shareholders cash contribution 70,280 - - - - 70,280
Balance as at 31 December 2010 191,601 2,524 33 (108,781) 358 85,735
The notes on pages 14 to 77 are an integral part of these financial statements.
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Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
STATEMENT OF CHANGES IN THE BANK’S EQUITY (all amounts in thousands of Lats)
Share Reserve Revaluation Retained Total Capital capital deficit on earnings equity available for sale investments
Balance as at 31 December 2008 48,513 2,063 (3,562) 12,921 59,935
Loss for the period - - - (54,051) (54,051) Other comprehensive expenses - - 528 - 528 Total comprehensive (loss) / profit for the period - - 528 (54,051) (53,523)
Shareholders cash contribution 72,808 - - - 72,808 Distribution of profit – payment for use of state capital - - - (966) (966)
Balance as at 31 December 2009 121,321 2,063 (3,034) (42,096) 78,254
Loss for the period - - - (67,920) (67,920) Other comprehensive income - - 3,067 - 3,067 Total comprehensive (loss) / profit for the period - - 3,067 (67,920) (64,853)
Shareholders cash contribution 70,280 - - - 70,280
Balance as at 31 December 2010 191,601 2,063 33 (110,016) 83,681
The notes on pages 14 to 77 are an integral part of these financial statements.
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Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
STATEMENT OF CASH FLOWS (all amounts in thousands of Lats)
2010 2009 Group Bank Group Bank
Cash flows from operating activities (Loss) before taxation (66,175) (67,920) (55,344) (55,057) Depreciation and amortisation 1,912 1,727 2,036 1,834 Increase in provision for impairment losses 76,407 76,887 74,101 72,733 (Profit) / loss from sale of property and equipment (191) 9 (420) 81 Increase/ (decrease) in deferred income and accrued expenses (2,330) (2,152) 1,387 1,494 (Increase)/ decrease in deferred expenses and accrued income (520) (1,517) 56 32 (Increase) / decrease in other assets (4,748) 1,233 (5,722) (2,261) Increase in other liabilities (1,585) (1,615) 13,926 14,065 (Decrease)/ increase in cash and cash equivalents from operating activities before changes in assets and liabilities 2,770 6,652 30,020 32,921
Decrease in balances due from credit institutions 3,177 3,177 32,853 32,853 Decrease in loans to customers 64,373 61,084 37,806 15,678 Decrease/ (increase) in trading securities 2,502 2,545 (1,232) (1,208) (Decrease) / increase in balances due to credit institutions 20,624 20,624 (109,997) (90,696) Increase in balances due to customers 34,464 36,861 22,325 22,276 Decrease in debt securities issued (4,840) (5,203) (3,231) (2,411) Cash and cash equivalents used in operating activities 123,070 125,740 8,544 9,413
Corporate income tax paid (33) - (2) -
Cash flows from investing activities Purchase of investment securities (173,404) (179,665) (226,248) (226,248) Sale of investment securities 173,456 173,456 225,341 225,341 Purchases of property and equipment (807) (654) (1,106) (974) Proceeds from property and equipment disposal 346 14 891 22 Proceeds from disposal of investments in associated entities - - 16 - Acquisition of investments in associated entities - - - - Cash and cash equivalents used in investing activities (409) (6,849) (1,106) (1,859)
Cash flows from financing activities Increase in minority interest 210 - - Repayment of syndicated loan (145,480) (145,480) Shareholders cash contribution - - 43,290 43,290 Dividend paid - - (966) (966) Cash and cash equivalents generated from financing activities (145,270) (145,480) 42,324 42,324
Increase / (decrease) in cash and cash equivalents (22,642) (26,589) 49,760 49,878 Cash and cash equivalents at the beginning of the year 111,062 110,927 61,302 61,049 Cash and cash equivalents at the end of the year (Note 33) 88,420 84,338 111,062 110,927
Cash flow from interest received 44,350 44,136 54,902 52,963 Cash flow from interest paid 27,633 27,644 34,078 33,343
The most significant non-cash item is increase of shareholder equity, which have been done by shareholder assuming liabilities for loan from credit institution in amount of LVL 70 million (2009: LVL 30 million).
The notes on pages 14 to 77 are an integral part of these financial statements.
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Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
1 GENERAL INFORMATION
The Mortgage and Land Bank of Latvia was established as a state-owned commercial bank on 19 March 1993 by the Government of Latvia based on the Decree No 140 adopted by the Cabinet of Ministers. The Bank was registered with the Register of Enterprises of the Republic of Latvia on 3 June 1993. According to the Commercial Law the Bank was registered in the Commercial Register on 14 July 2004.
The operations of the Bank are regulated by the law On Credit Institutions and other effective laws of the Republic of Latvia, the Statutes of the Bank, the instructions of the Bank of Latvia and Financial and Capital Market Commission, as well as the decrees and regulations of the Cabinet of Ministers of the Republic of Latvia. The Bank is under the jurisdiction of the Ministry of Finance of the Republic of Latvia that represents the interests of the shareholder on behalf of the Cabinet of Ministers and holds 100% of the Bank’s shares.
The principal activities of the Bank have been dividend by commercial activities, where Bank provides universal bank’s services, and state support programs, where Bank issues loans under state and European Union programs.
On 3 December 2009, the concept for Transformation of the State-owned JSC Mortgage and Land Bank of Latvia into a Development Bank was approved by Order No 820 issued by the Cabinet of the Republic of Latvia. The concept stipulates that the Mortgage Bank be gradually transformed into a development bank, phasing out commercial functions to completely refuse from them by 31 December 2013 at the latest. The Mortgage Bank will be gradually reducing its commercial loan portfolio and the portfolio balance outstanding at the end of the transition period will be realised or transferred to another financial institution.
In April 2010 the shareholder of the Bank increased share capital of the Bank by LVL 70 million. The Shareholder sent a notification to European Commission requesting to approve the share capital increase. The management of the Bank expects that decision will be made after review of Bank‘s transformation plan as described below. Thus, the approval from European Commision towards the bank's shareholder is still pending at the date of the issue of these Finacial Statements. If this approval was not been obtained, the bank's shareholder would need to perform actions to obtain repayment of made capital increase. The increase has been recognized as equity and included in capital adequacy calculation.
In September 2010, in accordance with the Cabinet’s decision, a consultant – SEB Enskilda - was attracted to ensure the transformation process. The consultant was engaged to draw the transformation plan of the Bank. The tranformation plan shall include actions to be taken by the Bank, which currently have not been agreed and therefore are uncertain.
Therefore, the Bank’s management has not been able to assess the potential effect, if any, which the approval of the transformation plan, including related approval on Bank's equity, could produce on the Bank’s future operations, presentation of Bank‘s asset and liability term structure and their valuation s, as well as capital adequacy. A decision on the transformation plan will be adopted by the Cabinet of the Republic of Latvia after the approval of the annual report. Given the existing circumstances, the Bank’s management has adopted the going concern assumption based on the budget and action plan for 2011 approved by the Bank’s Council and shareholder, stating that the Bank will be in compliance with all regulatory requirements and assuming positive decision over capital increase made in April 2010. The Bank’s management also expects that the transformation plan that will be approved to implement the transformation process will encompass measures and resources which may be necessary to achieve compliance with the regulatory requirements and will not cast any doubt upon the appropriateness of the going concern assumption.
These financial statements on pages 9 to 77 have been accepted by the Board of Directors on 3 February 2011 and accepted by the Supervisory Council on 9 February 2011. In accordance with the Commercial Law of the Republic of Latvia, the shareholders’ meeting has the right to make decision on approval of the financial statements.
14
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
2 ACCOUNTING POLICIES
(1) Basis of preparation
These financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted in the European Union, on a going concern basis (see also significant assumptions). In preparation of the financial statements on a going concern basis the management considered the Bank’s and the Group’s financial position, access to financial resources and analysed the impact of the recent financial crisis on future operations of the Bank and the Group The financial statements are prepared under the historical cost convention as modified by the fair valuation of financial assets held as available-for-sale, trading securities, derivative financial instruments and investment properties.
The preparation of financial statements in accordance with International Financial Reporting Standards as adopted by European Union requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on the Management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates.
The accompanying financial statements are reported in thousands of lats, unless otherwise stated. Functional currency of the Bank and Group is Latvian lats.
The accounting policies used in the preparation of the financial statements for the period ended 31 December 2010 are consistent with those used in the annual financial statements for the year ended 31 December 2009, except as described in Note 2(23).
In order to improve financial statement presentation, the Group has changed presentation of several income statement and financial position classifications, as well as made reclassifications in prior period balances. Key changes in statement of income relates to reclassifying penalty income from caption Other operating income to Interest income in amount of 2,461 thousand LVL and recovery of loans written off in previous periods from caption Other operating income to Impairment expenses, net in amount of 1,486 thousand LVL. Key change in statement of financial position is to show separately provisions for off-balance sheet items, as a result reclassification in last year balances of 189 thousand LVL from other liabilities was made.
(2) Consolidation and investments in subsidiaries
Consolidation Subsidiary undertakings, in which the Bank, directly or indirectly, has power to exercise control over financial and operating policies, and where operating volumes are substantial, have been consolidated, by adding together similar types of assets, liabilities, income and expenses.
For the purposes of consolidation, all intercompany transactions, balances and unrealised surpluses and deficits on transactions between the Group companies have been eliminated. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group.
Subsidiaries Investments in subsidiaries are accounted for under the cost method in the separate financial statements of the Bank. The Bank recognises income from the investment only to the extent that the Bank receives dividends from the accumulated profits of the subsidiaries arising after the date of acquisition.
Associates Associates are all entities over which the Group and the Bank has significant influence but not control. Investments in associates are accounted for under cost method in Bank’s financial statements and using the equity method in Group’s financial statements.
15
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
2 ACCOUNTING POLICIES (continued)
(3) Foreign currency translation
Transactions denominated in foreign currencies are recorded in lats at actual rates of exchange set forth by the Bank of Latvia at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into lats at the rate of exchange prevailing at the end of period. Any gain or loss resulting from a change in rates of exchange subsequent to the date of the transaction is included in the income statement.
The applicable rates for the principal currencies held by the Group and the Bank were as follows:
31 December 2010 31 December 2009 1 EUR = LVL 0.702804 1 EUR = LVL 0.702804 1 USD = LVL 0.535000 1 USD = LVL 0.489000 1 GBP = LVL 0.824000 1 GBP = LVL 0.783000
(4) Income and expense recognition
Interest income and expense are recognised in the income statement for all interest bearing instruments on an accrual basis using the effective interest rate method.
The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
Fees and commissions are generally recognised on an accrual basis when the service has been provided. Fees related to loans issuing are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan.
(5) Financial instruments – initial recognition and subsequent measurement
(i) Date of recognition Purchases and sales of trading securities and investment securities that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales), are recognised at settlement date, which is the date, when the asset is delivered or given to the Group or the Bank. Any change in the fair value of the asset during the period between the purchase date and the settlement date is recognised in the income statement or in the statement of comprehensive income. Otherwise such transactions are treated as derivative instruments until settlement.
(ii) Initial recognition of financial instruments Trading securities, derivatives and other financial instruments at fair value through profit or loss are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument.
16
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
2 ACCOUNTING POLICIES (continued)
(5) Financial instruments – initial recognition and subsequent measurement (continued)
(iii) Trading and investment securities
Trading and investment securities are comprised of the following categories:
• Trading securities comprise fixed income securities and equity shares held by the Bank for trading purposes. They are accounted for at fair value and all gains and losses arising from changes in the fair value are included in the income statement as part of net trading income. • Investment securities available-for-sale comprise treasury bills and other fixed income securities held by the Bank for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. They are stated at fair value with all gains and losses from revaluation recognised in the statement of comprehensive income, except for impairment losses, which are recognized in the income statement, until derecognition. The cumulative change recognised as other comprehensive income is presented as Revaluatoin reserve on available for sale investments under equity. • Investment securities held-to-maturity comprise debt securities with fixed or determinable payments and fixed maturities that the Bank’s management has the positive intention and ability to hold to maturity. They are carried at amortised cost, that is calculated based on the purchase price of the securities adjusted by discount or premium amortised over the tem of the securities, using the effective interest rate method.
(iv) Loans and receivables
Loans and advances to customers are accounted for as loans and receivables and are carried at amortised cost. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. All loans are recognised when cash is advanced to borrowers.
For the purposes of these financial statements, finance lease receivables are included in loans and advances to customers.
Management considers risks for all loans to determine the provision for loan impairment and possible losses.
Provisions for individual loan impairment are established if there is objective evidence that it will not be possible to collect all amounts due according to the original contractual terms of loans. The amount of the provision is the difference between the carrying amount and the recoverable amount, being determined as the present value of expected cash flows, including amounts recoverable from guarantees and collateral. Impairment losses are recognised through an allowance account.
In addition to provisions for individual loans, provisions for homogeneous groups of loans based on similarities of credit risk involved, loan size, quality and loan terms are also established. The provision for loan impairment losses for those loans included within homogeneous groups have been estimated based upon historical patterns of losses in each group, the historic pattern of timeliness of payments and reflecting the current economic climate in which the borrowers operate.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss and disclosed as part of provision for impairment loss.
The methodology and assumptions used are reviewed regularly to reduce any differences between loss estimates and actual loss experience.
17
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
2 ACCOUNTING POLICIES (continued)
(5) Financial instruments – initial recognition and subsequent measurement (continued)
(v) Due from banks
Amounts due from other banks are recorded when the Group and the Bank advances money to counterparty banks with no intention of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates. Amounts due from other banks are carried at amortised cost.
(vi) Derivative financial instruments
Derivative financial instruments including foreign currency swaps are initially recognised at fair value and subsequently measured at their fair value. Fair values are obtained from quoted market prices and discounted cash flow models as appropriate. All derivatives are carried as assets when fair value is positive and liabilities when the fair value is negative. Changes in the fair value of derivatives are reported in the income statement. The Group and the Bank do not use hedge accounting.
(vii) Financial liabilities carried at amortised cost
Financial liabilities carried at amortised cost are mainly amounts due to customers and due to banks. These are recognised initially at cost, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Financial liabilities are subsequently stated at amortised cost and any difference between net proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.
(6) Derecognition of financial assets
The Group and the Bank derecognise financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Group and the Bank has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale
(7) Fair values of financial assets and liabilities
Fair value is the amount for which assets could be exchanged, or liability settled, between knowledgeable, willing parties in an arms length transaction. Fair values of financial assets or liabilities, including derivative financial instruments, in active markets are based on quoted market prices.
If the market for a financial asset or liability is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of discounted cash flow analysis, option pricing models and recent comparative transactions as appropriate.
Where, in the opinion of the Management, the fair values of financial assets and liabilities differ materially from their book values, such fair values are separately disclosed in the notes to the accounts.
(8) Off-setting financial instruments
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liability simultaneously.
18
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
2 ACCOUNTING POLICIES (continued)
(9) Impairment of financial assets and liabilities
The Group and the Bank first assess whether objective evidence of impairment exists individually for financial assets at amortised cost (such as due from banks, loans and advances to customers and held-to- maturity investments) that are significant. Financial 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 the Group and the Bank determines that no objective evidence of impairment exists for individually assessed financial assets, it is included in a group of loans with similar credit risk characteristics and collectively assessed for impairment. For the purposes of a collective evaluation of impairment loans are grouped on a basis of similar credit risk characteristics.
The cumulative impairment loss - measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate – is reduced through use of an allowance account and the amount of the loss is recognised in the income statement. Interest income continues to be be accrued on the reduced carrying amount using the rate of interest used to discount the future cash flows for the purpose of measuring impairment loss and is recognised as ‘Interest income’. When a loan is uncollectible, it is written off against the related allowances for credit losses; subsequent recoveries are credited to the income statement.
The Group and the Bank review their loan portfolios to assess impairment on a quarterly basis. In determining whether an impairment loss should be recorded in the income statement, the Group and the Bank make judgements as to whether there is any objective indication that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. Management uses estimates based on historical loss experience for assets with similar credit risk characteristics and current economic climate in which the borrowers operate. The methodology and assumptions used are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Nevertheless, it is reasonably possible, based on existing knowledge, that outcomes within the next financial year that are different from assumptions could require a material adjustment to the carrying amount of the asset or liability affected.
(i) Available for sale financial instruments The Group assesses at each balance sheet date whether there is objective evidence that available-for-sale securities are impaired. If any such evidence exists, for available for sale investments the cumulative impairment loss - measured as the difference between the amortised cost of the asset and the current fair value, less any impairment loss previously recognised - is removed from other comprehensive income and recognised in the income statement.
Impairment losses recognised in the income statement are subsequently reversed if a fair value increase is observed that can be objectively related to an event occurring after the impairment loss was recognised. The assessment of the evidence for impairment and the determination of the amount of impairment or its reversal requires the application of management's judgement and estimates.
