CITADELE BANKAS AB · 2015-07-22 · Citadele Bankas AB took over all rights and responsibilities...

CITADELE BANKAS AB

SEPARATE AND CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 DECEMBER 2010

PREPARED ACCORDING TOINTERNATIONAL FINANCIAL REPORTING STANDARDS

AS ADOPTED BY THE EUROPEAN UNIONPRESENTED TOGETHER WITH INDEPENDENT AUDITOR’S

REPORT

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This document has been prepared in Lithuanian and English languages. In all matters of interpretation of information, viewsor opinions, the Lithuanian language version of this document takes precedence over the English language version.

CONTENTS

INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDER OF CITADELE BANKAS AB .....................3

CONSOLIDATED ANNUAL REPORT ......................................................................................................................5

SEPARATE AND CONSOLIDATED STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)...........12

SEPARATE AND CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME......................................14

SEPARATE AND CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ................................................15

SEPARATE AND CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED) .....................16

SEPARATE AND CONSOLIDATED STATEMENT OF CASH FLOWS...............................................................17

NOTE 1 GENERAL INFORMATION...............................................................................................................18NOTE 2 SIGNIFICANT ACCOUNTING POLICIES ............................................................................................19NOTE 3 BALANCES WITH THE CENTRAL BANK ..........................................................................................33NOTE 4 BALANCES WITH BANKS AND CREDIT INSTITUTIONS.....................................................................33NOTE 5 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS .....................................................33NOTE 6 DERIVATIVE FINANCIAL INSTRUMENTS ........................................................................................33NOTE 7 AVAILABLE-FOR-SALE FINANCIAL ASSETS ...................................................................................34NOTE 8 HELD-TO-MATURITY INVESTMENTS .............................................................................................34NOTE 9 FINANCE LEASE RECEIVABLES ......................................................................................................35NOTE 10 LOANS AND ADVANCES ................................................................................................................36NOTE 11 PROPERTY, PLANT, AND EQUIPMENT.............................................................................................37NOTE 12 INVESTMENT PROPERTY ...............................................................................................................39NOTE 13 INTANGIBLE ASSETS .....................................................................................................................40NOTE 14 DEFERRED INCOME TAX ASSETS ...................................................................................................41NOTE 15 OTHER ASSETS..............................................................................................................................43NOTE 16 DUE TO BANKS AND OTHER CREDIT INSTITUTIONS........................................................................43NOTE 17 DUE TO CUSTOMERS .....................................................................................................................44NOTE 18 FINANCE LEASE LIABILITIES .........................................................................................................44NOTE 19 OTHER LOANS ..............................................................................................................................45NOTE 20 OTHER LIABILITIES .......................................................................................................................45NOTE 21 CAPITAL AND RESERVES...............................................................................................................45NOTE 22 COMMITMENTS AND GUARANTEES ...............................................................................................46NOTE 23 INTEREST INCOME AND INTEREST EXPENSE ..................................................................................46NOTE 24 SERVICE FEE AND COMMISSION INCOME AND EXPENSE ................................................................47NOTE 25 NET GAIN (LOSS) ON OPERATIONS WITH SECURITIES.....................................................................47NOTE 26 NET GAIN (LOSS) ON OTHER OPERATIONS .....................................................................................47NOTE 27 OTHER INCOME.............................................................................................................................48NOTE 28 IMPAIRMENT EXPENSES ................................................................................................................48NOTE 29 OPERATING EXPENSES ..................................................................................................................50NOTE 30 CAPITAL ADEQUACY ....................................................................................................................51NOTE 31 RELATED PARTY TRANSACTIONS ..................................................................................................52NOTE 32 OFF-BALANCE SHEET COMMITMENTS AND CONTINGENCIES .........................................................53NOTE 33 COMPLIANCE WITH THE REGULATORY REQUIREMENTS OF THE BANK OF LITHUANIA ..................53NOTE 34 CASH AND CASH EQUIVALENTS ....................................................................................................53NOTE 35 RISK MANAGEMENT......................................................................................................................54NOTE 36 FAIR VALUES OF FINANCIAL INSTRUMENTS ..................................................................................81

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CONSOLIDATED ANNUAL REPORT

1. Reporting period covered by the consolidated annual report

The consolidated annual report has been prepared for the financial year 2010. The financial year of the Bank coincides withthe calendar year.

2. Contact details

Company name AB „Citadele“ bankasLegal form public limited liability companyDate of registration 16 July 1998Company code 112021619Address of registered office K. Kalinausko g.13, LT-03107 VilniusLicence No. No. 17Phone (8 5) 266 46 00Fax (8 5) 266 46 01E-mail [email protected] www.citadele.lt

In this report the bank is referred to as Citadele Bankas AB or the Bank.

3. Information on branches, customer service units and currency exchange points

The Bank has its branches established in the cities of Vilnius, Kaunas, Klaipėda, Panevėžys, Šiauliai, Alytus. The Bank’s customer service units:

Vilnius branch: Gedimino, Stoties, Vingio, Žaliojo tilto;

Kaunas branch: Akropolio.

Currency exchange points of Vilnius branch: Stoties, Mados, Prospekto.