(ii) Restructured loans Where possible, the Group seeks to restructure loans rather than take possession of collateral. This mostly involves adjusting payment made by a borrower in a manner matching such a borrower’s financial capacity (temporarily reducing principal repayments, extending payment terms) and the agreement of new loan conditions. Once the terms have been renegotiated and executed a loan is no longer considered non- performing as long as a borrower complies with the renegotiated terms and conditions. Such loans are continuously reviewed to ensure that all criteria are met and that future payments are likely to occur and interest and fee income is accrued and recognised as for other performing loans. Restructured loans continue to be subject to an individual or collective impairment assessment.
19
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
2 ACCOUNTING POLICIES (continued)
(10) Intangible Assets including Goodwill
Acquired computer software and licences are recognised as intangible assets on the basis of the costs incurred to acquire and bring to use the software. These costs are amortised on the basis of their expected useful lives (5 years). Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred.
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisition is reported in the balance sheet as an intangible asset and is measured at cost less any accumulated impairment loss. The goodwill is assessed during each reporting period to determine whether the goodwill is impaired; such impairment loss is determined on the basis of the estimated recoverable amount of the goodwill. The assessment of the impairment of goodwill requires the application of management's judgement, including estimates of future cash flows of the appropriate cash generating unit based on management's business plans, discounted at an appropriate discount rate. Identifiable intangible assets arising on acquisition whose fair value can be measured reliably are recognised separately from goodwill and amortised on a straight-line basis over their expected useful lives. The identification and fair valuation of such intangible assets may require the application of management's judgement and, where applicable, estimates of the attributable cost of the asset or future cash flows from the Group's ownership of the asset discounted at an appropriate discount rate.
(11) Property and equipment
All property and equipment is stated at historical cost less accumulated depreciation. Depreciation is provided using the straight-line method to write off the cost of each asset to its residual value over the estimated useful life of the asset. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. The annual rates of fixed asset depreciation are:
Category Depreciation rate Buildings 2 % p.a. Furniture and fittings 10 - 20 % p.a. Computers and equipment 10 - 33 % p.a. Motor vehicles 17 % p.a. Leasehold improvements over the term of the lease agreements
Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposals of property and equipment are recognised in the income statement in the period of disposal. Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to income statement during the financial period in which they are incurred.. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Property and equipment are periodically reviewed for impairment. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.
20
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
2 ACCOUNTING POLICIES (continued)
(12) Investment Properties
Investment property comprises land or buildings, which are held in order to earn rentals or for capital appreciation or both, and which are not occupied by the companies in the Group or otherwise held for sale. Property held under operating lease is classified as investment property if, and only if, it meets the definition of an investment property.
Investment property is carried at fair value. Fair value is based on active market prices, adjusted, if necessary, for any difference in the nature, location or condition of the asset. If this information is not available, the Group uses alternative valuation methods such as discounted cash flow projections. Changes in the fair value of investment property are recorded in the income statement as part of other operating income.
(13) Leases - when the Group is a lessor
Finance lease receivables at commencement of the lease are recognised at the lower of the fair value of the leased asset or the present value of minimum lease payments. The net investment in finance leases is recorded in the balance sheet net of taxes and the related provision for impairment.
Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return.
Assets under operating leases are recognised as fixed assets at historical cost net of accumulated depreciation. Depreciation is calculated on a straight-line basis to write off the cost of each asset to its residual value over the estimated useful life of fixed assets that is determined based on useful lives of similar assets of the Group.
(14) Corporate income tax
Corporate income tax for the reporting period is included in the financial statements based on the management’s calculations prepared in accordance with tax legislation of the Republic of Latvia.
Deferred tax is provided in full, using liability method, on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The deferred tax is calculated based on currently enacted tax rates that are expected to apply when the temporary differences reverse. The principal temporary differences arise from different fixed asset depreciation rates, revaluation of investment properties, as well as tax losses carried forward. Deferred tax assets and liabilities are netted only within the individual companies of the Group.
Where an overall deferred taxation asset arises, it is only recognised in the financial statements where it is probable that future taxable profit will be available against which the temporary differences can be utilised.
(15) Cash and cash equivalents
Cash and cash equivalents comprise cash and demand deposits with the Bank of Latvia and other credit institutions, deposits with and from other credit institutions with original maturity of 3 months or less.
21
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
2 ACCOUNTING POLICIES (continued)
(16) Mortgage bonds coverage register
The coverage register of mortgage bonds at the Bank is maintained in accordance with the legislation of the Republic of Latvia, including regulatory documents covering mortgage transactions.
The Bank manages mortgage claims included in the coverage register of mortgage bonds according to their remaining value, as well as substitute coverage separately from other assets.
The mortgage claims included in the coverage register of mortgage bonds according to their remaining value are used to ensure that those liabilities that result from the issue of mortgage bonds are met.
Mortgage bonds in circulation according to their total face value are fully covered with mortgage loans. The interest expense on mortgage bonds is covered with the interest income from mortgage loans of the same amount.
(17) Provisions
Provisions are recognised when the Group or the Bank has a present legal or constructive obligation as a result of past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. These provisions relate to the guarantees issued and other off balance sheet items.
(18) Employee benefits
The Group and the Bank pays 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 Group and the Bank pay fixed contributions determined by the law and they 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. The social security contributions are recognised as an expense on an accrual basis and are included within staff costs.
(19) Assets held for sale
Property is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. Property held for sale is measured at the lower of its carrying amount and fair value less costs to sell.
(20) Financial guarantees
The Group measures issued financial guarantees initially at their fair value, which is normally evidenced by the amount of fees received. This amount is then amortised on a straight-line basis over the life of the guarantee. At each balance sheet date, the guarantees are measured at the higher of (i) the unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the commitment at balance sheet date.
(21) Off-balance sheet instruments
In the ordinary course of business, the Group and the Bank utilise off-balance sheet financial instruments including commitments to extend loans and advances, financial guarantees and commercial letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. The methodology for provisioning against off-balance sheet instruments is given in Note 2(17 ) above.
22
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
2 ACCOUNTING POLICIES (continued)
(22) Operating segments
Operating segment is different component of Group’s activities which is related with offering products and services that are subject to risks and provide revenues that are different from other segments’ risks and revenues.
Operating segments with highest revenues received from external customers as well as segments that assets are 10 percent or more of the combined assets of all operating segments are disclosed separately.
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of the Bank that makes strategic decisions.
Same accounting policies are applied in recording inter-segment transactions.
(23) Critical Accounting Estimates and Judgements
The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Such estimates and assumptions are outlined below:
Going concern evaluation. Please see Note 1 General information. Impairment losses of loans and advances . The Group reviews its loan portfolio to assess impairment on a regular basis as described in Note 2(9). Due to rising amount of non-performing loans, the Group has become more active in workout of loans in order to regain client’s solvency in case when it is possible. When the Group considers that restructuring is not possible or economically feasible, Group proceeded with foreclosure by first offering voluntary sales of collateral. Taking into consideration low activity of real estate market and unwillingness of non-performing loan borrowers to voluntary. Due to such approach the Group estimated to have recognized additional impairment expenses of 2,217 thousand LVL. Taking into consideration that such approach shall be applied also in the future, the Group made the estimate of impairment allowance for non-performing loans by calculating impairment allowance for certain collaterals based on their fast realization price. Due to this change of estimate the Group has recognized additional impairment expenses of 7,735 thousand LVL. Finally, do to current economic slow-down, which have affected valued of real estate, the Group continuously is making revaluation of collaterals, including revaluation of such real estate, which serves as collateral for loans with significant impairment allowance. Due to this additional impairment expenses were recognized during the reporting period.. Impairment allowance for securities held to maturity. The Group performs credit risk evaluation of the issuer of securities on a regular basis for a timely identification of eventual loss events, which might occur due to issuer’s default. The Group shall use the following criteria in the evaluation process of the quality of securities and building of provisions: o changes in credit risk of the securities issuer since the moment of financial asset procurement, upon evaluation of changes in internal or international credit ratings; o changes in the fair value of the respective security and the potential losses, if the respective security would be sold at the market price on a regulated market; o changes in estimated future cash flow and date of maturity due to late payments (except for cases when delays caused by payment system errors) or due to negative changes in creditworthiness of the issuer, bankruptcy, liquidation or reorganization of the issuer.
23
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
2 ACCOUNTING POLICIES (continued)
(23) Critical Accounting Estimates and Judgements (continued) Fair value of financial instruments. The Group has established principles and methods for evaluating securities at their fair value, selection and application procedure of these principles and methods, as well as applicable information sources in securities evaluation and hierarchy of their use. Major principles: o to identify the fair value of securities traded on the active market, the bid prices published in stock-exchanges or reliable information sources are used, or the price of the last transaction, if five business days have not elapsed since that transaction; o for securities having no active market, the fair value is determined by looking at market prices of similar securities, bid prices of other market players or by discounted cash flow analysis. The priority is given to data observed on the market to support the estimates and assumptions used in determining the fair value of securities; o in cases when the fair value of a security may not be credibly established, its value is determined at its amortised cost (debt securities) or historical cost (equity securities) , as initially determined for the security. Deferred tax asset. Deferred tax asset are recognized in respect to tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Judgemnt is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies. Given the uncertainties as described under Note 1, the management of the Group has resolved not to recognize any deferred tax asset. Consolidation. The Group has made investments in several investment funds, which are managed by Bank’s subsidiary operating in asset management business. A judgment is required to determine whether Group has control over these investments. The management has determined that they have control over certain closed-ended funds, while no control is maintained over open-ended funds, which are operating according to the prospectus. As a result certain investment funds have been consolidated in Group’s financial statements. See Note 17. Assets held for sale. In 2010, the Bank started transferring non-performing loans to a subsidiary company of the Bank, assigning the Bank’s rights to claim towards the customer to that company. In order to determine the value of ceded loans, the long-term economic value of each loan was estimated. The long-term economic value of loans was determined by discounting the potentially recoverable cash flow by an appropriate discount rate. The projected receivables were taken as the positive cash flow for these non-performing loans, the receivables from borrowers, guarantors and disposal of collateral (adjusting the property value, determined by a certified valuator, in line with real estate market development trend forecasts, depending on the planned term of collateral disposal), while the negative cash flow considered to be the costs to be incurred by disposing of collateral (expenses for services of certified bailiffs, insolvency administrators, property maintenance costs until disposal, etc. costs). (24) Adoption of new or revised standards and interpretations
The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year: • Amendments to IAS 24 Related Party Disclosures (early adopted) • Amendment to IFRS 2 Share-based Payment • Amendments to IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements • Amendment to IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items • IFRIC 12 Service Concession Arrangements • IFRIC 17 Distributions of Non-cash Assets to Owners • IFRIC 18 Transfers of Assets from Customers • Improvements to IFRS (issued in 2008 and 2009 and effective on 1 January 2010).
24
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
2 ACCOUNTING POLICIES (continued)
(24) Adoption of new or revised standards and interpretations (continued)
The principal effects of these changes are as follows:
Amendments to IAS 24 Related Party Disclosures (effective for financial years beginning on or after 1 January 2011). The amendments simplify the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition. They also provide a partial exemption from the disclosure requirements for government-related entities. The implementation of these amendments have an impact as less disclosures on transactions with other government related entities.
Amendments to IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements
The amendments to IFRS 3 introduce significant changes in the accounting for business combinations occurring after becoming effective. Changes affect the valuation of non-controlling interest, the accounting for transaction costs, the initial recognition and subsequent measurement of a contingent consideration and business combinations achieved in stages. These changes will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs and future reported results.
The amendments to IAS 27 require that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as an equity transaction. Therefore, such transactions do not give rise to goodwill, nor they give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary.
The changes to IFRS 3 and IAS 27 were applied prospectively, therefore, they affect acquisitions or loss of control of subsidiaries and transactions with non-controlling interests after 1 January 2010.
The other standards and interpretations and their amendments adopted in 2010 did not impact the financial statements of the Group, because the Group did not have the respective financial statement items and transactions addressed by these changes.
Standards issued but not yet effective
The Group has not applied the following IFRSs and IFRIC Interpretations that have been issued but are not yet effective:
Amendments to IFRS 7 Financial instruments: Disclosures (effective for financial years beginning on or after 1 July 2011, once adopted by the EU) The amendment modifies disclosure requirements for certain transfers of financial assets. The amendment is not expected to have any impact on the consolidated financial statements since the Group does not have these kinds of transfers.
IFRS 9 Financial Instruments (effective for financial years beginning on or after 1 January 2013, once adopted by the EU). IFRS 9 will eventually replace IAS 39. The IASB has issued the first two parts of the standard, establishing a new classification and measurement framework for financial assets and requirements on the accounting for financial liabilities. The Group has not yet evaluated the impact of the implementation of this standard.
25
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
2 ACCOUNTING POLICIES (continued)
(24) Adoption of new or revised standards and interpretations and new accounting pronouncements (continued)
Amendments to IAS 12 Income Taxes (effective for financial years beginning on or after 1 January 2012, once adopted by the EU). The amendment provides a practical solution to the problem of determining whether an entity that is measuring deferred tax related to investment property, measured using the fair value model, expects to recover the carrying amount of the investment property through use or sale by introducing a presumption that recovery of the carrying amount will normally be through sale. The Group has not estimated yet the impact of the implementation of these changes.
Amendment to IAS 32 Financial Instruments: Presentation – Classification of Rights Issues (effective for financial years beginning on or after 1 February 2010). The amendment changes the definition of a financial liability to exclude certain rights, options and warrants. The amendment will have no impact on the financial position or performance of the Group, as the Group does not have such instruments.
Improvements to IFRSs In May 2010 IASB issued omnibus of amendments to its standards. The amendments become effective for annual periods on or after either 1 July 2010 or 1 January 2011, but they are still to be adopted by the EU. The adoption of the following amendments may result in changes to accounting policies but will not have any impact on the financial position or performance of the Group: • IFRS 3 Business Combinations ; • IFRS 7 Financial instruments: Disclosures; • IAS 1 Presentation of Financial Statements; • IAS 27 Consolidated and Separate Financial Statements ; • IFRIC 13 Customer Loyalty Programmes .
Amendment to IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for financial years beginning on or after 1 January 2011). The amendment modifies the accounting for prepayments of future contributions when there is a minimum funding requirement. This amendment will not have any impact on the consolidated financial statements because the Group does not have defined benefit assets.
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective for financial years beginning on or after 1 July 2010). The interpretation provides guidance on accounting for extinguishing financial liabilities with equity instruments. Since the Group does not have such transactions, IFRIC 19 will not have any impact on its consolidated financial statements.
26
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
3 RISK MANAGEMENT
The Group and the Bank manages all the major risks affecting the operation of the Group and the Bank in accordance with the Risk Management Policy approved by the Council of the Bank. The Risk Management Policy stipulates and describes the aggregate of measures used to ensure that a possibility of suffering losses is minimized in the event the invested or receivable resources would not be repaid or recovered in due time or full amount or the Group or the Bank would suffer other losses or would not derive the planned profit. Risk management is an integral component of the internal control system of the Group and the Bank and the risk management system has been established taking into account the size and structure of the Group and the Bank, as well as the best advisable practice, incl. the guidelines of Basel bank supervisory committee.
The Group and the Bank abides by the following principles in its risk management: - risk assessment and management shall be an integral component of the every-day functions of the Group and the Bank; - while assuming the risks the Group and the Bank shall be capable of implementing the aims and assignments defined in its development strategy in a longer run; - the Group and the Bank shall operate by maintaining an optimum balance between profitability and safeguarding against the risks, i.e. the profitability must be as high as possible, however, the Group and the Bank shall not be exposed to material risks; - in accordance with their authority and competence the employees of the Group and the Bank shall know the customer and understand fully the nature of each transaction (operation) to be able to identify and assess the risks associated with the transaction (operation) and find the best solution both for the customer and the Group or the Bank; - the Group and the Bank shall assess the probable losses that it might incur by assuming the risks and avoid extraordinary losses in its operation; - the Group and the Bank shall identify and assess the probable risks before launching new products or services or entering new markets; - where necessary, the Group and the Bank shall reduce the risk limits, sell the assets subject to the risk or even cease operations on the respective markets should these be assessed as excessively risky.
In light of the changes in the world’s financial markets and economy, the Group and the Bank continued improving the risk management system, developing and improving risk management methods, which enhance more accurate and timelier identification of the major risks characteristic to operations of the Group and the Bank and evaluate their impact on further operation of the Group and the Bank.
In managing the risks the Group and the Bank apply various methods and instruments for measuring risks, set the limits and maintain the appropriate controls. The Council of the Bank has approved the policies for managing the risks characteristic for operations of the Group and the Bank. Each of the structural units involved in risk management maintains an appropriate internal control, efficiency assessment of which is the responsibility of the Internal audit department.
Credit Risk The Group and the Bank are subject to the credit risk. The credit risk is the risk of the customer or co- operation partner being unable to or refusing to meet its liabilities towards the Group or the Bank in full amount and due time. The Group and the Bank manages the credit risk according to the Credit Risk Management Strategy and Policies as well as internal regulations, procedures and instructions of credit operations. The Credit Risk Management Strategy and Policies of the Bank describe and define the principles for the management of the credit risk and it relates to all activities of the Group and the Bank involving credit risk – lending, financial market transactions (operations), intermediary activities on behalf of the clients and issue of guarantees to third parties. Management process of credit risk within the Group and the Bank encompasses establishment of guidelines and limitations, granting of loans or setting limits to particular clients or groups of interrelated clients; administration, monitoring and evaluation of files of clients or interrelated client groups, as well as appropriate control of the process, operation of management information system and evaluation of the total efficiency of the process.
27
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
3 RISK MANAGEMENT (continued)
In establishment of guidelines and limitations, the Group and the Bank primarily follows the common strategy of the Group and the Bank, credit risk management strategy, as well as their historic experience in credit risk management, which allows defining adequate limitations of concentration, as well as adequate assessment of creditworthiness and collateral, passing decisions in decision-making institutions of the appropriate level. As the common strategy of the Group and the Bank encompasses gradual transformation of the Bank into development bank, the risk stemming from implementation of framework funding programmes becomes an increasingly significant risk source for the Group and the Bank.
The Bank’s Lending department and Promotional Programmes Office bear the responsibility for daily credit risk management in lending operations, incl. when setting criteria of creditworthiness and collateral adequacy, while decisions about assuming credit risk within the set limits are made by branch, regional and the Central lending committees, or the Board of the Bank. The daily supervision and administration of loans is conducted on the basis of each individual borrower’s risk grade and affiliation, determined by organizational structure of the Group and the Bank.
The Risk management committee conducts the integrated monitoring of credit risk, incl. credit risk concentration and loan portfolio quality, while independent control of credit risk is performed by the Risk management department, its functions are detached from the business functions. Risk management department bears the responsibility for analysis of credit risk concentration, setting of limits and their control, quality assessment of the loan portfolio and building of provisions, as well as independent evaluation of lending operations and daily management of credit risk in operations with financial instruments. Stress testing of the loan portfolio and scenario analysis is conducted within the Group and the Bank within the framework of the credit risk management on a regular basis, and not less than once a year, which includes changes of various macro-environment affecting factors (for instance, drop of real estate property prices, households’ income decrease, contingent changes in development of various industries of national economy, and similar) and demonstrates the eventual impact on the Group’s and the Bank’s profitability, loan portfolio quality, volume of provisions and level of capital adequacy. The Group and the Bank manages credit risk concentrations according to the Risk Exposures Controlling Policy that stipulates the methods of analysis of the credit risk concentrations and its controlling instruments including limits on credit risk concentrations. Credit risk concentration is managed by measuring and setting limits on the following concentrations: – ratio of large exposure concentration and own funds (internal limit - 400%,), as of 31.12.2010 was 33.6% (as of 31.12.2009 – 47.1% ); – ratio of single client’s (related clients’ group) large exposure and own funds, which may not exceed 25%, as of 31.12.2010 was 22.2% (as Bank of 31.12.2009 – 20.7% ); – ratio of risk exposures with persons related to the Bank and own funds, which may not exceed 15%, as of 31.12.2010 was 1.0% (as of 31.12.2009 – 2.6%). – proportion of risk concentration in a single economic sector in the Bank’s credit portfolio and own funds as of 31.12.2010 was 131.9% (as of 31.12.2009 – 120.9% ) in operations related to real estate;
Since the Bank’s strategy is not focused on servicing the non-residents business, the proportion of the Bank’s total claims to non-residents was small and as of 31.12.2010 was 7.3% (as 31.12.2009 – 7.1%) of the Bank’s total assets. The Group and the Bank manages the country risk that results from the lending operations to non- residents according to the Country Risk Management Policy.
The management of the Group and the Bank has performed calculation of losses on the basis of all the facts at its disposal, unbiased proofs of depreciation, and believes the calculations disclosed in the financial reports are reasonable, considering the available information. Nonetheless, having the present awareness, it might occur, as a result of the next year’s actual events, differing from the assumptions, that the respective book values of assets and liabilities be corrected.
Liquidity Risk The liquidity risk relates to the ability of the Group and the Bank to redeem the legally valid claims of its customers and other creditors in due time and secure that the increase of the anticipated claims presents reasonable costs.
28
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
3 RISK MANAGEMENT (continued)
The principles for management of liquidity risk are determined by the Liquidity Maintenance Strategy, Liquidity Risk Management Policy and Business Continuity Plan for Liquidity Crisis Situation. The Bank maintains that the liquid assets do not fall below 30% (set by the FCMC) of its short-term liabilities at all times. The Assets and Liabilities Committee of the Bank stipulates the guidelines for liquidity risk management and controls compliance thereof, whereas the Treasury Department provides for daily management of the liquidity risk. The Bank uses the GAP method to evaluate the liquidity risk. The Bank has set liquidity net position limit in each significant currency and total liquidity net position limit as well as maximum deposit amount from a single depositor to control the liquidity risk. At least once a month, scenario analysis or stress testing is conducted, to reveal the impact of contingencies on liquidity of the Group and the Bank. Compliance with the liquidity ratio (min – 30%) was 84.76% as of 31.12.2010 (as of 31.12.2009 – 82.2%). Liquidity ratio data of the Group and the Bank as of 31 December 2010 are disclosed in Notes 40 to these financial reports.
Foreign Currency Risk The foreign currency risk occurs due to the differences between the asset and liability positions of foreign currencies that, as a result of the fluctuations of the exchange rates, affect the cash flow and financial results of the Group and the Bank. The principles for the management of the foreign currency risk are outlined in the Foreign Currency Risk Management Policy of the Bank. Monitoring of the foreign currency risk is conducted by the Assets and Liabilities Management Committee of the Bank, whereas the Treasury Department provides for daily management of the foreign currency risk.
The Group and the Bank maintains a cautious foreign currency risk management policy and controls the foreign currency risk by imposing limits on the open currency positions for each currency and all currencies together consolidating in lats and by complying with the open currency position limits established in the law On Credit Institutions. The biggest exposures for the Group and the Bank were in EUR and USD currencies as of December 31, 2010. Upon evaluation of the foreign currency risk level for the Bank, measuring its sensitivity to foreign currency rate changes, a decision was made that Latvia would continue its participation in Exchange rate mechanism (ERM II)), which means that the rate of Lats and Euro would remain fixed. Thus, the impact of changes in foreign currency exchange rates has been measured only for the USD open position. By using a simplified scenario, assuming that the LVL/USD rate would change +/-5% on the final date of the reporting period and assuming that all the other variables remain unchanged, it provides following figures (LVL thousands):
31.12.2010 31.12.2009 Impact on Impact on Impact on Impact on USD USD profit/loss profit/loss profit/loss profit/loss open open statement statement statement statement position position +5% -5% +5% - 5%
Group 97 (5) 5 (381) 19 (19) Bank (131) 7 (7) (432) 22 (22)
The open currency positions of the Group and the Bank by currency profile as of 31 December 2010 are disclosed in Notes 41 to these financial reports.
Interest Rate Risk The interest rate risk is related to the influence of the fluctuations of the market rates onto the interest income and expenses of the Group and the Bank. The management principles of the interest rate risk are defined in the Interest Rate Risk Management Policy. To assess the interest rate risk, the Group and the Bank analyses the maturity structure of the assets and liabilities sensitive to the changes in interest rates and susceptibility of the maturity structure to the potential fluctuations of the interest rates on a regular basis. The Assets and Liabilities Management Committee monitors the interest rate risk, whereas the Treasury Department is responsible for the daily management of the interest rate risk.
29
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
3 RISK MANAGEMENT (continued)
With the purpose to minimize the adverse effect of interest rate changes onto interest income and the economic value of the Group and the Bank, the Bank, within the framework of the Interest rate risk management programme, has set established limits, capping the overall interest rate risk exposure to all balance and off-balance-sheet items susceptible to interest rate risks.
Interest rate risk sensitivity analysis is calculated as the impact on net interest income and the economic value of the Bank, with interest rates changing by 100 basis points (thsd. LVL): 31/12/2010 31/12/2009
Change in Impact on net Impact on net Impact on equity Impact on equity interest rate interest income interest income
LVL +100/-100 bp 480/ (480) (940)/940 918/(918) (244)/244 USD +100/-100 bp (6)/6 - 4/(4) - EUR +100/-100 bp (25)/25 (44)/44 (543)/543 (2)/2
Impact on economic value shows impact on equity and have been calculated fixed rate available for sale financial assets for the effects of assumed changes in interest rates based on assumption of parallel shift in yield curve. shows analyses have been calculating using .Sensitivity on interest income is the effect of changes in interest rates on the profit or loss for a year based on the floating rate financial assets and liabilities held at 31 December 2010.
Operational risk The operational risk results from intentional or unintentional deviations from the standards adopted in daily operation of the Group and the Bank, for example human mistake or fraud, disturbances in the operation of the information systems, insufficient control procedures or their ignorance. The Group and the Bank manages operational risk according to the Operational Risk Management Policy. The operational risk is measured by using the method of self assessment and statistical analysis, whereas the operational risk information system, established within the Group and the Bank, is used to identify, analyze and control the Operational risk, it registers and analyses occurrences of operational risk and calculates the scale of actual or potential losses. Structural units of the Group and the Bank are responsible for the management of the operational risk in the daily operations, but the Risk Management Committee supervises the operational risk. The Risk Management Department is responsible for implementation of the operational risk management as well as the operational risk assessment in the Group and the Bank. The Bank has implemented Business Continuity Plan under the operational risk management measures, which includes guidelines on actions to be taken by the Bank, its structural units and employees at occurrence of risks that can have substantial negative effect on the Bank’s operations.
Capital Adequacy Capital adequacy shows the capital resources of the Group and the Bank that are required to protect them against risks, potential and characteristic to the current and future operations of the Group and the Bank. Capital adequacy maintenance strategy and Capital adequacy evaluation process policy describes the processes of evaluation, planning and maintenance of the capital adequacy.
30
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
3 RISK MANAGEMENT (continued) The goals of the Bank in capital management are: • comply with the requirements of the Financial and Capital Market Commission, as well as the strategic goals to capital volume requirement and capital adequacy, established by the management of the Bank; • maintain operation capability of the Group and the Bank, bringing profit to the shareholder and benefiting other interested parties; • use the capital effectively and support the development of operations of the Group and the Bank by means of a healthy capital base. Capital adequacy is evaluated on a regular basis and a report is monthly submitted to the supervisory institution, in accordance with the requirements of the Financial and Capital Market Commission. The Group and the Bank completely follows the requirements of Basel II in their capital adequacy evaluation process. Own funds of the Group are constituted by aggregate of Tier I and Tier II capital, less the reduction of own funds. In order to calculate the minimum capital charge for credit and market risks according the requirements of the Financial and Capital Market Commission, the Group and the Bank use the standardised approach, and basic indicator approach – for operational risk. As of 31.12.2010, the capital adequacy ratio of the Bank was 16.7% (as of 31.12.2009 - 12.8%) which exceeded the statutory minimum of 8% for the ratio of the own capital and total of risk-weighted assets and off-balance sheet items. Expanded calculation of the capital adequacy ratio of the Group and the Bank is provided in Notes42 to these financial reports. The capital adequacy includes increase of share capita which have been described in Note 1 and Note 32.In order to maintain that the capital at disposal of the Group and the Bank is sufficient to cover all risks of the current and scheduled operations, the Group and the Bank conducts the internal capital adequacy evaluation process (ICAAP) once a year, calculating capital requirements for those significant risks which do not have minimum regulatory capital requirements determined. The results of the internal capital adequacy evaluation as of 31.12.2010 were as follows:
31/12/10 Group Bank
Capital base for internal capital adequacy evaluation 104,233 102,542 Total internal capital requirement 68,602 70,047 Internal capital adequacy ratio 12.2% 11.7% Surplus of capital base 35,631 32,495
Capital adequacy evaluation process includes: • analysis of changes in operation of the Group and the Bank, according the goals for the next period established in development and risk strategies of the Group; • identification of essential risks; • analysis of the amount of own funds at disposal of the Group and the Bank, capital requirements and capital reserves volume; • planning of capital adequacy and identifying quantitative goals; • analysis of the results of the capital adequacy evaluation process.
The Group and the Bank have identified the following essential operation-affecting risks for determining the internal capital requirements: Credit risk The volume of funds required to cover the credit risk is identified by means of the standardized approach, complemented by a scenario analysis and assessing, whether the volume of funds estimated by the standardized method is sufficient for covering the credit risk of the Group.
31
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
3 RISK MANAGEMENT (continued) Market risks The volume of funds required to cover the market risk is identified by means of the standardized approach. Complementary to that, the Group performs capital adequacy evaluation by using the internal valuation model, which looks at the actual risk level of the currency risk position. The volume of the internal capital requirement for the risk is determined according the largest value. Operational risk The volume of funds required to cover the operational risk is defined as 15% of the median of net interest and noninterest income of the Group for the last three years in aggregate, which is then compared to the accumulated statistical data by the Group accounting for losses incurred by operational risk occurrences within previous periods and the maximum permissible annual losses to operational processes of the Group determined in the annual operational risk evaluation. The volume of the internal capital requirement for the risk is determined according the largest value. Interest rate risk The volume of funds required to cover the interest rate risk is defined as the volume of anticipated losses, which may arise due to the economic value of the Group shrinking as a result of interest rate changes, in the case of parallel shift of the interest rate curve by 200 basis points. The volume of estimated losses is defined as the absolute value of the change of the economic value. Risk of laundering of funds derived from criminal activities and terrorism financing (LFDCATF) To determine the volume of funds required to cover the LFDCATF risk, the Group analyzes: the ratio of non- resident deposits of the total deposit volume; customers that require further investigation, volume of deposits; changes in the non-resident deposit volume; amount of trust operations. In addition to that, the Group analyzes the efficiency of the internal control system in the area of LFDCATF. Concentration risks When determining the volume of funds required to cover the concentration risk, the Group analyzes the concentration risk of a single customer / group of interrelated customers, industry concentration risk, currency mismatch concentration risk and collateral concentration risk in loan portfolio; and include the aggregate volume of funds required to cover these risks in the capital adequacy estimate. Other risks (reputation, strategy, business etc.) To cover the other risks, the Group reserves funds according to the simplified method, maintaining respective risk management and risk mitigating activity.
In order to maintain that the funds of the Group and the Bank are sufficient for covering losses in case of contingencies, and are sufficient throughout the entire economic cycle, the Group and the Bank, in addition to funds reserved for risk covering, determine reserve funds by using the simplified method. The Group and the Bank maintain the cover for the aggregate of the internal capital requirement and capital reserves by own funds, regular evaluation of the internal capital adequacy and maintenance of an adequate level of funds. Within the framework of capital adequacy evaluation process, stress testing is conducted to provide the confidence that the Group and the Bank are well capitalized with various economic development scenarios.
32
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
4 REPORT ON CORPORATE GOVERNANCE
The corporate governance followed by the Bank is established in compliance with international standards, the best corporate governance practice and the laws of the Republic of Latvia.
The Bank complies with high standards of corporate governance, constantly working on improvement of its corporate governance.
The purpose of the corporate governance is to establish, maintain and continuously develop the operational systems that guarantee meeting the goals set within the Bank, control over operations and management of the operational risks while taking care of customer satisfaction and sustaining good co-operation with the business partners.
Within the framework of corporate governance the Bank implements: - protection of the rights and securing of the interests of the investors, customers and other related parties; - timely and adequate provision of information about the operations and financial performance and other important events of the Bank; - compliance with generally adopted code of ethics; - protection of the rights and securing of the interests of the shareholder of the Bank.
The Bank has developed and implemented an effective internal control system incorporating the management system of the operational risks of the Bank. The internal control system is being improved on a regular basis, in line with the changes in the operations of the Bank and internal and external circumstances affecting the operations of the Bank.
The internal control system identifies and defines responsibility for maintaining efficient functioning of the specific components of the internal control system by listing the duties and obligations of the the Bank’s shareholder, Council, Board, special committees established by the Board, structural units and employees.
In view of the importance of such a component of corporate governance as independent evaluation and control of the financial standing of the Bank, the Council and Board of the Bank guarantee that regarding the drawing up of the financial reports the internal control system gives a true and accurate representation of the operations and financial standing of the Bank.
Within the framework of the internal control system the control processes have been developed and documented. The control processes comprise: control over daily operations, supervision and control of drafting of the financial reports and information to be included therein, including independent supervision and control by internal audit, audit committee, external audit and other control institutions.
The Bank is fully owned by the state of Latvia. The Bank is supervised by the Ministry of Finance of the Republic of Latvia that represents the interests of the shareholder on behalf of the Cabinet of Ministers of the Republic of Latvia and holds 100% of the shares of the Bank.