4. Group companies

Company name UAB „Citadele faktoringas ir lizingas“Legal form private limited liability companyDate of registration 3 June 2003Company code 126233315Address of registered office K. Kalinausko g. 13, LT-03107 VilniusPhone (8 5) 266 46 34Fax (8 5) 266 46 88E-mail [email protected] www.citadelelizingas.lt

5. Type of activities

Citadele Bankas AB operating in Lithuania is a part of the newly established Citadele Bank Group in Latvia. The Latvianbank Citadele Banka AS is the sole shareholder of the bank Citadele AB in Lithuania. The shareholders of Citadele BankaAS are the Republic of Latvia holding an ownership interest of 75 per cent and the European Bank for Reconstruction andDevelopment holding an ownership interest of 25 per cent. The Bank and its subsidiary Citadele Faktoringas ir LizingasUAB provide the following licensed financial services and non-licensed financial services established in the Lithuanian Lawon Banks and the Lithuanian Law on Financial Institutions: accept deposits and other refundable means from non-professional market participants, lend funds, perform cash transfers, provide financial lease, issue payment cards andconducts transactions with them, issue warranties and financial guarantees, conclude transactions on their account orclients’ account in respect of financial market instruments, perform currency exchange transactions, rent safe-depositboxes, offer consulting services on credit granting and repayment issues and perform other services.

6. Management of the Bank

The bodies of the Bank are the General Shareholder Meeting, the Supervisory Council, the Board and the Head ofAdministration. The managing bodies of the Bank are the Board of the Bank and the Head of Administration.

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7. Capital of the Bank

The shareholders‘ equity of the Bank consists of the authorised share capital, prior-year retained loss, revaluation reserveof property, plant and equipment, revaluation reserve of financial assets, current-year retained loss.As at 31 December 2010 and 2009, the Bank‘s authorised share capital amounted to LTL 286,207 thousand.

8. Prudential ratios

No. RatioEstablished by theBank of Lithuania

Compliance at31 December 2010

Compliance at 31December 2009

1. Capital adequacy8% 18.53% 15.23%

2. Liquidity Not lower than 30% 32.82% 40.74%

3.Maximum open positionin foreign currency

Overall open positionmay not exceed 25 %and open position inone currency may notexceed 15 % of theBank’ capital

Overall open position– 1.08 % and openposition in onecurrency (PLN) –0.27 % of the Bank’capital

Overall open position– 0.74 % and openposition in onecurrency (USD) –0.21 % of the Bank’capital

4.Maximum exposure to asingle borrower

Loans to a singleborrower may notexceed 25 % of theBank’s capital

To a single borrower– 20.36 % of theBank’s capital

To a single borrower– 18.33 % of theBank’s capital

5. Large exposure

May not exceed800 % of the Bank’scapital 60.20% 67.87%

During the reporting period the Bank and the Group complied with all prudential ratios set by the Bank of Lithuania.

9. Accounting, financial reporting and audit

The Bank and the Group maintain their accounting records in accordance with the Lithuanian regulatory legislation,accounting policies and International Accounting Standards.The annual financial statements of the Bank and the Group consist of:

a) Statement of financial position (balance sheet);b) Statement of comprehensive income;c) Statement of cash flows;d) Statement of changes in equity;e) Notes to the financial statements.

The audit company performs the audit of the separate and consolidated financial statements and based on the auditperformed provides the auditor’s report on the financial statements of the Bank and the Group. The audit companyPricewaterhouseCoopers UAB performed the audit of the financial statements of the Bank and the Group for the financialyear 2010 and issued the independent auditor‘s report thereon.

10. Supervisory institution

The supervisory institution of the Bank is the Bank of Lithuania.

11. Number of employees at the end of reporting period

As at 31 December 2010, the Group had 355 employees (31 December 2009: 458), of which 336 (31 December 2009:430) were employed by the Bank.

The breakdown of the Bank’s employees by category is as follows:

Category Number of employees Change31/12/2010 31/12/2009 Number %

Management 86 97 -11 -11.34Specialists 245 311 -66 -21.22Support staff 5 22 -17 -77.27Total 336 430 -94 -21.86

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The breakdown of the Bank’s employees by education is as follows:

Education Number of employees Change31/12/2010 31/12/2009 Number %

Higher 231 277 -46 -16.61Higher non-university 32 33 -1 -3.03Non-higher professional education 34 61 -27 -44.26Secondary (and unfinished higher education) 39 59 -20 -33.90Total 336 430 -94 -21.86

During 2010 the Bank focused on internal training of employees, in particular, those involved in risk management, namely,operational risk management, money laundering prevention, fraud prevention and occupational security. 291 employeeshad the opportunity to upgrade their qualification in 119 different training courses organised (seminars, training sessions,etc.). 79 internal and 40 external training courses were organised.

12. Performance overview

In 2010, Lithuania’s economy grew by 1.3 per cent as compared to 2009, thus leading to a conclusion that the country’seconomy is starting to recover from the downturn caused by the global economic crisis. The growth of the productionsector owing to the recovery of export markets was the most important factor behind the GDP growth rather than theinternal demand which continued to decline. Last year the largest growth rates were enjoyed by manufacturing industryand energy (5.7 per cent) and trade, transport and communications (3.1 per cent) sectors, whereas construction andagriculture, forestry and fishery sectors declined by 8.6 per cent and 3.1 per cent, respectively. A slight growth of economydid not improve daily lives of residents. In 2010, unemployment peaked to a very high level, work pay declined, financialsituation of households deteriorated due to rising prices of energy resources. Unemployment rate stood at 17.8 per cent,by 4.1 per cent higher than in 2009, forcing more than 83 thousand Lithuanian residents to leave the country in the year2010 alone. The average work pay decreased by 3.2 per cent during the year.Notably low quantity of inventories stored by companies shows that companies, particularly small ones, are in a constantneed for working capital to expand their business volumes and this deters the creation of new jobs and results in poorfinancial performance of such companies.The economic conditions in the country directly affected operating results of local banks. In 2010, assets of banksdecreased by 3.0 per cent and loans by 5.2 per cent, deposits increased by 10.6 per cent.