The Articles of Association of the state-owned JSC “Mortgage and Land Bank of Latvia” govern the election of the Bank’s Board members and changes to the composition of the Board and mandate of the Board members. The Articles of Association are published on the homepage of the Bank. The procedure for making changes to the Articles of Association is governed by the laws of the Republic of Latvia. Once the changes to the Articles of Association are made they are published on the home page of the Bank.
33
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
5 INTEREST INCOME
2010 2009 Group Bank Group Bank
Interest income: - interest on balances due from credit institutions 733 727 3,388 3,388 - interest on loans to customers 41,440 40,962 47,316 44,798 Including on impaired loans (see Note 20) 4,739 4,382 - - - interest on securities at amortised cost 4,620 4,620 7,490 7,490 - interest on securities at fair value 107 104 154 139 46,900 46,413 58,348 55,815
6 INTEREST EXPENSE
2010 2009 Group Bank Group Bank
Interest expense: - interest on balances due to credit institutions 10,116 10,116 12,729 12,270 - interest on current and deposit accounts 13,964 13,966 13,919 13,923 - interest on subordinated liabilities 1,803 1,803 1,803 1,803 - interest on mortgage bonds issued 1,385 1,395 1,950 1,999 - payments to the deposit guarantee fund 598 598 510 510 - other interest expense 87 86 49 46 27,953 27,964 30,960 30,551
7 FEE AND COMMISSION INCOME
2010 2009 Group Bank Group Bank
Fee and commission income: - from lending activities 995 935 1,239 1,194 - from money transfers and account Servicing 1,316 1,339 1,402 1,406 - from payment cards 826 826 811 811 - from securities accounts 590 99 272 52 - from insurance fiduciary activities 146 12 133 75 - other fee and commission income 39 39 35 19 3,912 3,250 3,892 3,557
8 FEE AND COMMISSION EXPENSE 2010 2009 Group Bank Group Bank
Fee and commission expense: - for account services 209 208 192 191 - for payment cards 555 555 518 518 - for transactions with securities 89 239 107 295 - other fee and commission expense 127 11 179 21 980 1,013 996 1,025
34
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
9 NET TRADING INCOME
2010 2009 Group Bank Group Bank
Profit from trading securities 236 182 395 372 Profit / (loss) from securities available for sale 312 312 (47) (47) Loss from securities held to maturity (81) (81) (1,027) (1,027) Profit from dealing with currency exchange and revaluation of foreign currency positions 1,127 1,326 6,845 7,021 1,594 1,739 6,166 6,319
10 OTHER OPERATING INCOME
2010 2009 Group Bank Group Bank
Income from property privatisation services 357 357 270 270 Compensations* 1,452 1,452 336 336 Operating lease income 131 - 235 - Other income 2,470 245 1,234 504 4,410 2,054 2,075 1,110
*Compensation is provided to cover Bank’s state aid programs management expenses. Bank’s expenses are compensated according to terms and budget of each particular program.
11 PERSONNEL EXPENSES 2010 2009 Group Bank Group Bank
Remuneration to the Council and the Board 287 163 447 308 Remuneration to staff members 6,863 6,118 7,333 6,624 Social security contributions 1,716 1,507 1,845 1,641 8,866 7,788 9,625 8,573
During the reporting year the Bank employed on average 595 staff members (2009: 648).
12 ADMINISTRATIVE AND OTHER OPERATING EXPENSES
2010 2009 Group Bank Group Bank
Training and other staff expense 230 213 357 343 Equipment and premises maintenance expense 2,145 1,930 2,555 2,373 Information system and communication expense 1,520 1,438 1,614 1,532 Advertising and public relations 822 628 1,061 841 Professional services 933 851 675 644 Property tax 83 62 60 60 Write off of fixed assets 38 20 101 101 Revaluation of investment properties 115 7 660 660 Other expenses 987 848 1,029 640 6,873 5,997 8,112 7,194
35
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
13 IMPAIRMENT EXPENSES
2010 2009 Group Bank Group Bank Impairment expenses on: - loans 89,544 90,269 76,537 76,324 - other assets 1,233 361 2,121 323 - securities 33 33 2,178 2,178 - investments in subsidiaries - 710 - 235 - goodwill 86 - - - - due from credit institutions 33 33 - - - provisions for off balance sheet liabilities 1,202 1,202 174 174 92,131 92,608 81,010 79,234
Release of impairment expenses on: - loans (9,542) (9,542) (4,557) (4,551) - other assets (268) (268) (491) (105) - securities (857) (857) (344) (344) - provisions for off balance sheet liabilities (337) (337) (15) (15) (11,004) (11,004) (5,407) (5,015)
Recovery of loans written off in the previous periods (4,720) (4,717) (1,502) (1,486)
Total impairment expenses, net 76,407 76,887 74,101 72,733
14 CORPORATE INCOME TAX
2010 2009 Group Bank Group Bank
Income tax 50 - 45 - Deferred tax (17) - (979) (1,006) Total corporate income tax (income) / expense 33 - (934) (1,006)
Corporate income tax differs from the theoretically calculated tax amount that would arise applying the 15% rate stipulated by the law to the Bank’s and the Group’s(loss) / profit before taxation:
2010 2009 Group Bank Group Bank
(Loss) / profit before tax (66,175) (67,920) (55,344) (55,057) Theoretically calculated tax at a tax rate of 15% (9,926) (10,188) (8,302) (8,259) Dividends received - - (1) (8) Net income / expenses non deductable for tax purposes (385) 25 (1,821) (1,923) Change in unrecognized deferred tax asset 10,344 10,163 9,190 9,184 Tax (income) / expense for the year ended 31 December 33 - (934) (1,006)
As at 31 December 2010 the Bank had accumulated tax losses of LVL 134,473, which it can carry forward and utilise in future years. In accordance with the legislation of the Republic of Latvia tax losses carried forward can be covered in chronological order from taxable income during the following eight years.
36
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
14 CORPORATE INCOME TAX (continued)
Movements in the provision for deferred tax liability: 31/12/10 31/12/09 Group Bank Group Bank
Deferred tax liability at the beginning of the reporting year 27 - 1,006 1,006 Change in deferred tax liabilities (17) - (979) (1,006) Deferred tax liability at the end of the reporting year 10 - 27 -
Deferred income tax assets and liabilities are attributable to the following items:
31/12/10 31/12/09 Group Bank Group Bank
Deferred tax liabilities: 917 895 917 825 Temporary difference of property and equipment depreciation 692 671 798 706 Revaluation of investment property 118 118 119 119 Other temporary differences 107 107 - -
Deferred tax assets: 20,441 20,242 10,080 10,009 Provision for employee holiday pay 79 71 80 71 Other temporary differences 5 - 35 35 Tax loss carried forward* 20,357 20,171 9,965 9,903
Total deferred tax liability 10 - 27 -
Unrecognized deferred tax asset* (19,534) (19,347) (9,190) (9,184)
* Deferred tax asset was not recognized according to the policy (14) described in the Note 2 Accounting policies .
15 EARNINGS PER SHARE
Basic earnings per share are calculated by dividing the net profit attributable to equity holders of the Bank by the weighted average number of ordinary shares in issue during the year.
2010 2009 Group Group
Loss attributable to equity holders of the Bank (66,208) (54,410) Weighted average number of ordinary shares in issue 173,116,603 80,666,979 Basic earnings per share (expressed in LVL per share) (0.38) (0.67)
There is no dilution effect, as a result diluted earnings per share are in the same amount.
37
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
16 CASH AND BALANCES WITH CENTRAL BANK
31/12/10 31/12/09 Group Bank Group Bank
Cash 9,795 9,795 7,715 7,715 Balances with the Bank of Latvia 58,382 58,382 88,282 88,282 68,177 68,177 95,997 95,997
Balances with the Bank of Latvia reflect the balance of the Bank's correspondent account, on which interest is paid in the amount of the compulsory reserve requirement.
The Bank is required to comply with minimum reserve requirements set by the Bank of Latvia. This requires the Bank’s monthly average LVL balance on its correspondent account with the Bank of Latvia to exceed a specified minimum during the maintenance period of requirements.
The Bank was in compliance with the reserve requirement during the reporting period.
17 TRADING AND INVESTMENT SECURITIES
31/12/10 31/12/09 Group Bank Group Bank
Trading securities Latvian Treasury bills and government bonds 509 509 3,004 3,004 Non-OECD government bonds - - 160 160 Latvian corporate bonds 106 106 1,452 1,452 OECD corporate bonds - - 217 217 Non-OECD corporate bonds - - 26 26 Equity shares in Latvian corporate entities - - 41 41 Equity shares in non-OECD corporate entities - - 19 19 Investment funds registered in Latvia 1,957 1,759 155 - Total trading securities 2,572 2,374 5,074 4,919
Securities held to maturity OECD government bonds 1,293 1,293 1,251 1,251 Non-OECD government bonds 6,057 6,057 7,432 7,432 OECD corporate bonds 10,111 10,111 19,926 19,926 Non-OECD corporate bonds 6,591 6,591 5,889 5,889 Latvian corporate bonds 3,517 3,517 12,111 12,111 Total securities held to maturity 27,569 27,569 46,609 46,609 Impairment allowance (2,955) (2,955) (3,625) (3,625) Total net securities held to maturity 24,614 24,614 42,984 42,984
Securities available-for-sale Latvian Treasury bills and government bonds 67,601 66,939 49,892 49,892 OECD government bonds 371 371 - - Investment funds registered in Latvia* 3,532 10,455 - - Total securities available-for-sale 71,504 77,765 49,892 49,892
Total net trading and investment securities 98,690 104,753 97,950 97,795
*Bank has consolidated certain closed investment funds in the consolidated reports.
38
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
17 TRADING AND INVESTMENT SECURITIES (continued)
The following table shows the division of the Bank’s debt securities by rating agency designation ( Moody`s investors Service ) as at 31 December 2010: Trading securities Investment Securities held to Total net securities maturity available-for-sale
Aa1 - Aa3 - 371 3,320 3,691 A1 - A3 - - 4,611 4,611 Baa1 - Baa3 509 66,939 12,034 79,482 Lower than Baa3 106 - 2,050 2,156 Unrated - - 2,599 2,599 Total 615 67,310 24,614 92,539
The following table shows the division of the Bank’s debt securities by rating agency designation ( Moody`s Investors Service ) as at 31 December 2009: Trading securities Investment Securities held to Total net securities maturity available-for-sale
Aa1 - Aa3 1,317 - 7,326 8,643 A1 - A3 15 - 5,162 5,177 Baa1 - Baa3 3,164 49,892 13,459 66,515 Lower than Baa3 164 - 8,944 9,108 Unrated 199 - 8,093 8,292 Total 4,859 49,892 42,984 97,735
All securities are quoted on stock exchange. The average yield on investment securities as at 31 December 2010 was 3.5% (2009: 6.6%).
18 INVESTMENT PROPERTIES
31/12/10 31/12/09 Group Bank Group Bank
Carrying amount at 1 January 1,166 1,166 1,826 1,826
Acquired 9,523 - - - Loss on fair valuation (115) (7) (660) (660) Carrying amount at 31 December 10,574 1,159 1,166 1,166
Investment properties represent properties that are held to earn rentals or for capital appreciation. The investment properties comprise properties taken over by the Group that previously had been pledged as collateral.
Investment properties are held at fair value based on valuations made by independent valuers who have up-to- date experience in valuing real estate in the respective location and category and who hold an appropriate professional qualification for real estate valuation. The valuations are made on the basis of recent comparative data in the local market and/or on discounted cash flow method. In case discounted cash flow method is used, key assumptions are made about discount rate, yield, occupancy and rent rate increase. Dependant on the location of the investment property, key assumptions on average range between 9-12% for discount rate, 8-10% for yield, 50%-90% for occupancy rate and future rent price increase between 3-10% per annum.
39
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
19 DUE FROM CREDIT INSTITUTIONS
31/12/10 31/12/09 Group Bank Group Bank
Due from credit institutions registered in OECD countries 11,724 11,724 8,923 8,923 Due from credit institutions registered in Latvia 8,975 4,893 25,296 25,161 Due from credit institutions registered in other countries 75 75 1,192 1,192 20,774 16,692 35,411 35,276
When interbank loans to credit institutions and storage of funds with correspondent banks are concerned, the Group takes into consideration the limits imposed to interbank and nostro accounts, which are established on the basis of financial and operational performance evaluation of credit institutions. The Bank conducted considerable improvements to internal credit risk evaluation models in 2009, and developed internal credit rating system for evaluation, analysis and monitoring the credit risk of credit institutions, the system was fully implemented in 2010. The internal credit rating, based on the operational and financial performance results and evaluation of the external environment, characterizes the creditworthiness of an institution and its level of safety. The scale of internal credit ratings consists of 7 rating levels: A – very low risk; B – low risk; C – below average risk; D – average risk; E – above average risk; F – high risk; G – very high risk; AR – annulled rating. Subsequently to the internal credit rating, the Bank performs an adequate monitoring of the institution, in accordance with the credit rating risk level, makes decisions on limits, transaction types and terms, as well as classifies these assets by their quality.
Interal credit rating system could be compared to Moody`s the credit ratings:
Interal credit ratings A B C D E F G
Moody`s credit ratings Aaa Aa1- A1- Baa1- Ba1- B1-B3 Caa- Aa3 A3 Baa3 Ba3 C
The balances due to banks by credit quality of the Bank as at 31 December 2010 is as follows:
A B C D E F G AR - Total
Due from credit institutions registered in OECD countries 51 - 9,626 1,323 724 - - - - 11,724 Due from credit institutions registered in Latvia - - - 74 4,390 8 - - 421 4,893 Due from credit institutions registered in other countries - - - 40 - 35 - - - 75 Total 51 - 9,626 1,437 5,114 43 - - 421 16,692
40
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
19 DUE FROM CREDIT INSTITUTIONS (continued)
The balances due to banks by credit quality of the Bank as at 31 December 2009 is as follows:
A B C D E F G AR - Total
Due from credit institutions registered in OECD countries 15 - 4,434 10 820 - - - 3,644 8,923 Due from credit institutions registered in Latvia - - - 5,000 5,067 12,008 - 24 3,062 25,161 Due from credit institutions registered in other countries - - - 39 11 35 - - 1,107 1,192 Total 15 - 4,434 5,049 5,898 12,043 - 24 7,813 35,276
At 31 December 2009 the Bank had correspondent accounts with 20 banks (2009: 21 banks).
The average interest rate on balances due from credit institutions as at 31 December 2010 was 0.4% (2009: 0.9%).
20 DERIVATIVE FINANCIAL INSTRUMENTS
The Group and the Bank use the following derivative financial instruments: currency forwards representing commitments to purchase foreign and domestic currency, currency swaps representing commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of currencies.
The Group’s and the Bank's credit risk represents the potential cost to replace the forward or swap contracts if counterparties fail to perform their obligation. To control the level of credit risk taken, the Group and the Bank assesses counterparties using the same techniques as for its lending activities.
The notional amounts of certain types of financial instruments provide a basis for comparison with instruments recognised on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and do not indicate the Group’s and the Bank's exposure to credit risks. The derivative instruments become favourable or unfavourable as a result of fluctuations in foreign exchange rates relative to their terms.
The Group’s notional amounts and fair values of derivative instruments held for trading are set out in the following table: 31/12/10 31/12/09 Contract / Fair value Contract / Fair value notional Assets Liabilities notional Assets Liabilities amount amount
Currency swaps 107,343 853 9 86,042 1,950 68 Currency forwards 2,759 9 4 3,547 4 87
Total 862 13 1,954 155
41
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
21 LOANS TO CUSTOMERS
Loans by type of borrower: 31/12/10 31/12/09 Group Bank Group Bank
Private companies 402,026 328,597 483,804 429,800 Individuals 175,101 142,177 205,104 196,841 Financial institutions 297 47,582 621 70,304 State owned companies 6,543 6,543 2,420 2,420 Management / personnel 6,851 5,634 7,468 6,167 Local government 1,279 1,109 1,614 1,319 Public and religious institutions 596 528 673 673 Accrued interest on loans 4,977 3,324 5,412 5,418 Total gross loans 597,670 535,494 707,116 712,942
Allowance for impairment loss (105,929) (64,960) (74,435) (73,441) Total net loans 491,741 470,534 632,681 639,501
97.9% from loans issued by the Bank and the Group are loans to residents of Latvia.