Following the procedure prescribed by laws the name of the Bank was changed from Parex Bankas AB to Citadele BankasAB on 26 August 2010. During the implementation of the restructuring plan of Parex Banka AS which was approved bythe Latvian Government, a new bank was established entitled Citadele. During the restructuring process assets of ParexBanka AS attributable to its operating activities were spinned off and transferred to a newly established bank in LatviaCitadele Banka AS which provides all banking services to clients. Upon the approval of shareholders of Parex Banka ASand Citadele Banka AS, it was resolved that Lithuania based Parex Bankas AB is to become a part of the new Latvianbank group Citadele as well. As a result, the Latvian bank Citadele Banka AS became the sole shareholder of Lithuaniabased Parex Bankas AB; the name of the Bank was changed accordingly. Following the procedure prescribed by lawsCitadele Bankas AB took over all rights and responsibilities of Parex Bankas AB.

On 6 September 2010, the rating agency Moody's assigned to Citadele Banka AS a long-term foreign-currency rating ‘Ba3’,a short-term foreign-currency rating ‘NP’ and financial capacity rating ‘E+’. All ratings assigned to Citadele Banka AS areexpected to remain unchanged over the coming periods. A subsidiary bank based in Lithuania Citadele AB does not haveindividually assigned ratings, however by the decision of the Bank’s Board ratings assigned to the parent bank can beused by the Bank in the local market.

In 2010, the economic prospects of the country got brighter, however, unemployment remained high leading to rise indefaults on repayment of loans by private individuals. Where the level of repayment defaults by corporate customersbecame stable, mortgage repayment defaults yet were slightly increasing. The stability of the value of the loan portfoliowas impacted by the situation in the real estate market. Although the overall level of real estate prices declined in 2010,the decline was rather moderate and significantly lower than in 2009. Moreover, real estate prices and the number oftransactions in specific real estate segments and regions even increased by several percentage points.

In 2010, the loan portfolio of Citadele Bank AB decreased significantly because of the restructuring of the parent bankParex Banka AS in the course of which assets with a low risk were transferred to the newly established bank Citadele ASand assets with a high risk were transferred to Parex Banka AS. In 2010, funding provided to small and medium-sizedcompanies, farmers and agricultural enterprises using resources of the EU Structural Funds accessed through theparticipation in funding tenders organised by public institutions represented the major portion of the Bank's lendingactivities. The total value of such loans granted amounted to LTL 10 million, an average loan amount did not exceed LTL140 thousand. Although the profitability of this loan portfolio is not high, yet the amount of provisions established in respectof these loans is low, the portfolio is diversified and the Bank plans to continue the development of these funding areas.Funding provided to small and medium-sized companies allows attracting additional cheap working capital, earn additionalcommission income and sell retail banking products to employees of newly attracted small companies.

In view of changed market conditions and aiming to continue cost optimisation and management programmeimplementation, in 2010 the Bank reduced interest rates on deposits, offered a new deposit FLEX and continued theimplementation of the deposit loyalty programme and the programme for senior citizens that enabled the attraction ofcurrent deposits. The portfolio of the Bank’s deposits grew by 17.2 per cent.

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In order to increase the Bank's commission income and in view of the rise in the number of Lithuanian residents livingabroad, on 1 October 2010 the Bank signed the contract with the international money transfer company MoneyGram withoperations in more than 190 countries worldwide and started to provide a new service, i.e., MoneyGram money transfers.The new service is the money transfer operation when no account is opened on behalf of the sender and (or) the receiver.Such money transfer is the most effective and convenient way to transfer money from abroad to Lithuania and vice versa.The introduction of this new banking service increased the Bank's commission income and allowed attracting morecustomers.

Aiming to earn interest income with an acceptable risk level the Bank granted more than 90 new loans to small andmedium-sized companies and agricultural entities that presented state guarantees issued by the guarantee funds using theEU Structural Funds accessed through the participation in funding tenders organised by public institutions.

During the implementation of the strategy on the development and management of the Bank’s information technologiesapproved by the Board in 2009, last year the technical platform of the main banking system was upgraded enabling theprovision of higher quality services, more operative response to market changes and introduction of new products. Riskmitigation and internal process optimisation in the course of automation system implementation were other significantpriority areas. The Citadele internet banking system was ranked 6

thamong all the Lithuanian banks by Metasite UAB.

During 2010, the Bank aimed to retain its competitiveness and preserve the number of payment card holders and its sharein the credit card market which was estimated at 5 per cent. The Bank reviewed products related to payment cards byadjusting annual charges, fees charged for the main and additional card; introduced loyalty programmes.As a single official representative of American Express, the international financial service and travel agency, in Lithuania,the Bank further engaged in provision of the American Express credit cards to natural persons and sought to add value tocard holders. An active advertising campaign involving different marketing channels was conducted in the first half-year of2010 in an attempt to promote sales of the American Express credit cards. In 2010, given the negative effects of theeconomic crisis, credit card holder risk mitigation measures were enhanced due to which the Bank did not issue a largenumber of the American Express credit cards, however, an even growth, loyalty of card holders and the usage of creditcards were maintained.

Indicators At 31 December 2010 At 31 December 2009Number of newly issued cards (units) 5,214 4,430Number of valid cards (units) 25,569 24,047

Having joined the ATM network of the banks Nordea, Danske and Ūkio Bankas at the end of 2009, the Bank seeking to improve client service quality and ensure convenient servicing of card holders’ increased the number of ATMs held up to216. The ATM network covering the entire territory of Lithuania is highly advanced and complies with the highesttechnological, quality and security requirements. The joint network of ATMs increased the accessibility of the service andsafeguarded a better client service not only in the major but also in smaller Lithuanian cities and regions.

During 2010, the Bank’s net interest income decreased 44.8 per cent, comprising LTL 14.1 million at the end of reportingperiod. Interest income shrank mainly due to a lower volume of loans. A major portion of interest income is earned frominterest paid on loans and other advances which totals LTL 42.2 million. Interest income makes up 67 per cent of theBank’s total income

Net service fee and commission income fell 22.5 per cent as compared to 2009. Such a reduction was mainly caused bylower fee and commission income from foreign exchange operations, guarantees and sureties, taking of payments andamong other things by a fundamental down-sizing of the network of the Bank's customer service units (up to 14 units) inline with the cost saving programme and under recommendations of the Bank’s Board. In principal, contraction of thenumber of the customer service units determined the fall in income from daily banking services which comprise asignificant share of commission income of banks. Commission income accounts for 19 per cent of the Bank’s total income.

In 2010, income from other activities amounted to LTL 9,729 thousand and were 95.4 per cent higher from the previousyear. Income rise was mainly related to increase in value of debt securities.

In implementing a stringent cost optimisation programme approved by the Bank’s Board the Bank reduced operatingexpenses by 18.3 per cent during 2010. Staff costs were cut by 15.6 per cent.

In 2010, impairment charges contracted 59 per cent and amounted to LTL 33 million. A major portion of impairmentcharges represents costs for loans and advances which totals LTL 31 million.

Compared to 2009 the net value of the lease portfolio of Parex Faktoringas ir Lizingas UAB, the Bank's subsidiary,diminished by LTL 37,572 thousand and amounted to LTL 48,428 thousand at the end of 2010. Impairment charges forfinance lease contracts for the year amounted to LTL 1,174 thousand.

The main items of the audited statement of financial position and statement of comprehensive income of the Bank and theGroup are presented in the tables below.

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Separate and consolidated statement of financial position (balance sheet) (condensed), LTL thousand:

Items Bank Group2010 2009 2010 2009

Cash and balances with banks 86,772 132,198 86,772 132,198Loans and advances, including finance lease 701,205 1,167,353 747,906 1,247,879Investments in securities 121,264 118,765 121,264 118,765Property, plant, and equipment, intangible assets andinvestment property 18,096 21,547 20,593 23,572Other assets 3,584 2,874 7,479 16,658Total assets 930,921 1,442,737 984,014 1,539,072

Due to banks and other credit institutions 169,118 729,562 222,280 826,542Due to customers 611,615 521,618 610,588 520,468Other liabilities 7,302 7,174 7,767 7,793Total liabilities 788,035 1,258,354 840,635 1,354,803

Equity 142,886 184,383 143,379 184,269

Separate and consolidated statement of comprehensive income (condensed), LTL thousand:

Items Bank Group

2010 2009 2010 2009Net interest income 14,107 25,564 18,052 30,929Net service fee and commission income 5,704 7,491 5,035 6,604Other income 9,729 4,979 11,563 6,269Operating expenses (38,280) (46,840) (40,848) (50,143)Impairment (33,069) (80,838) (35,004) (77,124)Income tax income/(expenses) 355 (1,859) 355 (2,151)Profit/(loss) for the year (41,454) (91,503) (40,847) (85,616)

The Bank is a member of the SWIFT organisation, the Lithuanian Banks’ Association and the Lithuanian Confederation ofIndustrialists.

13. Risk management. Description of the main risk types

Management of risk is an essential element of the Bank and Group’s day-to-day management process. The risk ismanaged according to risk management policies. The risk is limited by applying the internal limit system. Riskmanagement within the Group is controlled by independent and structural units. Risks are assessed in relation to theexpected yield and risk exposures that are not acceptable for the Bank and the Group are avoided.

Credit risk

Credit risk is the risk that the Bank and the Group will incur losses in case clients or counterparties fail to discharge theircontractual obligations. The credit exposure is managed by setting limits according to the clients, geographical regions andindustry sectors. The Bank and the Group have established a credit quality review process to provide early identification ofpossible changes in the creditworthiness of counterparties, including regular collateral revision. The amount and type ofcollateral required depends on an assessment of the credit risk of the counterparty. The credit quality of financial assets ismanaged by the Bank and Group using an internal credit assessment system. When evaluating loans and finance leasereceivables, the Bank and the Group apply specific valuation criteria and procedures for the clients. The main criteria forevaluation are those related client’s financial position assessment. Based on a set of defined criteria ratings are assignedto the clients.

Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values offinancial instruments. The Board has established limits on the interest rate gaps for stipulated periods. Positions aremonitored on a monthly basis.

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Operational Risk

Operational risk is the risk to incur direct and indirect losses due to inappropriate or unimplemented internal processes,technologies, employees’ actions or external factors and fraudulent actions of individuals.

The aim of operational risk is to achieve that operations of the Bank and its subsidiary are organised in a way that isprofitable, secure and able to guarantee the continuous process of providing services to the clients by appropriate means,by minimising possible future operational losses and by placing priority on operational risk prevention. The Bank hasdeveloped the database of operational risk events registration, which accumulates historical data and allows forecastingsources of operational risk and preventing potential losses.

Liquidity risk

Liquidity risk is the risk that the Bank or the Group will not have sufficient funds to meet commitments at any given point intime. The liquidity management is based on the current and forecasted structure of the balance sheet. The Bank’s and theGroup’s liquidity forecasts are performed when drafting yearly budgets and projecting the total amount and profile of therequired liquidity.

In order to reduce liquidity risk, the Bank‘s management continuously aims at matching maturity profiles of assets andliabilities, makes decision to safeguard appropriate volumes of deposits. Dynamics and values of the liquidity ratio wereconsidered at each sitting of the Board held last year.

The Bank and the Group sustain adequate liquidity level by regularly estimating their actual possibilities to use internal andexternal sources to maintain the liquidity.

14. References to and additional explanations of data reported in the consolidated financial statements

Underlying financial data is presented in the Bank’s consolidated financial statements.

15. Significant events subsequent to the end of the previous reporting period

There were no significant events subsequent to the end of the financial year that need to be disclosed in the financialstatements or notes to the financial statements.

16. Information on business plans and prospects

Priority objectives of Citadele Bank AB in Lithuania are as follows: Increasing returns on the existing loan portfolio and expanding its volume by issuing new credits particularly

focusing on the granting of credits to small and medium-sized companies and an integrated servicing approach ofsuch companies;

Developing the project on consumer credit provision; Increasing a portion of current deposits in the overall structure of deposits; Achieving a positive performance result already in 2011; Ensuring a stable growth of the number of American Express credit card holders and sales volumes and

increasing the Bank‘s share occupied in the market of credit cards; Increasing fee and commission income; Enhancing operational effectiveness of the Bank‘s units and continue implementation of the cost optimisation

programme; Promoting the use of internet banking services and e-channels; Introducing consistent and effective risk prevention measures; Training, coaching and motivating the Bank’s employees.

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The above mentioned objectives will be implemented with the use of the following measures: Modification of the structure of the deposit portfolio by increasing a portion of current deposits in the overall

structure of deposits; Focus on saving and investment products and meeting the needs of the Bank’s customers; Assessment whether the services expected by customers are profitable to the Bank; Introduction of measures for optimisation of the working hours of the Bank’s units and employees to achieve

effective use of work stations; revision and centralisation of certain functions; Regular analysis of the economic situation and competitive environment to ensure that customers are offered

attractive and competitive products; Improvement of a sales culture and continuous implementation of quality standards.

Expansion of the range of the Bank’s products and services: Uniform terms and features of products and services across the Group in the Baltic countries; Meeting the needs of customers and reacting to market changes, tailoring competitive products that

customers expect; In terms of product development, focusing on strategic segments of the Bank’s business including the

segment of the American Express credit cards; Enhancing use of electronic sales and customer communication channels for the provision of services, i.e.,

the Citadele internet baking, the SMS bank and the Contact Centre.

Protection of the Bank’s information systems and data:

Effective daily functioning and maintenance of the Bank’s information system; Business development and cost optimisation by improving IT systems; Ensuring security of the Bank’s data, prevention of the system interruptions and reduction of operational IT

risk.

Customer loyalty promotion.

Chairman of the BoardChief Executive Officer Alma Vaitkunskienė

CITADELE BANKAS AB, COMPANY code 112021619, K. Kalinausko g. 13, Vilnius

SEPARATE AND CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 DECEMBER 2010(All amounts in LTL thousand unless otherwise stated)

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SEPARATE AND CONSOLIDATED STATEMENT OF FINANCIAL POSITION (BALANCESHEET)

Assets NotesBank Group

31 December2010

31 December2009

31 December2010

31 December2009

Cash and balances with banksCash 11,717 16,888 11,717 16,888Balances with the central bank 3 27,627 42,325 27,627 42,325Balances with banks and other creditinstitutions 4 47,428 72,985 47,428 72,985

86,772 132,198 86,772 132,198Financial assets at fair value through

profit or lossFinancial derivatives 5,6 210 103 210 103

210 103 210 103

Available-for-sale financial assetsDebt securities 7 79,259 52,586 79,259 52,586Equity securities 7 71 77 71 77

79,330 52,663 79,330 52,663

Held-to-maturity investmentsDebt securities 8 41,724 65,999 41,724 65,999

41,724 65,999 41,724 65,999

Finance lease receivables 9 - - 48,428 85,974

Loans and advances 10 701,205 1,167,353 699,478 1,161,905

Investments in subsidiary 28 1,158 - - -

Property, plant, and equipment 11 12,705 14,420 12,786 14,920

Investment property 12 2,215 2,243 4,429 3,484

Intangible assets 13 3,176 4,884 3,378 5,168

Prepaid income tax - - 24 39

Deferred income tax asset 14 301 - 301 -

Other assets 15 2,125 2,874 7,154 16,619

Total assets 930,921 1,442,737 984,014 1,539,072

(cont’d on the next page)