Economic sector risk concentrations within the customer loan portfolio are as follows:
31/12/10 31/12/09 Group Bank Group Bank
Individuals 181,952 147,811 212,572 203,008 Manufacturing 88,797 78,285 97,082 88,123 Real estate 70,661 76,183 80,198 82,336 Agriculture and forestry 77,418 62,835 90,692 75,857 Financial intermediaries 149 47,435 669 70,353 Other industries 35,411 26,723 50,956 45,789 Retail trade and wholesale distribution 44,056 30,315 55,514 49,168 Construction 30,845 22,800 40,341 38,327 Hotels and restaurants 21,526 13,011 24,985 24,608 Transport, warehousing and communications 26,757 12,336 33,412 15,254 Electricity, gas and water utilities 11,155 10,753 9,863 9,652 Fishing 2,687 2,574 3,806 3,730 Municipal authorities 1,279 1,109 1,614 1,319 Accrued interest on loans 4,977 3,324 5,412 5,418 Total gross loans 597,670 535,494 707,116 712,942
The extent of loan and advance concentration with respect to individual non-bank customers with total credit exposures equal to or exceeding Ls 1,000 thousand is presented below:
31/12/10 31/12/09 Group Bank Group Bank
Number of customers 63 52 73 75 Total credit exposure of customers 172,847 212,339 197,327 269,010 Percentage of total gross portfolio of loans 28.9% 39.6% 28.1% 38.0%
At 31 December 2010 the top ten borrowers represented 11.3% (10.3% at 31 December 2009) of the total loan portfolio.
42
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
21 LOANS TO CUSTOMERS (continued)
The Latvian banking legislation requires that any credit exposure to a non-related entity or group of non- related entities may not exceed 25% of a credit institution’s equity and the total credit exposure to all related parties may not exceed 15% of equity. The Latvian Financial and Capital Market Commission has agreed that these limits are not applicable to the Bank’s credit exposure to its fully owned leasing subsidiary SIA “Hipol īzings”.
As at 31 December 2010, the Bank was in compliance with the legal requirement set for the total amount of non-zero risk credit exposure.
Analysis of loans issued by the Bank by type of valuation:
31/12/10 31/12/09 Bank Bank Total Total Individuals Companies loans Individuals Companies loans
Individually assessed loans 47,700 310,281 357,981 77,726 425,222 502,948 Collectively assessed loans 100,786 76,727 177,513 126,907 83,087 209,994 Total gross loans 148,486 387,008 535,494 204,633 508,309 712,942 Allowance for impairment loss – individually assessed (8,663) (50,843) (59,506) (21,676) (50,670) (72,346) Allowance for impairment loss – collectively assessed (1,502) (3,952) (5,454) (444) (651) (1,095) Total net loans 138,321 332,213 470,534 182,513 456,988 639,501
Analysis of loans issued by the Group by type of valuation:
31/12/10 31/12/09 Group Group Total Total Individuals Companies loans Individuals Companies loans
Individually assessed loans 82,019 337,254 419,273 87,298 409,824 497,122 Collectively assessed loans 101,052 77,345 178,397 126,907 83,087 209,994 Total gross loans 183,071 414,599 597,670 214,205 492,911 707,116 Allowance for impairment loss – individually assessed (19,525) (80,523) (100,048) (21,855) (51,485) (73,340) Allowance for impairment loss – collectively assessed (1,599) (4,282) (5,881) (444) (651) (1,095) Total net loans 161,947 329,794 491,741 191,906 440,775 632,681
43
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
21 LOANS TO CUSTOMERS (continued)
The following table provides the division of loans and advances to customers by quality (Bank):
31/12/10 31/12/09 Bank Bank Total Total Individuals Companies loans Individuals Companies loans
Neither past due nor impaired 106,856 268,597 375,453 125,815 327,405 453,220 Past due but not impaired 21,129 29,917 51,046 27,707 43,148 70,855 Impaired 20,501 88,494 108,995 51,111 137,756 188,867 Total loans 148,486 387,008 535,494 204,633 508,309 712,942 Allowance for impairment loss (10,165) (54,795) (64,960) (22,120) (51,321) (73,441) Total net loans 138,321 332,213 470,534 182,513 456,988 639,501
The following table provides the division of loans and advances to customers by quality (Group):
31/12/10 31/12/09 Group Group Total Total Individuals Companies loans Individuals Companies loans
Neither past due nor impaired 112,411 230,374 342,785 132,982 293,910 426,892 Past due but not impaired 22,424 36,042 58,466 29,311 54,630 83,941 Impaired 48,236 148,183 196,419 51,912 144,371 196,283 Total loans 183,071 414,599 597,670 214,205 492,911 707,116 Allowance for impairment loss (21,124) (84,805) (105,929) (22,299) (52,136) (74,435) Total net loans 161,947 329,794 491,741 191,906 440,775 632,681
The following table provides an analysis of loans and advances to customers past due but not impaired:
31/12/10 31/12/09 Bank Bank Total Total Individuals Companies loans Individuals Companies loans
Past due up to 30 days 13,800 20,385 34,185 19,696 24,249 43,945 Past due 30-60 days 2,535 2,609 5,144 3,659 8,857 12,516 Past due 60-90 days 961 1,031 1,992 2,192 3,935 6,127 Past due over 90 days 3,833 5,892 9,725 2,160 6,107 8,267 Total loans 21,129 29,917 51,046 27,707 43,148 70,855
44
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
21 LOANS TO CUSTOMERS (continued)
The following table provides the division of loans and advances to customers past due but not impaired:
31/12/10 31/12/09 Group Group Total Total Individuals Companies loans Individuals Companies loans
Past due up to 30 days 14,824 25,939 40,763 21,300 35,731 57,031 Past due 30-60 days 2,535 2,626 5,161 3,659 8,857 12,516 Past due 60-90 days 961 1,031 1,992 2,192 3,935 6,127 Past due over 90 days 4,104 6,446 10,550 2,160 6,107 8,267 Total loans 22,424 36,042 58,466 29,311 54,630 83,941
The following table provides fair values of collaterals of impaired loans:
31/12/10 31/12/09 Group Bank Group Bank
Impaired loans 196,419 108,995 196,283 188,867 Fair value of collateral 109,714 58,706 129,762 124,430
The following table provides the division of restructured loans and advances to customers by type of borrower:
31/12/10 31/12/09 Group Bank Group Bank
Individuals 23,712 18,681 10,596 10,596 Companies 64,002 57,990 62,454 62,454 Total net restructured loans 87,714 76,671 73,050 73,050
Analysis of movement in impairment allowance for loans:
31/12/10 31/12/09 Bank Bank Total Total Individuals Companies loans Individuals Companies loans
As at beginning of the year 22,120 51,321 73,441 3,423 6,050 9,473 Impairment charge, net 12,556 68,171 80,727 21,563 50,210 71,773 Adjustment (foreign exchange fluctuation) 16 28 44 27 40 67 Accrued interest (Note 5) (1,019) (3,363) (4,382) - - - Write-off of loans (14,543) (42,549) (57,092) (2,893) (4,979) (7,872) As at end of the year 19,130 73,608 92,738 22,120 73,411 73,441
impairment for loan 10,165 54,795 64,960 - - - impairment for asstes held for sale* 8,965 18,813 27,778 - - -
* As described in note 22, the Bank has decided to sell certain loans to its subsidiary during 2011. As a result these loans are classified as held for sale in financial position and are valued net of impairment charge. Due to expected sales of these loans the Bank have incurred additional impairment expenses in amount of LVL 9,662 thousand.
45
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
21 LOANS TO CUSTOMERS (continued)
** Written down loan include loans sold to Banks subsidiary during 2010, with impairment allowance at time of write-down of 13 million LVL. *** Management uses judgment to conclude when loans are written off. Generally loan is considered for write-off, when both collateral have been realized or its remaining value is not significant from outstanding loan amount and loan is delayed more than 360 days. The Bank continue to work with recoveries from loan if possible, after write-down of loans.
Analysis of movement in impairment allowance for loans:
31/12/10 31/12/09 Group Group Total Total Individuals Companies loans Individuals Companies loans
As at beginning of the year 22,299 52,136 74,435 3,530 6,730 10,260 Impairment charge, net 12,791 67,211 80,002 21,635 50,345 71,980 Adjustment (foreign exchange fluctuation) 16 28 44 27 40 67 Accrued interest (Note 5) (1,119) (3,620) (4,739) - - - Write-off of lokans (12,863) (30,950) (43,813) (2,893) (4,979) (7,872) As at end of the year 21,124 84,805 105,929 22,299 52,136 74,435
The loans to customers include finance lease receivables. As at 31 December 2010 finance lease receivables may be analysed as follows: 31/12/10 31/12/09 Group Group Falling due within: 1 month 1,179 1,493 1 – 3 months 2,644 3,028 3 – 6 months 3,232 4,340 6 –12 months 6,424 8,758 1 – 5 years 22,221 36,097 more than 5 years 225 546 Total 35,925 54,262
Finance leases by type of leased assets:
31/12/10 31/12/09 Group Group
Manufacturing and agricultural equipment 10,420 15,448 Transport vehicles 25,505 38,814 Total 35,925 54,262
The average interest rate for the loan portfolio as at 31 December 2010 was 5.9% per annum (5.5% at 31 December 2009).
46
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
22 ASSETS HELD FOR SALE
31/12/10 31/12/09 Group Bank Group Bank
Private companies - 33,574 - - Individuals - 23,886 - - Public and religious institutions - 68 - - Accrued interest on loans - 1,195 - - Total gross assets/loans for sale - 58,723
Provisions for impairment losses - (27,778) - - Total net assets/loans for sale - 30,945 - -
Assets held for sale include non-performing lokans which Bank has intended to sell to its subsiudiary SIA „Hipot ēku bankas nekustam ā īpašuma a ģent ūra”. Before the decision to transfer the assets to Bank’s subsidiary, the impairment allowance was in amount of LVL 18,116 thousand. Management have estiamted expected cash flows from sales of these assets by assessing fair value of collaterals, related maintainace costs and expected time of holding collateral. Due to these estimates additional loss of LVL 9,662 thousand was recognised.
23 INVESTMENTS IN SUBSIDIARIES AND ASSOCIATED UNDERTAKINGS
The Bank’s direct investments in subsidiaries and associated entities are specified as follows:
Share Total Bank’s Investment Investment capital equity share value value (%) 31/12/10 31/12/09
SIA “Hipol īzings” 645 1,246 100% 300 300 SIA “Hipot ēku bankas nekustam ā īpašuma a ģent ūra” 915 (1,262) 100% 915 915 SIA „Risku invest īciju sabiedr ība” 500 361 100% 500 500 KS „Mazo un vid ējo komersantu atbalsta fonds” 101 4 47.62% 48 48 Total 1,763 1,763
Impairment provision (945) (235) Total net investments in subsidiaries and associated entities 818 1,528
The consolidation group also includes the following entities: IPS „Hipo Fondi” (51% owned by SIA „Risku invest īciju sabiedr ība”(as at 31 December 2009 – 83%)) and SIA „R īgas centra namu p ārvalde” (100% owned by SIA „Risku invest īciju sabiedr ība”).
For the purposes of value reduction test, the Bank has treated its subsidiary companies as cash generating units. The recoverable amounts of the cash generating units were determined by estimating their operating value. The estimates used discounted cash flow forecasts for the coming years, where the major value- affecting factors are:
• Subsidiary company’s financial plan for the coming years. Financial plan and business growth in the next years was estimated for each company individually, on the basis of operational peculiarities of each company, taking into account the general economic situation within the industry and the future development trends.
47
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
• Discount rate, determined individually to each subsidiary company according to CAPM model and evaluating the business risk of each individual company in comparison with market risk.
As at 31 December 2010 the carrying amount of cash generating unit exceeded its estimated value in use. Therefore impairment loss in the amount of LVL 710 thousand was recognised as expense in the reporting period (2009: LVL 235 thousand)
24 INTANGIBLE ASSETS
The following is included in the net book value of intangible assets:
31/12/10 31/12/09 Group Bank Group Bank
Computer software 1,493 1,447 1,800 1,721 Goodwill arising on acquisition 318 - 404 -
Total intangible assets 1,811 1,447 2,204 1,721
The intangible value included in the intangible assets formed in 2008, when a Bank-owned subsidiary company SIA “Riska invest īciju sabiedr ība” (Venture Investment Company LLC) obtained 87% equities in AMC “Suprema Fondi” (now AMC “Hipo Fondi) and 100% equities in SIA “R ības centra namu p ārvalde”. These company acquisition costs were respectively LVL 450 thousand and LVL 150 thousand.
Within the reporting period, in order to identify changes in the intangible values, the future cash flows of the companies were discounted at a discount rate, corresponding a particular business risk. The forecast of future cash flows of the companies was made on the basis of operational peculiarities of the companies and estimates regarding development plans.
On 31 December 2010, the carrying amount exceeded the estimated intangible value and expenses of LVL 86 thousand were reported in the reporting year for reduction of the intangibles value.
The following table presents movements in the Group’s and the Bank’s net book value of compute software:
Group Bank Historical cost As at 1 January 2010 5,285 5,128 Additions 238 229 Disposals (33) (1) As at 31 December 2010 5,490 5,356
Accumulated depreciation As at 1 January 2010 3,485 3,407 Charge for the period 513 503 Disposals (1) (1) As at 31 December 2010 3,997 3,909
Net book value as at 31 December 2009 1,800 1,721
Net book value as at 31 December 2010 1,493 1,447
48
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
25 PROPERTY AND EQUIPMENT
The following table shows changes in property and equipment of the Bank in 2010:
Land and Vehicles Equipment Leasehold Total buildings improvements Cost As at 1 January 2010 4,169 956 9,917 1,341 16,383 Additions 11 36 378 - 425 Disposals (12) (41) (406) - (459) As at 31 December 2010 4,168 951 9,889 1,341 16,349
Accumulated depreciation As at 1 January 2010 650 606 7,613 618 9,487 Charge for the period 84 125 847 168 1,224 Disposals - (41) (395) - (436) As at 31 December 2010 734 690 8,065 786 10,275 Net book value As at 31 December 2010 3,434 261 1,824 555 6,074
The following table shows changes in property and equipment of the Bank in 2009:
Land and Vehicles Equipment Leasehold Total buildings improvements Cost As at 1 January 2009 4,111 1,016 9,654 1,408 16,189 Additions 58 53 579 3 693 Disposals - (113) (316) (70) (499) As at 31 December 2009 4,169 956 9,917 1,341 16,383
Accumulated depreciation As at 1 January 2009 569 571 6,948 463 8,551 Charge for the period 81 137 958 156 1,332 Disposals - (102) (293) (1) (396) As at 31 December 2009 650 606 7,613 618 9,487 Net book value As at 31 December 2009 3,519 350 2,304 723 6,896
The following table shows changes in property and equipment of the Group in 2010:
Land and Leasehold Buildings Vehicles Equipment improvements Total Cost As at 1 January 2010 4,284 1,589 10,208 1,366 17,447 Additions 11 95 463 - 569 Disposals (12) (213) (432) - (657) As at 31 December 2010 4,283 1,471 10,239 1,366 17,359
Accumulated depreciation As at 1 January 2010 677 817 7,787 630 9,911 Charge for the period 88 228 911 172 1,399 Disposals - (121) (413) - (534) As at 31 December 2010 765 924 8,285 802 10,776 Net book value As at 31 December 2010 3,518 547 1,954 564 6,583
49
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
25 PROPERTY AND EQUIPMENT ( continued )
The following table shows changes in property and equipment of the Group in 2009:
Land and Leasehold Buildings Vehicles Equipment improvements Total Cost As at 1 January 2009 4,226 2,007 9,950 1,474 17,657 Additions 58 176 585 3 822 Disposals - (594) (327) (111) (1,032) As at 31 December 2009 4,284 1,589 10,208 1,366 17,447
Accumulated depreciation As at 1 January 2009 592 792 7,088 478 8,950 Charge for the period 85 273 1,002 161 1,521 Disposals - (248) (303) (9) (560) As at 31 December 2009 677 817 7,787 630 9,911 Net book value As at 31 December 2009 3,607 772 2,421 736 7,536
26 OTHER ASSETS
31/12/10 31/12/09 Group Bank Group Bank
Financial assets 2,809 1,993 2,548 2,040 Non-financial assets 4,098 503 7,001 129 Total other assets (gross) 6,907 2,496 9,549 2,169 Impairment provision (1,248) (198) (653) (304) Total other assets (net) 5,659 2,298 8,896 1,865
27 DUE TO CREDIT INSTITUTIONS
31/12/10 31/12/09 Group Bank Group Bank
Due to credit institutions registered in OECD 153,161 153,161 361,226 361,226 area Due to credit institutions registered in Latvia 14,610 14,610 18,286 18,286 167,771 167,771 379,512 379,512
Due to credit institutions include the following syndicated loans which totaled to 55 mln EUR (at 31 December 2009: 262 mln EUR):
Lender/arranger Initial amount Currency Maturity Sumitomo Mitsui Banking Corporation (3 participants) 18,488 EUR 15.06.2012 Raiffeisen Zentralbank Osterreich (15 participants) 85,000 EUR 16.06.2012
The average interest rate for due to credit institutions as at 31 December 2010 was 2.9% (at 31 December 2009: 2.4%).
50
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
28 DUE TO CUSTOMERS
31/12/10 31/12/09 Group Bank Group Bank
Individuals 227,954 227,954 206,742 206,742 Financial institutions 49,400 51,852 55,298 55,336 Private companies 49,794 49,801 41,769 41,793 State owned companies 9,023 9,023 8,034 8,034 Public and religious organisations 7,329 7,329 4,996 4,996 Local government 7,146 7,146 3,411 3,411 Central government 6,478 6,478 2,912 2,912 Accrued interest 4,039 4,039 3,537 3,537
Total due to customers 361,163 363,622 326,699 326,761
Due to customers analysis by term:
31/12/10 31/12/09 Group Bank Group Bank
On demand 83,518 84,928 63,179 63,214 Term balances 277,645 278,694 263,520 263,547 Total due to customers 361,163 363,622 326,699 326,761
97.8% of the deposits with the Bank are the Bank’s liabilities to residents of Latvia, the remaining 2.2% of the deposits are liabilities to other countries residents.
The average interest rate for demand deposits at 31 December 2010 was 0.1% (0.4% at 31 December 2009), for term deposits – 4.2% (5.9% at 31 December 2009).
29 ISSUED DEBT SECURITIES
The purpose of mortgage bonds issuing was to attract financial resources for refinancing of the long-term mortgage loans.
The average annual interest rate of the issued securities was 3.8% (as at 31 December 2009: 4.9%).
Statement on Mortgage bond coverage as at 31 December 2010 (a) Issued mortgage bonds ISIN Security Number Face Registered Coupon Maturity Outstanding Book value class of value volume rate, date volume, LVL mortgage % LVL bonds LV0000800100 AH 20,000 100 LVL 2,000,000 7.5% 15.08.2011. 1,150,000 1,182,112 LV0000800217 BA 100,000 100 USD 10,000,000 1.375%* 15.08.2011. 2,630,595 2,644,259 LV0000800688 C01CC 250,000 100 EUR 25,000,000 5.70% 15.02.2011. 8,721,165 8,904,381 LV0000800340 CA 200,000 100 EUR 20,000,000 1.4375** 15.02.2012. 10,978,783 11,042,582 LV0000800142 AL 50,000 100 LVL 5,000,000 6.0% 15.08.2012. 5,000,000 5,110,524 LV0000800159 AM 70,000 100 LVL 7,000,000 5.25% 15.08.2013. 3,862,400 3,930,903 Total 32,342,943 32,814,761
* floating coupon rate (6 month LIBOR plus 0.8%) that is revised twice every year on 15 February and 15 August **floating coupon rate (6 month EURIBOR plus 0.29%) that is revised twice every year on 15 February and 15 August
51
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
29 ISSUED DEBT SECURITIES (continued)
(b) Structure of Mortgage bond coverage
Mortgage bonds in circulation are secured by assets included in the Mortgage Bond Cover Register which as of 31 December 2010 amounted to LVL 41,142 thousand (as at 31 December 2009: LVL 94,666 thousand). Assets included in the Mortgage Bond Cover Register consisted of mortgage loans (ordinary cover) in the amount of LVL 39,634 thousand and substitute cover amounting LVL 1,508 thousand (as at 31 December 2009: mortgage loans - LVL 85,186 thousand and substitute cover amounting - LVL 9,480 thousand).
As at 31 December 2010 the amount of assets included in the Mortgage Bond Cover Register exceeds the amount of mortgage bonds in circulation by 17.1% (as at 31 December 2009: 65.4%) of the amount of weighted assets included in the Mortgage Bond Cover Register (minimum statutory requirement: 10%). All mortgage bonds issued by the Bank are assigned Baa2 rating by Moody’s Investors Service. All issued debt securities are quoted on the Official List of the Riga Stock Exchange.
30 OTHER LIABILITIES
31/12/10 31/12/09 Group Bank Group Bank Financial liabilities Support programmes financing* 20,442 20,442 23,777 23,777 Other financial liabilities 4,461 3,866 3,434 2,869 24,903 24,308 27,211 26,646
* Co-financing for realisation of European Social Fund programme “Training, consulting and financial support for commercial activity and self-employment undertakers” and European Regional Development Fund programme “Lending for undertakers of commercial activity”.
31 SUBORDINATED LIABILITIES
On 27 November 2003, an agreement was concluded between the Bank and the State Treasury on issuing of a subordinated debt of LVL 10,000 thousand, with a maturity of 7 February 2013 and an interest rate of 5.6 % as at 31 December 2010.
On 31 March 2008, an agreement was concluded between the Bank and the State Treasury on issuing of a subordinated debt of EUR 30,000 thousand, with a maturity of 30 April 2015 and an interest rate of 5.78 % as at 31 December 2010.
32 SHARE CAPITAL
Share capital as at 31 December 2010 and 31 December 2009 was as follows:
31/12/10 31/12/09 Fully paid share capital Number LVL Number LVL Ordinary shares 191,601,311 191,601,311 121,320,911 121,320,911 Total fully paid share capital 191,601,311 191,601,311 121,320,911 121,320,911
According to the Articles of Association, the fully paid share capital of the Bank consists of 191,601,311 ordinary shares in the total amount of LVL 191,601,311, owned by the Republic of Latvia. The nominal value of each share is LVL 1.
In accordance with the decision of the bank`s shareholder, the Bank has increased its fixed capital by LVL 70,280 thousand. Thus the total volume of the fixed capital has reached LVL 191,601 thousand. The increase of fixed capital was performed according the state budget law for year 2010 and as disclosed under Note 1 the European Commission (EC) has been notified of the increase of the equity capital. The EC will pass its decision on the issue after analysis of the transformation plan of the Bank.
52
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
33 CASH AND CASH EQUIVALENTS
31/12/10 31/12/09 Group Bank Group Bank
Cash 9,795 9,795 7,715 7,715 Placements with the Bank of Latvia 58,382 58,382 88,282 88,282 Placements with other credit institutions 12,209 12,137 26,780 26,645 Placements with other credit institutions with the original maturity less than 3 months 8,144 4,134 5,000 5,000 Placements from other credit institutions with the original maturity less than 3 months (110) (110) (16,715) (16,715) 88,420 84,338 111,062 110,927
34 RELATED PARTY TRANSACTIONS
Related parties are defined as shareholder who has significant influence over the Bank, members of the Council, the Board of Directors and the Bank’s higher level management, their close relatives and companies in which they have a controlling interest as well as Bank’s subsidiaries and companies, in which the Bank is having a significant influence.
The following loans and deposits were held with related parties at 31 December 2010:
31/12/10 31/12/09 Group Bank Group Bank
Loans: - Members of the Council and the Board and high level management 1,052 1,052 1,260 1,260 - subsidiaries - 69,449 - 73,765 - other related parties 2,775 2,775 3,261 3,261 Total loans held by related parties 3,827 73,276 4,521 78,286
Deposits: - Members of the Council and the Board and high level management 433 433 479 479 - subsidiaries - 435 - 63 - other related parties 374 374 1,067 1,067 Total deposits held by related parties 807 1,242 1,546 1,609
The Banka has entered into a guarantee agreement with SIA Hipol īzings for covering lease losses totalling LVL 6,000 thousand. According to the agreement, the Bank has established impairment allowance for doubtful lease receivables. The balance of the above provisions as at 31 December 2010 amounted to LVL 3,615 thousand (31 December 2009: LVL 3,886 thousand). Impairment allowance for other receivables from subsidiaries as at 31 December 2010 amounted to LVL 2,586 thousand (31 December 2009: LVL 196 thousand).
In order to maintain specialization, concentration of competence and higher efficiency within the framework of non-performing loans management process, the Bank has made a decision to concentrate the management function of these loans within the subsidiary company of the Bank SIA “Hipot ēku bankas nekustam ā īpašuma aģent ūra” (LLC Real Estate Agency of the Mortgage bank). During the reporting period, the Bank has sold its non-performing loans of LVL 10,142 thousand, book value, to the subsidiary company SIA “Hipot ēku bankas nekustam ā īpašuma a ģent ūra” for LVL 9,866 thousands, as a result of which the Bank recognized additional losses of LVL 276 thousands.
53
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
34 RELATED PARTY TRANSACTIONS (continued)
The process of handing over the non-performing loans to SIA “Hipot ēku bankas nekustam ā īpašumu aģent ūra” is going to be carried on in 2011 as well (see Note 22).
Bank’s income / (expenses) from transactions with related parties:
31/12/10 31/12/09 Group Bank Group Bank
Interest income from loans to related parties 89 3,135 226 2,775 Interest expenses for deposits held from related parties (50) (52) (111) (129) Total income, net 39 3,083 115 2,646
The average interest rate as at 31 December 2010 on loans issued to related parties was 3.9% per annum (2.5% as at 31 December 2009). The average interest rate as at 31 December 2010 on deposits held for related parties was 1.4% per annum (4.6% as at 31 December 2009).
The Bank has entered in number of transactions with other government entities. The most significant being obtaining financing from Investment and Development Agency of Latvia, Ministry of Finance, Rural Support Service, Rural Development Fund which is used to co-finance development programs of the Bank. Total obtained financing for 2010 is LVL 5,466 thousand. (2009: LVL 14,767 thousand).
The Group and the Bank have entered into transactions with related parties in ordinary course of business at commercial terms.
35 SEGMENT ANALYSIS
Group’s operations are managed based on two operating segments:
Promotional programs: operating segment comprises loans to particular SME’s or individuals according to priorities defined by the Government or within the scope of European Union promotional programs.
Commercial services (Bank): operating segment comprises Bank’s services to individuals and legal entities, loans to customers, accounts, savings and investments, serving payment cards.
Commercial services (Associated companies): operating segment comprises associated companies’ services with real estate, leasing and asset management.
54
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
35 SEGMENT ANALYSIS (continued)
Commercial Commercial 2010 Promotional services services Reconciliation Group programs Associated Group Bank comp.
Revenue form external customers 19,335 31,180 6,301 56,816 Intersegment revenue 1,524 8,788 439 (10,751) - Total revenues 20,859 39,968 6,740 (10,751) 56,816
External expense (37,091) (81,001) (4,899) (122,991) Intersegment expense (5,491) (1,963) (3,297) 10,751 - Total expenses (42,582) (82,964) (8,196) 10,751 (122,991)
Loss before income tax (21,723) (42,996) (1,456) - (66,175) - Income tax expense - - - - (33) - Net loss for the period (21,723) (42,996) (1,456) - (66,208)
Total revenue comprise: Interest income 17,339 26,194 3,367 - 46,900 Interest income from other segments 556 4,291 12 (4,859) - Fee and commission income 202 3,004 706 - 3,912 Fee and commission income from other segments - 1,521 131 (1,652) - Other income 1,794 1,982 2,228 - 6,004 Other income from segments 968 2,976 296 (4,240) - Total revenue 20,859 39,968 6,740 (10,751) 56,816
Total expense comprise: Interest expense (1,567) (26,385) (1) - (27,953) Interest expense to other segments (1,054) (568) (3,237) 4,859 - Fee and commission expense - (883) (97) - (980) Fee and commission expense to other segments (1,477) (131) (44) 1,652 - Administrative expenses* (809) (12,679) (2,251) - (15,739) Administrative expenses to other segments (2,960) (1,264) (16) 4,240 - Depreciation and amortization (32) (1,695) (185) - (1,912) Provision for impairment losses (34,683) (39,359) (2,365) - (76,407) Total expense (42,582) (82,964) (8,196) 10,751 (122,991) * Administrative expenses are allocated between promotional programs and commercial bank based on Management’s estimate of split of administrative expenses and number of worked hours between the two segments.
55
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
35 SEGMENT ANALYSIS (continued)
Commercial Commercial 31/12/10 Promotional services services Reconciliation Group programs Associated Group Bank comp.
Reportable segment assets 221,272 539,392 75,754
Segment assets comprise: Cash and balances with Central Bank - 68,177 - - 68,177 Securities 18,220 80,271 199 - 98,690 Securities to other segments - - 226 (226) - Due from credit institutions - 20,702 72 - 20,774 Due from other segments - 57,107 435 (57,542) - Loans to customers 202,094 229,790 59,857 - 491,741 Loans to other segments - 69,595 - (69,595) - Other assets 958 10,748 14,965 - 26,671 Other assets to other segments - 3,002 - (3,002) - Total assets 221,272 539,392 75,754 (130,365) 706,053
Reportable segment liabilities and shareholder’s equity 221,272 539,392 75,754
Segment liabilities comprise: Due to customers 26,206 334,957 - - 361,163 Due to other segments (deposits) - 435 - (435) - Issued debt securities - 32,589 - - 32,589 Issued debt securities to other segments - 226 - (226) - Other liabilities 75,514 118,857 1,106 - 195,477 Other liabilities to segments 57,107 - 70,686 (127,793) - Subordinated liabilities - 31,089 - - 31,089 Shareholders equity * 62,445 21,239 2,051 - 85,735 Shareholders equity to other segments - - 1,911 (1,911) - Total liabilities and shareholder’s equity 221,272 539,392 75,754 (130,365) 706,053
* Shareholder equity for promotional programs is calculated as share capital increase performed both in 2009 and 2010, less any accumulated losses and equity allocated to commercial activities . In April 2010 the management has decided to allocate certain amount of equity from promotional program to commercial bank activities, based on internally calculated regulatory capital requirement for commercial bank. Promotional programs are charging 5% interest for this capital, which is presented in interest income in this segment reporting. As at 31 December 2010 promotional program had allocated shareholder equity of LVL 40,000 to commercial activities. The charge for year 2010 was LVL 968 thousand and is disclosed as other income.
56
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
35 SEGMENT ANALYSIS (continued)
Commercial Commercial 2009 Promotional services services Reconciliation Group programs Associated Group Bank comp.
Revenue form external customers 12,406 53,205 6,377 71,988 Intersegment revenue 219 9,173 405 (9,797) - Total revenues 12,625 62,378 6,782 (9,797) 71,988
External expense (31,645) (91,346) (4,341) (127,332) Intersegment expense (6,492) (624) (2,681) 9,797 - Total expenses (38,137) (91,970) (7,022) 9,797 (127,332)
Loss before income tax (25,512) (29,592) (240) - (55,344) - Income tax expense - - - - 934 - Net loss for the period (25,512) (29,592) (240) - (54,410)
Dividend from other segments - 47 - (47) -
Total revenue comprise: Interest income 11,858 38,968 4,147 - 54,973 Interest income from other segments 219 5,688 52 (5,959) - Fee and commission income 234 3,203 813 - 4,250 Fee and commission income from other segments - 2,826 - (2,826) - Other income 314 11,034 1,417 - 12,765 Other income from segments - 659 353 (1,012) - Total revenue 12,625 62,378 6,782 (9,797) 71,988
Total expense comprise: Interest expense (2,554) (27,435) (461) - (30,450) Interest expense to other segments (3,518) (271) (2,170) 5,959 - Fee and commission expense - (996) - - (996) Fee and commission expense to other segments (2,348) - (478) 2,826 - Administrative expenses (542) (15,411) (2,294) - (18,247) Administrative expenses to other segments (626) (353) (33) 1,012 - Depreciation and amortization (24) (1,810) (202) - (2,036) Provision for impairment losses (28,525) (45,694) (1,384) - (75,603) Total expense (38,137) (91,970) (7,022) 9,797 (127,332)
Dividend from other segments - 47 - (47) -
57
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
35 SEGMENT ANALYSIS (continued)
Commercial Commercial 31/12/09 Promotional services services Reconciliation Group programs Associated Group Bank comp.
Reportable segment assets 282,915 721,318 78,530
Segment assets comprise: Cash and balances with Central Bank - 95,997 - 95,997 Securities - 97,795 155 - 97,950 Securities to other segments - - 820 (820) - Due from credit institutions - 35,276 135 - 35,411 Due from other segments 35,843 84,159 62 (120,064) - Loans to customers 246,813 317,902 67,966 - 632,681 Loans to other segments - 74,786 - (74,786) - Other assets 259 13,047 9,392 - 22,698 Other assets to other segments - 2,356 - (2,356) - Total assets 282,915 721,318 78,530 (198,026) 884,737
Reportable segment liabilities and shareholder’s equity 282,915 721,318 78,530 - -
Segment liabilities comprise: Due to customers - 324,749 - - 324,749 Due to other segments (deposits) - 62 - (62) - Issued debt securities - 37,429 - - 37,429 Issued debt securities to other segments - 820 - (820) - Other liabilities 144,966 266,862 1,256 - 413,084 Other liabilities to other segments 84,159 35,843 75,662 (195,664) - Subordinated liabilities - 31,089 - - 31,089 Shareholders’ equity 53,790 24,464 132 - 78,386 Shareholders equity to other segments - - 1,480 (1,480) - Total liabilities and shareholder’s equity 282,915 721,318 78,530 (198,026) 884,737
58
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
36 OFF BALANCE SHEET ITEMS AND CONTINGENT LIABILITIES
31/12/10 31/12/09 Group Bank Group Bank
Contingent liabilities outstanding guarantees 16,081 18,466 12,080 14,194 Financial commitments unutilised loan facilities 23,033 84,631 32,685 55,077 Other liabilities 91 91 252 252 Total 39,205 103,188 45,017 69,523
Competition council has made a claim against the Bank and other banks operating in Latvian market in relation to payment card fee determination. The Bank does not agree with objections raised by Competition council. The case has not been finalized, but the management of the Bank does not expect that material loss due to this will be incurred.