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SEPARATE AND CONSOLIDATED STATEMENT OF FINANCIAL POSITION (BALANCESHEET) (CONTINUED)

Liabilities and equity NotesBank Group

31 December2010

31 December2009

31 December2010

31 December2009

LiabilitiesFinancial liabilities at fair value through

profit or lossFinancial derivatives 6 164 33 164 33

Due to banks and other credit institutions16 132,995 702,921 186,157 799,927

Due to customers 17 611,451 521,585 610,424 520,435

Finance lease liabilities 18 5,358 8,441 5,358 8,415

Other loans 19 30,765 18,200 30,765 18,200

Deferred income tax liability 14 - 275 - 275

Other liabilities 20 7,302 6,899 7,767 7,518

Total liabilities 788,035 1,258,354 840,635 1,354,803

Equity

Capital and reservesRegistered share capital 21 286,207 286,207 286,207 286,207Revaluation reserve of property, plantand equipment 21 1,435 1,418 1,435 1,418

Revaluation reserve of financial assets 21 (1,663) (1,603) (1,663) (1,603)

Retained earnings (deficit) (143,093) (101,639) (142,600) (101,753)

Total equity 142,886 184,383 143,379 184,269

Total equity and liabilities 930,921 1,442,737 984,014 1,539,072

The accompanying notes are an integral part of the financial statements

These financial statements were signed and approved on behalf of the Bank on 1 March 2011 by:

Chairman of the Board Alma Vaitkunskienė

Chief Accountant Renė Mečinskienė



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SEPARATE AND CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Bank Group

Notes 2010 2009 2010 2009

Interest income 46,817 82,295 52,984 92,181

Interest expense (32,710) (56,731) (34,932) (61,252)

Net interest income 23 14,107 25,564 18,052 30,929

Service fee and commission income 13,660 13,950 13,657 13,949

Service fee and commission expense (7,956) (6,459) (8,622) (7,345)

Net service fee and commission income 24 5,704 7,491 5,035 6,604

Net gain (loss) on operations with securities 25 4,078 (1,551) 4,078 (1,551)

Net gain (loss) on other operations 26 5,017 5,303 5,025 5,305

Other income 27 634 1,227 2,460 2,515

Other operating income 9,729 4,979 11,563 6,269

Impairment expenses 28 (33,069) (80,838) (35,004) (77,124)

Operating expenses 29 (38,280) (46,840) (40,848) (50,143)

Profit (loss) before income tax (41,809) (89,644) (41,202) (83,465)

Income tax benefit (expenses) 15 355 (1,859) 355 (2,151)

Profit (loss) for the year (41,454) (91,503) (40,847) (85,616)

Other comprehensive income/(expenses):

Gain (loss) on available-for-sale assets

Unrealised net gain (loss) before tax for the year 2,948 2,050 2,948 2,050Net reclassification adjustment for realised (gain)

losses (3,212) 1,426 (3,212) 1,426

Revaluation of property, plant and equipment - (3,874) - (3,874)Income tax relating to components of other

comprehensive income/(expenses) 221 77 221 77Other comprehensive income for the year, net of

tax (43) (321) (43) (321)Total comprehensive

income/(expenses) for the year (41,497) (91,824) (40,890) (85,937)

Profit (loss) for the year attributable to owners ofthe parent (41,454) (91,503) (40,847) (85,616)

Total comprehensive income/(expenses) for theyear attributable to owners of the parent (41,497) (91,824) (40,890) (85,937)







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SEPARATE AND CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

BankAuthorised

share capitalReservecapital

Revaluationreserve of

property, plantand

equipment

Revaluationreserve offinancialassets

Otherreserves

Retainedearnings Total

Balance at 31 December 2008 180,000 917 4,512 (4,376) 3,789 (14,842) 170,000Net gain (loss) on available-for-sale financial assets - - - 3,476 - - 3,476

Revaluation of property, plant andequipment - - (3,874) - - - (3,874)Income tax relating to componentsof other comprehensive income - - 780 (703) - - 77Profit (loss) for the year - - - - - (91,503) (91,503)Total comprehensiveincome/(expenses) for the year - - (3,094) 2,773 - (91,503) (91,824)

Increase in share capital 98,058 - - - - - 98,058

Transfer of subordinated loan toshare capital 8,149 - - - - - 8,149

Transfer to retained earnings - (917) - - (3,789) 4,706 -

Balance at 31 December 2009 286,207 - 1,418 (1,603) - (101,639) 184,383

Net gain (loss) on available-for-sale financial assets - - - (264) - - (264)Income tax relating to componentsof other comprehensive income - - 17 204 - - 221Profit (loss) for the year - - - - - (41,454) (41,454)Total comprehensiveincome/(expenses) for the year - - 17 (60) - (41,454) (41,497)


(cont’d on the next page)



16

SEPARATE AND CONSOLIDATED STATEMENT OF CHANGES IN EQUITY(CONTINUED)

GroupAuthorised

share capitalReservecapital

Revaluationreserve of

property, plantand

equipment

Revaluationreserve offinancialassets

Otherreserves

Retainedearnings Total

Balance at 31 December 2008 180,000 917 4,512 (4,376) 3,789 (20,474) 164,368Net gain (loss) on available-for-sale financial assets - - - 3,476 - - 3,476

Revaluation of property, plant andequipment - - (3,874) - - - (3,874)

Income tax relating to componentsof other comprehensive income - - 780 (703) - - 77Profit (loss) for the year - - - - - (85,616) (85,616)Total comprehensiveincome/(expenses) for the year - - (3,094) 2,773 - (85,616) (85,937)

Increase in share capital 98,058 - - - - - 98,058

Transfer of subordinated loan toshare capital 8,149 - - - - - 8,149

Transfer to retained earnings - (917) - - (3,789) 4,337 (369)


Net gain (loss) on available-for-sale financial assets - - - (264) - - (264)Income tax relating to componentsof other comprehensive income - - 17 204 - - 221

Profit (loss) for the year - - - - (40,847) (40,847)Total comprehensiveincome/(expenses) for the year - - 17 (60) (40,847) (40,890)








17

SEPARATE AND CONSOLIDATED STATEMENT OF CASH FLOWS

Bank Group

2010 2009 2010 2009

Cash flows from operating activities

Net result for the year (41,454) (91,503) (40,847) (85,616)Adjustments to reconcile net profit or loss to net cash

provided by operating activities:Income tax expenses (355) 1,859 (355) 2,151

Unrealised foreign exchange gains and losses (285) (562) 302 (559)

Depreciation and amortisation 3,119 4,726 3,342 5,005

Impairment expenses 33,069 80,838 35,004 77,124

Other non-cash items 3,760 2,583 3,775 2,653

Operating activities

Change in accrued interest income 4,347 1,601 6,427 1,094

Change in accrued interest expenses (600) (2,758) (597) (3,566)Cash flows from operating profits before changes in

operating assets and liabilities 1,601 (3,216) 7,051 (1,714)

(Increase) decrease in operating assets:

(Increase) decrease in loans and receivables 427,872 155,564 463,395 204,551

Decrease in financial assets held for trading 24 883 24 883

(Increase) decrease in other assets 317 4,019 3,246 (5,108)

Increase (decrease) in operating liabilities:

Increase (decrease) in amounts due to credit institutions (570,026) (775,959) (570,026) (775,959)(Decrease) increase in deposits (other than from credit

institutions) 89,637 96,956 89,760 102,342

(Decrease) increase in other liabilities 668 (226) 705 (1,392)

Income tax (paid) - - - -

Net cash used in operating activities (49,907) (521,979) (5,845) (476,397)

Cash flows from investing activities

(Acquisition) of property, plant and equipment (263) (83) (265) (237)

(Acquisition) of intangible assets (98) (205) (98) (205)

Proceeds from sale of property, plant and equipment 185 603 185 603

Cash payments to cover losses of subsidiary (2,923) (18,271) - -

Proceeds from sale of financial assets held for sale 97,828 27,698 97,828 27,698

Acquisition of financial assets held for sale (124,495) (71,206) (124,495) (71,206)

Proceeds from sale of financial assets held to maturity 24,275 31,853 24,275 31,853

Net cash used in investing activities (5,491) (29,611) (2,570) (11,494)

Cash flows from financing activities

Borrowings 13,186 22,853 13,186 22,853

Repayments of borrowings (3,481) (7,770) (50,121) (71,396)

Cash proceeds from issuing shares - 98,058 - 98,058

Net cash generated from/used in financing activities 9,705 113,141 (36,935) 49,515

Net increase in cash and cash equivalents (45,693) (438,449) (45,350) (438,376)

Effects of changes in exchange rates on cash balance 267 1,920 (76) 1,847

Cash and cash equivalents at beginning of year 132,198 568,727 132,198 568,727

Cash and cash equivalents at end of year (Note 34) 86,772 132,198 86,772 132,198

Cash flows from operating activities include:

Interest received 41,035 70,701 45,474 77,720

Interest (paid) (25,548) (45,419) (27,770) (50,955)

Dividends received - 1 - 1

The accompanying notes are an integral part of the financial statementsThese financial statements were signed and approved on behalf of the Bank on 1 March 2011 by:



CITADELE BANKAS AB


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Note 1 General information

Citadele BANKAS AB (hereinafter “the Bank”) was established on 24 October 1996 under the name Industrijos BankasUAB. By the resolution of the Bank of Lithuania No. 127 of 5 October 2000, the Bank's official name was changed fromIndustrijos Bankas UAB to PAREX BANKAS AB. During the restructuring process of Parex Banka AS (Latvia) carried outin 2010 a new bank was established in Latvia entitled Citadele. Upon the approval of the shareholders of Parex Banka ASand Citadele Banka AS, it was resolved that Lithuania based Parex Bankas AB will become a part of the new Latvian bankgroup Citadele. On 19 August 2010, the Board of the Bank of Lithuania approved the acquisition of shares of ParexBankas AB by the Latvian bank Citadele Banka AS and the registration of amendments to the Articles of Association ofParex Bankas AB concerning the change of the bank’s name as well as amendment of the license issued to the bank byspecifying a new name – Citadele Bankas AB. The address of the Bank’s registered office is

K. Kalinausko g. 13,LT – 03107 Vilnius,Lithuania

The Bank has six branches established in the cities of Vilnius, Kaunas, Klaipėda, Šiauliai, Panevėžys and Alytus.