37 MAXIMUM EXPOSURE TO CREDIT RISK
The table below shows credit risk exposures relating to on-balance sheet assets and off-balance sheet items before collateral held or other credit enhancements: 31/12/10 31/12/09 Group Bank Group Bank Credit risk exposures relating to on- balance sheet assets are as follows: Trading securities 2,572 2,374 5,074 4,919 Investment securities – held to maturity 24,614 24,614 42,984 42,984 Investment securities – available for sale 71,504 77,765 49,892 49,892 Due from credit institutions 20,774 16,692 35,411 35,276 Derivative financial instruments 862 862 1,954 1,954 Loans to customers 491,741 470,534 632,681 639,501 Other assets 5,659 2,298 8,896 1,865 Assets held for sale - 30,945 - - Total 617,726 626,084 776,892 776,391 Credit risk exposures relating to off- balance sheet items are as follows: Contingent liabilities 16,081 18,466 12,080 14,194 Financial commitments 23,124 84,722 32,937 55,329 Total 39,205 103,188 45,017 69,523
59
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
38 FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
In respect of financial assets and liabilities held in the Group’s balance sheet at carrying values other than fair value, in the opinion of Management the fair value of those financial assets and liabilities differ from their carrying values, as follows: 31/12/10 31/12/09 Book Fair value Book Fair value value value
Assets Cash and balances with central Bank 68,177 68,177 95,997 95,997 Due from credit institutions 20,774 20,777 35,411 35,410 Derivative financial instruments 862 862 1,954 1,954
Debt securities 615 615 4,859 4,859 Investment funds 1,957 1,957 215 215 Trading securities 2,572 2,572 5,074 5,074
Debt securities 67,972 67,972 49,892 49,892 Investment funds 3,532 3,535 - - Available for sale securities 71,504 71,504 49,892 49,892
Individuals 161,947 161,726 191,906 192,615 Companies 329,794 328,908 440,775 441,706 Loans to customers 491,741 490,634 632,681 634,321
Debt securities 24,614 23,809 42,984 43,138 Investment funds - - - - Investment securities held to maturity 24,614 23,809 42,984 43,138
Liabilities Due to credit institutions 167,771 169,876 379,512 379,511 Derivative financial instruments 13 13 155 Due to customers 361,163 366,551 324,749 324,027 Issued debt securities 32,589 32,910 37,429 37,011
Assets Fair value of securities has been estimated based on quoted price where available. In assessing the fair value of financial assets that are carried at amortised cost, the management has performed discounted cash flow analysis and estimated fair value using prevailing interest rates for similar credit risk and maturity instruments.. For loans, where base interest rates are pegged to floating market interest rates, the Group have considered difference between average interest margin of issued loans and average interest margin for newly issues loans. Given that for part of the loan portfolio this margin has been changed (increased) since issuance, the Group have estimated that for such loans the carrying value is considered equal to fair value. Liabilities Fair value of financial liabilities at amortised cost such as Due to credit institutions and Due to customers which are not on demand have been estimated based on discounted cash flow model using interest rates for similar products as at year end. Fair value of those financial liabilities that are on demand or have floating interest rate (e.g. Due to credit institutions) have been estimated to be approximately equal to its carrying amount. Issued debt securities are quoted, however there is not active market in them. Therefore the management has applied valuation techniques. The management have assumed that issued floating rate instrument carrying amount is close approximate of its fair value, while fair value of fixed rate debt securities has been estimated based on discounted cash flow model, by applying discount rates for similar risk securities.
When calculating fair value of above described financial instruments, the management has not taken into consideration any possible impact from Bank’s transformation as disclosed in Note 1, as impact currently is uncertain and therefore not possible to estimate.
60
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
38 FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (continued)
The following table shows analyses of financial instruments recorded at fair value by level of fair value hierarchy:
Group’s financial assets measured at fair value by fair value hierarchy as at 31/12/2010:
Level 1 Level 2 Level 3 Total
Assets Investment debt cecurities – available for sale 371 67,601 - 67,972 Trading debt securities 509 - 106 615 Shares of investment funds 5,489 - - 5,489 Derivative financial instruments - 862 - 862 Total 6,369 68,463 106 74,938
Liabilities Derivative financial instruments - 13 - 13 Total - 13 - 13
Group’s financial assets measured at fair value by fair value hierarchy as at 31/12/2009:
Level 1 Level 2 Level 3 Total
Assets Investment debt cecurities – available for sale - 49,892 - 49,892 Trading debt securities 4,052 807 4,859 Shares 60 - - 60 Shares of investment funds 155 - - 155 Derivative financial instruments - 1,954 - 1,954 Total 60 55,898 807 56,920
Liabilities Derivative financial instruments - 155 - 155 Total - 155 - 155
Fair value hierarchy of financial assets and liabilities The Bank classifies valuations of fair value by applying a fair value hierarchy, which reflects the significance of the data used in evaluation. The fair value hierarchy of the Bank has 3 levels: the first level includes listed financial instruments having an active market, if the Bank, to determine their fair value, uses unadjusted quoted market prices, obtained from the stock-exchange or reliable information systems. the second level includes financial instruments traded over the counter and financial instruments having no active market or the active market is being lost, and the bulk of determining their fair value is constituted by observable data (e.g., similar instruments, benchmark financial instruments, credit risk insurance transaction rates, etc.). the third level includes financial instruments, the fair value of which is determined by using observable data, which are to be making a significant adjustment, on the grounds of non-observable data, and financial instruments, the fair value of which is determined primarily on the grounds of non- observable data on the active market, based on assumptions and estimates of the Bank that enable a credible determination of a financial instrument’s value.
61
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
38 FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (continued)
During the year there have not been significant transfers between Level 1 and Level 2. . Decrease of Level 3 trading securities is attributable due to maturity of securities in amount of 696 thousand LVL and decrease in fair value of 5 thousand LVL.
Debt securities Debt securities are valued using quoted prices or some valuation techniques using both market observable and unobservable input data and a combination of two. Majority of investments in debt securities at fair value are investments in Latvian government debt securities, which have quoted price, but are not traded in active market. The management have estimated that quoted price is reasonable approximation of their fair value by reference to yield of similar risk investments.
Derivatives Derivatives valued using a valuation techniquire with market observable data is mainly currency swaps and forward exchange contracts. Most frequently applied valuation techniques include discounted cash flow calculations, where inputs include foreign exchange spot and forward rates and interest rate curves.
Investment funds Investments in shares of investment funds are values based on net redemption price as these investments are made in open-ended investment funds.
39 MOVEMENT IN REVALUTION RESERVE OF INVESTMENT SECURITIES AVAILABLE FOR SALE
2010 2009 Group Bank Group Bank
At 1 January (3,034) (3,034) (3,562) (3,562) Profit or loss from sales (Note 9) (312) (312) 47 47 Gain from changes in fair value 3,379 3,379 481 481 Other comprehensive income 3,067 3,067 528 528 At 31 December 33 33 (3,034) (3,034)
62
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
40 MATURITY ANALYSIS OF ASSETS AND LIABILITIES
The table below allocates the Group’s assets and liabilities to maturity groupings as at 31 December 2010 based on the time remaining from the balance sheet date to the contractual maturity dates.
Up to 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 Total 1 month months months months years years and undated ASSETS Cash and balances with the Central Bank 68,177 - - - - - 68,177 Due from credit institutions 14,427 6,014 30 25 278 - 20,774 Derivative financial instruments 444 330 88 - - - 862 Securities 3,136 15,686 20,537 20,133 31,381 7,817 98,690 Loans to customers 43,549 34,491 41,235 40,157 195,686 136,623 491,741 Deferred expenses and accrued income - - - - - 1,182 1,182 Investment properties - - - - - 10,574 10,574 Property and equipment - - - - - 6,583 6,583 Intangible assets - - - - - 1,811 1,811 Investment in subsidiaries and associated undertakings ------Other assets - - - - - 5,659 5,659 Total assets 129,733 56,521 61,890 60,315 227,345 170,249 706,053
LIABILITIES AND
SHAREHOLDERS EQUITY Due to credit institutions 5,883 15,473 21,151 27,854 69,644 27,766 167,771 Derivative financial instruments 5 8 - - - - 13 Due to customers 134,493 44,302 67,715 98,180 14,346 2,127 361,163 Mortgage bonds - 8,904 - 3,600 20,085 - 32,589 Deferred income and accrued expenses - - - - - 1,686 1,686 Provisions for off-balance sheet commitments 1,054 - - - - - 1,054 Other liabilities - - - - - 24,953 24,953 Subordinated debt - - 5 - 31,084 - 31,089 Shareholders’ equity - - - - - 85,735 85,735 Total liabilities and shareholder’s equity 141,435 68,687 88,871 129,634 135,159 142,267 706,053
Net liquidity (11,702) (12,166) (26,981) (69,319) 92,186 27,982 -
The management have described how they manage liquidity risk in Note 3 Risk management.
63
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
40 MATURITY ANALYSIS OF ASSETS AND LIABILITIES
The table below allocates the Group’s assets and liabilities to maturity groupings as at 31 December 2009 based on the time remaining from the balance sheet date to the contractual maturity dates.
Up to 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 Total 1 month months months months years years and undated ASSETS Cash and balances with the Central Bank 95,997 - - - - - 95,997 Securities 3,984 31,020 18,288 5,990 32,675 5,993 97,950 Investment properties - - - - - 1,166 1,166 Due from credit institutions 33,159 12 1,949 28 263 - 35,411 Loans to customers 40,973 30,428 33,422 64,989 254,548 208,321 632,681 Derivative financial instruments 1,233 721 - - - - 1,954 Investment in subsidiaries and associated undertakings - - - - - 280 280 Intangible assets - - - - - 2,204 2,204 Property and equipment - - - - - 7,536 7,536 Other assets - - - - - 8,896 8,896 Deferred expenses and accrued income - - - - - 662 662 Total assets 175,346 62,181 53,659 71,007 287,486 235,058 884,737
LIABILITIES AND SHAREHOLDERS EQUITY Due to credit institutions* 21,959 5,885 28,817 123,535 136,676 62,640 379,512 Due to customers 148,045 52,181 51,924 63,166 8,815 618 324,749 Derivative financial instruments 68 87 - - - - 155 Transit funds - - 169 163 1,423 195 1,950 Mortgage bonds - 687 - 3,001 33,741 - 37,429 Other liabilities - - - - - 27,400 27,400 Deferred income and accrued expenses - - - - - 3,997 3,997 Current income tax liabilities - - - - - 43 43 Deferred tax liabilities - - - - - 27 27 Subordinated debt - - 5 - 10,000 21,084 31,089 Shareholder’s equity - - - - - 78,386 78,386 Total liabilities and shareholder’s equity 170,072 58,840 80,915 189,865 190,655 194,390 884,737
Net liquidity 5,274 3,341 (27,256) (118,858) 96,831 40,668 -
64
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
40 MATURITY ANALYSIS OF ASSETS AND LIABILITIES (continued)
The table below allocates the Bank’s assets and liabilities to maturity groupings as at 31 December 2010 based on the time remaining from the balance sheet date to the contractual maturity dates.
Up to 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 Total 1 month months months months years years and undated ASSETS Cash and balances with the Central Bank 68,177 - - - - - 68,177 Due from credit institutions 14,355 2,004 30 25 278 16,692 Derivative financial instruments 444 330 88 - - - 862 Securities 2,938 15,686 20,537 20,133 30,719 14,740 104,753 Loans to customers 36,917 30,677 36,462 76,675 186,665 134,083 501,479 Deferred expenses and accrued income - - - - - 2,049 2,049 Investment properties - - - - - 1,159 1,159 Property and equipment - - - - - 6,074 6,074 Intangible assets - - - - - 1,447 1,447 Investment in subsidiaries and associated - - - - - undertakings 818 818 Other assets - - - - - 2,298 2,298 Total assets 122,831 48,697 57,117 96,833 217,662 162,668 705,808
LIABILITIES AND
SHAREHOLDERS EQUITY Due to credit institutions 5,883 15,473 21,151 27,854 69,644 27,766 167,771 Derivative financial instruments 5 8 - - - - 13 Due to customers 136,260 44,994 67,715 98,180 14,346 2,127 363,622 Mortgage bonds - 8,904 - 3,826 20,316 - 33,046 Deferred income and accrued expenses - - - - - 1,224 1,224 Provisions for off-balance sheet commitments 1,054 - - - - - 1,054 Other liabilities - - - - - 24,308 24,308 Subordinated debt - - 5 - 31,084 - 31,089 Shareholders’ equity - - - - - 83,681 83,681 Total liabilities and shareholder’s equity 143,202 69,379 88,871 129,860 135,390 139,106 705,808
Net liquidity (20,371) (20,682) (31,754) (33,027) 82,272 23,562 -
65
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
40 MATURITY ANALYSIS OF ASSETS AND LIABILITIES (continued)
The table below allocates the Bank’s assets and liabilities to maturity groupings as at 31 December 2009 based on the time remaining from the balance sheet date to the contractual maturity dates.
Up to 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 Total 1 month months months months years years and undated ASSETS Cash and balances with the Central Bank 95,997 - - - - - 95,997 Securities 3,829 31,020 18,288 5,990 32,675 5,993 97,795 Investment properties - - - - - 1,166 1,166 Due from credit institutions 33,024 12 1,949 28 263 - 35,276 Loans to customers 37,583 27,157 28,860 54,744 283,497 207,660 639,501 Derivative financial instruments 1,233 721 - - - - 1,954 Investment in subsidiaries and associated undertakings - - - - - 1,528 1,528 Intangible assets - - - - - 1,721 1,721 Property and equipment - - - - - 6,896 6,896 Other assets - - - - - 1,865 1,865 Deferred expenses and accrued income - - - - - 532 532 Total assets 171,666 58,910 49,097 60,762 316,435 227,361 884,231
LIABILITIES AND SHAREHOLDERS EQUITY Due to credit institutions* 21,959 5,885 28,817 123,535 136,676 62,640 379,512 Due to customers 148,107 52,181 51,924 63,166 8,815 618 324,811 Derivative financial instruments 68 87 - - - - 155 Transit funds - - 169 163 1,423 195 1,950 Mortgage bonds - 687 - 3,001 34,561 - 38,249 Other liabilities - - - - - 26,835 26,835 Deferred income and accrued expenses - - - - - 3,376 3,376 Current income tax liabilities ------Deferred tax liabilities ------Subordinated debt - - 5 - 10,000 21,084 31,089 Shareholder’s equity - - - - - 78,254 78,254 Total liabilities and shareholder’s equity 170,134 58,840 80,915 189,865 191,475 193,002 884,231
Net liquidity 1,532 70 (31,818) (129,103) 124,960 34,359 -
40 MATURITY ANALYSIS OF ASSETS AND LIABILITIES (continued)
66
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
The table below allocates undiscounted future cash flows of the Group’s financial liabilities, off-balance liabilities and liquid assets as at 31 December 2010:
Up to 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 Total 1 month months months months years years and undated Due to credit institutions 5,932 16,119 22,385 29,290 75,186 29,145 178,057 Due to customers 134,001 45,831 69,113 100,354 15,250 2,162 366,711 Mortgage bonds - 9,363 - 4,184 20,720 - 34,267 Other liabilities - - - - - 26,007 26,007 Subordinated debt - - 895 909 35,831 - 37,635 Total financial liabilities 139,933 71,313 92,393 134,737 146,987 57,314 642,677 Total contingent liabilities and financial commitments 35,412 1,941 1,132 720 - - 39,205 Total financial liabilities, contingent liabilities and financial commitments 175,345 73,254 93,525 135,457 146,987 57,314 681,882
Liquid assets 84,869 14,944 15,769 13,871 20,138 13,350 162,941
The table below allocates undiscounted future cash flows of the Bank’s financial liabilities, off-balance liabilities and liquid assets as at 31 December 2010:
Up to 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 Total 1 month months months months years years and undated Due to credit institutions 5,932 16,119 22,385 29,290 75,186 29,145 178,057 Due to customers 136,460 45,831 69,113 100,354 15,250 2,162 369,170 Mortgage bonds - 9,363 - 4,413 20,954 - 34,730 Other liabilities - - - - - 25,362 25,362 Subordinated debt - - 895 909 35,831 - 37,635 Total financial liabilities 142,392 71,313 92,393 134,966 147,221 56,669 644,954 Total contingent liabilities and financial commitments 60,395 15,941 13,132 13,720 - - 103,188 Total financial liabilities, contingent liabilities and financial commitments 202,787 87,254 105,525 148,686 147,221 56,669 748,142
Liquid assets 84,599 14,944 15,769 13,871 20,138 13,350 162,671
The table below allocates undiscounted future cash flows of the Group’s financial liabilities, off-balance liabilities and liquid assets as at 31 December 2009:
Up to 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 Total 1 month months months months years years and undated Due to credit institutions 23,359 6,912 31,687 126,055 149,843 66,772 404,628 Due to customers 148,375 53,248 53,697 65,672 11,013 817 332,822 Mortgage bonds - 917 - 3,917 36,992 - 41,826 Other liabilities - - - - - 27,400 27,400 Subordinated debt - - 894 909 16,142 21,389 39,334 Total financial liabilities 171,734 61,077 86,278 196,553 213,990 116,378 846,010 Total contingent liabilities and financial commitments 42,112 2,473 432 - - - 45,017 Total financial liabilities, contingent liabilities and financial commitments 213,846 63,550 86,710 196,553 213,990 116,378 891,027
Liquid assets 129,686 31,547 11,910 1,025 12,309 4,158 190,635
40 MATURITY ANALYSIS OF ASSETS AND LIABILITIES (continued)
67
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
The table below allocates undiscounted future cash flows of the Bank’s financial liabilities, off-balance liabilities and liquid assets as at 31 December 2009:
Up to 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 Total 1 month months months months years years and undated Due to credit institutions 23,359 6,912 31,687 126,055 149,843 66,772 404,628 Due to customers 148,437 53,248 53,697 65,672 11,013 817 332,884 Mortgage bonds - 937 - 3,937 37,857 - 42,731 Other liabilities - - - - - 26,835 26,835 Subordinated debt - - 894 909 16,142 21,389 39,334 Total financial liabilities 171,796 61,097 86,278 196,573 214,855 115,813 846,412 Total contingent liabilities and financial commitments 66,618 2,473 432 - - - 69,523 Total financial liabilities, contingent liabilities and financial commitments 238,414 63,570 86,710 196,573 214,855 115,813 915,935
Liquid assets 129,396 31,547 11,910 1,025 12,309 4,158 190,345
The table below allocates the Group’s derivative future cash flows as at 31 December 2010:
Up to 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 Total 1 month months months months years years
Derivatives settled on a gross basis Foreign exchange derivatives outflow 59,329 39,338 10,542 109,209 inflow 59,789 39,693 10,620 110,102
The table below allocates the Bank’s derivative future cash flows as at 31 December 2010:
Up to 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 Total 1 month months months months years years
Derivatives settled on a gross basis Foreign exchange derivatives outflow 59,329 39,338 10,542 109,209 inflow 59,789 39,693 10,620 110,102
The table below allocates the Group’s derivative future cash flows as at 31 December 2009:
Up to 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 Total 1 month months months months years years
Derivatives settled on a gross basis Foreign exchange derivatives outflow 54,323 33,370 - - - - 87,693 inflow 55,503 34,086 - - - - 89,589
The table below allocates the Bank’s derivative future cash flows as at 31 December 2009:
Up to 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 Total 1 month months months months years years
Derivatives settled on a gross basis Foreign exchange derivatives outflow 54,323 33,370 - - - - 87,693 inflow 55,503 34,086 - - - - 89,589 41 CURRENCY ANALYSIS OF ASSETS AND LIABILITIES
68
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
The following table provides the analysis of the Group’s assets, liabilities and shareholders’ equity as well as memorandum items outstanding as at 31 December 2010 by currency profile:
LVL USD EUR Other Total ASSETS Cash and balances with the Central Bank 63,955 918 2,180 1,124 68,177 Due from credit institutions 2,096 2,323 16,056 299 20,774 Derivative financial instruments 862 - - - 862 Securities 67,450 6,219 25,021 - 98,690 Loans to customers 63,133 5,660 422,948 - 491,741 Deferred expenses and accrued income 1,084 - 96 2 1,182 Investment properties 10,574 - - - 10,574 Property and equipment 6,583 - - - 6,583 Intangible assets 1,811 - - - 1,811 Investment in subsidiaries and associated undertakings - - - - - Other assets 3,956 30 1,667 6 5,659 Total assets 221,504 15,150 467,968 1,431 706,053
LIABILITIES AND SHAREHOLDERS
EQUITY Due to credit institutions 7,460 3,221 157,090 - 167,771 Derivative financial instruments 13 - - - 13 Due to customers 171,368 22,165 167,089 541 361,163 Mortgage bonds 10,224 2,418 19,947 - 32,589 Deferred income and accrued expenses 1,677 - 9 - 1,686 Provisions for off-balance sheet commitments ,187 - 867 - 1,054 Other liabilities 23,006 4 1,939 4 24,953 Subordinated debt 10,002 - 21,087 - 31,089 Shareholders’ equity 85,735 - - - 85,735 Total liabilities and shareholder’s equity 309,672 27,808 368,028 545 706,053
Spot foreign exchange receivables/ (payables) (992) - 992 (82) (82) Forward foreign exchange receivables / (payables) 95,102 12,755 (106,504) (460) 893
Currency position 5,942 97 (5,572) 344 811
41 CURRENCY ANALYSIS OF ASSETS AND LIABILITIES
The following table provides the analysis of the Group’s assets, liabilities and shareholders’ equity as well as
69
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
memorandum items outstanding as at 31 December 2009 by currency profile:
LVL USD EUR Other Total ASSETS Cash and balances with the Central Bank 93,024 571 1,636 766 95,997 Securities 54,658 7,671 35,620 1 97,950 Investment properties 1,166 - - - 1,166 Due from credit institutions 17,173 3,536 14,519 183 35,411 Loans to customers 54,879 6,586 570,598 618 632,681 Derivative financial instruments 1,954 - - - 1,954 Investment in subsidiaries and associated undertakings 280 - - - 280 Intangible assets 2,204 - - - 2,204 Property and equipment 7,536 - - - 7,536 Other assets 1,470 38 7,371 17 8,896 Deferred expenses and accrued income 556 - 106 - 662 Total assets 234,900 18,402 629,850 1,585 884,737
LIABILITIES AND SHAREHOLDERS EQUITY Due to credit institutions 16,533 1,667 361,312 - 379,512 Due to customers 142,717 20,057 161,482 493 324,749 Derivative financial instruments 155 - - - 155 Transit funds 353 - 1,597 - 1,950 Mortgage bonds 12,468 2,747 22,214 - 37,429 Other liabilities 24,449 6 2,945 - 27,400 Deferred income and accrued expenses 2,612 - 1,385 - 3,997 Current income tax liabilities 43 - - - 43 Deferred tax liabilities 27 - - - 27 Subordinated debt 10,002 - 21,087 - 31,089 Shareholders’ equity 78,386 - - - 78,386 Total liabilities and shareholder’s equity 287,745 24,477 572,022 493 884,737
Spot foreign exchange receivables / (payables) (4,254) - 2,881 (71) (1,444) Forward foreign exchange receivables / (payables) 63,136 6,135 (66,668) (708) 1,895
Currency position 6,037 60 (5,959) 313 451
41 CURRENCY ANALYSIS OF ASSETS AND LIABILITIES (continued)
The following table provides the analysis of the Bank’s assets, liabilities and shareholders’ equity as well as memorandum items outstanding as at 31 December 2010 by currency profile:
70
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
LVL USD EUR Other Total ASSETS Cash and balances with the Central Bank 63,955 918 2,180 1,124 68,177 Due from credit institutions 2,041 2,322 12,030 299 16,692 Derivative financial instruments 862 - - - 862 Securities 67,450 6,219 31,084 - 104,753 Loans to customers 71,047 5,660 424,772 - 501,479 Deferred expenses and accrued income 1,951 - 96 2 2,049 Investment properties 1,159 - - - 1,159 Property and equipment 6,074 - - - 6,074 Intangible assets 1,447 - - - 1,447 Investment in subsidiaries and associated undertakings 818 - - - 818 Other assets 1,998 30 264 6 2,298 Total assets 218,802 15,149 470,426 1,431 705,808
LIABILITIES AND SHAREHOLDERS
EQUITY Due to credit institutions 7,460 3,221 157,090 - 167,771 Derivative financial instruments 13 - - - 13 Due to customers 171,765 22,166 169,150 541 363,622 Mortgage bonds 10,224 2,644 20,178 - 33,046 Deferred income and accrued expenses 1,215 - 9 - 1,224 Provisions for off-balance sheet commitments 187 - 867 - 1,054 Other liabilities 22,361 4 1,939 4 24,308 Subordinated debt 10,002 - 21,087 - 31,089 Shareholders’ equity 83,681 - - - 83,681 Total liabilities and shareholder’s equity 306,908 28,035 370,320 545 705,808
Spot foreign exchange receivables/ (payables) (992) - 992 (82) (82) Forward foreign exchange receivables / (payables) 95,102 12,755 (106,504) (460) 893
Currency position 6,004 (131) (5,406) 344 811
41 CURRENCY ANALYSIS OF ASSETS AND LIABILITIES (continued)
The following table provides the analysis of the Bank’s assets, liabilities and shareholders’ equity as well as memorandum items outstanding as at 31 December 2009 by currency profile:
71
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
LVL USD EUR Other Total ASSETS Cash and balances with the Central Bank 93,024 571 1,636 766 95,997 Securities 54,658 7,671 35,465 1 97,795 Investment properties 1,166 - - - 1,166 Due from credit institutions 17,076 3,534 14,483 183 35,276 Loans to customers 54,264 6,736 577,883 618 639,501 Derivative financial instruments 1,954 - - - 1,954 Investment in subsidiaries and associated undertakings 1,528 - - - 1,528 Intangible assets 1,721 - - - 1,721 Property and equipment 6,896 - - - 6,896 Other assets 1,358 38 452 17 1,865 Deferred expenses and accrued income 426 - 106 - 532 Total assets 234,071 18,550 630,025 1,585 884,231
LIABILITIES AND SHAREHOLDERS EQUITY Due to credit institutions 16,533 1,667 361,312 - 379,512 Due to customers 142,770 20,059 161,489 493 324,811 Derivative financial instruments 155 - - - 155 Transit funds 353 - 1,597 - 1,950 Mortgage bonds 12,468 2,952 22,829 - 38,249 Other liabilities 24,201 6 2,628 - 26,835 Deferred income and accrued expenses 2,098 - 1,278 - 3,376 Current income tax liabilities - - - - - Deferred tax liabilities - - - - - Subordinated debt 10,002 - 21,087 - 31,089 Shareholders’ equity 78,254 - - - 78,254 Total liabilities and shareholder’s equity 286,834 24,684 572,220 493 884,231
Spot foreign exchange receivables/ (payables) (4,254) - 2,881 (71) (1,444) Forward foreign exchange receivables / (payables) 63,136 6,135 (66,668) (708) 1,895 Currency position 6,119 1 (5,982) 313 451
42 CAPITAL ADEQUACY CALCULATION
72
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
Based on the requirements set by the Financial and Capital Market Commission (FCMC), the Group’s and the Bank’s equity to be utilised in the capital adequacy ratio as at 31 December 2010 has been calculated as follows: 31/12/2010 Group Bank Tier 1 - paid-in share capital 191,601 191,601 - legal and other reserves 2,774 2,063 - audited retained earnings (42,823) (42,096) - loss for the period (66,208) (67,920) - negative revaluation reserve on investment securities available-for-sale - - - intangible assets (1,811) (1,447) Total Tier 1 83,533 82,201
Tier 2 - subordinated capital (restricted to 50% of Tier 1) 31,084 31,084 - decrease of subordinated capital (10,217) (10,217) - other elements reducing capital (167) (526) Total Tier 2 20,700 20,341
Capital base 104,233 102,542
The total of Tier 2 may not exceed the total of Tier 1.
42 CAPITAL ADEQUACY CALCULATION (continued)
The following table shows the Group’s asset weightings used in calculation of capital adequacy ratio according to the FCMC requirements and calculation of the Group’s capital adequacy ratio according to the
73
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
FCMC requirements:
Risk Credit weighted equivalent Balance assets Assets and off-balance sheet items
Claims or contingent claims on central governments or central banks 134,096 2,216 Claims or contingent claims on regional governments or local authorities 468 468 Claims or contingent claims on institutions 24,630 10,601 Claims in the form of covered bonds 6,525 3,263 Claims or contingent claims on corporates 311,714 297,668 Claims secured by real property 42,676 14,929 Retail exposures 114,185 83,850 Past due items 75,772 88,441 Shares of investment funds 12,214 12,214 Other claims 29,251 20,372 Derivative financial instruments 1,915 862 385 Deductions from capital: Intangible assets 1,811 Total assets and off-balance sheet items 754,204 534,407
Calculation of capital requirements Capital requirement for the Group’s portfolio credit risk 8% 42,752 Capital requirements for market risk - Operational risk capital requirement 5,179 Capital requirement for the Group’s portfolio credit risk and market risk 47,931
Capital base 104,233
Capital adequacy ratio (Capital base / Capital requirement x 8%) 17.4%
42 CAPITAL ADEQUACY CALCULATION (continued)
The following table shows the Bank’s asset weightings used in calculation of capital adequacy ratio according to the FCMC requirements and calculation of the Bank’s capital adequacy ratio according to the FCMC requirements:
74
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
Risk Credit weighted equivalent Balance assets Assets and off-balance sheet items
Claims or contingent claims on central governments or central banks 134,096 2,216 Claims or contingent claims on regional governments or local authorities 468 468 Claims or contingent claims on institutions 26,610 10,997 Claims in the form of covered bonds 6,525 3,263 Claims or contingent claims on corporates 381,121 340,083 Claims secured by real property 42,676 14,929 Retail exposures 114,185 83,850 Past due items 66,575 74,645 Shares of investment funds 12,214 12,214 Other claims 21,164 12,284 Derivative financial instruments 1,915 862 385 Deductions from capital: Intangible assets 1,446 Total assets and off-balance sheet items 807,942 555,334
Calculation of capital requirements Capital requirement for the Group’s portfolio credit risk 8% 44,427 Capital requirements for market risk - Operational risk capital requirement 4,761 Capital requirement for the Group’s portfolio credit risk and market risk 49,188
Capital base 102,542
Capital adequacy ratio (Capital base / Capital requirement x 8%) 16.7%
43 FUTURE MINIMUM LEASE PAYMENTS FOR OPERATIONAL LEASES
The following table discloses future minimum lease payments for premises operational leases (other lease payments also exist while those are comparatively small):
Group Bank
Year 2011 631 574 Year 2012 456 418 Year 2013 383 383 Year 2014 365 365 Year 2015 and later 3,704 3,704
Total 5,539 5,444
44 ANALYSIS OF FINANCIAL ASSETS AND LIABILITIES BY MEASUREMENT
The assets and liabilities of the Group as at 31 December 2010 by measurement are as follows:
Held to trading Available for Amortised cost Total book sale value
75
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
ASSETS Cash and balances with the Central Bank - - 68,177 68,177 Securities 2,572 71,504 24,614 98,690 Due from credit institutions - - 20,774 20,774 Loans to customers - - 491,741 491,741 Derivative financial instruments 862 - - 862 Other financial assets - - 5,659 5,659 Total financial assets 3,432 71,504 610,965 685,903 Non-financial assets - - - 20,150 Total assets 3,432 71,504 610,965 706,053
LIABILITIES Due to credit institutions - - 167,771 167,771 Due to customers - - 361,163 361,163 Derivative financial instruments 13 - - 13 Mortgage bonds - - 32,589 32,589 Subordinated liabilities - - 31,089 31,089 Other financial liabilities - - 25,957 25,957 Total financial liabilities 13 - 618,569 618,582 Non-financial liabilities - - - 87,471 Total liabilities 13 - 618,569 706,053
76
Mortgage and Land Bank of Latvia Annual Report for the year ended 31 December 2010
NOTES TO THE FINANCIAL STATEMENTS
44 ANALYSIS OF FINANCIAL ASSETS AND LIABILITIES BY MEASUREMENT (continued)
The assets and liabilities of the Bank as at 31 December 2010 by measurement are as follows:
Held to trading Available for Amortised cost Total book sale value ASSETS Cash and balances with the Central Bank - - 68,177 68,177 Securities 2,374 77,765 24,614 104,753 Due from credit institutions - - 16,692 16,692 Loans to customers - - 470,534 470,534 Derivative financial instruments 862 - - 862 Held for sale assets - - 30,945 30,945 Other financial assets - - 3,116 3,116 Total financial assets 3,236 77,765 614,078 695,079 Non-financial assets - - - 10,729 Total assets 3,236 77,765 614,078 705,808
LIABILITIES Due to credit institutions Due to customers - - 167,771 167,771 Derivative financial instruments - - 363,622 363,622 Mortgage bonds - - 33,046 33,046 Subordinated liabilities - - 31,089 31,089 Other financial liabilities - - 25,362 25,362 Total financial liabilities 13 - 620,890 620,903 Non-financial liabilities - - - 84,905 Total liabilities 13 - 620,890 705,808
77