By the resolution of the Bank of Lithuania No. 134 of 16 July 1998, the Bank was granted license No. 17 that allowed theBank to perform all operations of a commercial bank. The Bank accepts deposits, grants loans, performs monetary anddocumentary settlements, exchanges currencies and grants monetary and other guarantees to its clients. The Bank alsotrades in securities, provides consulting and custody services. The Bank provides services to both corporate and privatecustomers.

The Group consists of the Bank and Citadele Faktoringas ir Lizingas UAB, the Bank’s wholly owned subsidiary operating inLithuania. The main activity of the subsidiary is finance lease.

As at 31 December 2010, the Bank had 336 (31 December 2009: 430) employees. As at 31 December 2010, the numberof employees of the Group was 355 (31 December 2009: 458).

As at 31 December 2010, Citadele Banka AS (Latvia) was the sole shareholder of the Bank. Shareholders of CitadeleBanka AS are the Republic of Latvia holding an ownership interest of 75 per cent and the European Bank forReconstruction and Development holding an ownership interest of 25 per cent. As at 31 December 2009, Parex Banka AS(Latvia) was the sole shareholder of the Bank. Parex Banka AS is controlled by the Latvian Government.

The authorised share capital of the Bank is divided into 2,862 thousand ordinary shares with a par value of LTL 100 each.As at 31 December 2010 and 2009 all shares were fully paid.

The shareholders of the Bank have a statutory right to approve these financial statements or not to approve and to requirepreparation of a new set of the financial statements.

Financial stability

In 2010, the global economy entered the phase of recovery and operating conditions improved significantly from theprevious reporting period. The economic activity of industrial and other market sectors was increasing, the level ofconsumption and investments was on the rise along with the international trade, however, the growth rate was low.

The economy of Lithuania also signalled recovery. The volume of export rose substantially and nearly stood at the levelthat prevailed before the crisis. Import volumes increased as well, however the unemployment rate peaked to a very highlevel. The rise in unemployment level was caused by, among other things, the active registration of unemployed personsfully unaware of their status in the Labour Exchange in an attempt to receive compulsory health insurance. The percentageof population leaving the country was very high in 2010. Inflation growth was caused by rise in prices of energy, oil, foodand other products. In 2010, an average salary remained at the 2007 level. Fall in prices of real estate receded, however,the activity level in this sector remains low.

At the beginning of 2010, the quality of loan portfolios of banks became stable. Interest income decreased due to smallerloan portfolios and lower net interest margin. A rising capital adequacy ratio shows improving capacities of banks to coverlosses being incurred.

In 2010, the loan portfolio of Citadele Bank AB decreased 39.6 per cent mainly due to the transfer of bad loans to ParexBanka AS. A significant reduction in the loan portfolio caused the shrinking of interest income. During 2010, liabilities to theparent bank declined around 83 per cent and deposits placed by the local market participants increased around 17.2 percent (placed by banks - around 11 per cent). A capital adequacy ratio of the Bank rose substantially.

Financial stability of the Bank and availability of new financing sources is proven by new ratings assigned to the parentbank Citadele Banka AS on 6 September by the international rating agency Moody‘s, namely, a long-term borrowing inforeign currency rating ‘Ba3’, a short-term borrowing in foreign currency rating ‘NP’ and financial capacity rating ‘E+’. Allratings assigned to Citadele Banka AS are expected to remain unchanged over the coming periods.

CITADELE BANKAS AB


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Note 2 Significant accounting policies

Basis of preparation

These financial statements have been prepared on a historical cost basis, except for financial assets and financial liabilitiesstated at fair value through profit or loss and available-for-sale financial assets that have been measured at fair value, andland and buildings stated at revalued amounts.

Statement of compliance

In 2010, the restructuring process of Parex Banka AS was successfully accomplished as a result of which a new bank wasestablished entitled Citadele Banka AS. The bank operating in Lithuania Citadele Bankas AB with its ,,good” assetsbecame part of this newly established bank group.

During 2010, Citadele Bankas AB reduced its liabilities to the parent bank by LTL 587.8 million (The Group – LTL 631.6million) and attracted 17.2 per cent more deposits from the local market participants thus managing to reduce itsdependence with respect to liquidity risk management from the parent bank Citadele Banka AS.

Management of the Bank and the Group have reasonable grounds to believe that the Bank and the Group can continue asa going concern. Accordingly, these separate and consolidated financial statements of the Bank and the Group have beenprepared on a going concern basis, consistently applying International Financial Reporting Standards (IFRS), effective asof 31 December 2010 as adopted by the European Union.

Measurement and presentation currency

Separate financial statements of the entities of the Group are presented in the main currency of the economic environmentin which the entity operates (functional currency). In the consolidated financial statements, financial results and financialposition of each Group company are presented in the litas (LTL), which is the functional currency of the Bank and thepresentation currency of the consolidated Group’s financial statements.

Starting from 2 February 2002, Lithuanian litas is pegged to euro at the rate of 3.4528 litas for 1 euro, and the exchangerates in relation to other currencies are set daily by the Bank of Lithuania.

These financial statements combine the consolidated financial statements for the Group and stand-alone financialstatements of the Bank.

Adoption of new and/or amended IFRS and IFRIC interpretations

The following new or amended IFRS and IFRIC interpretations are effective in 2010 and relevant to the Bank and theGroup:

IAS 27, ‘Consolidated and Separate Financial Statements’ (revised in January 2008) (effective for annual periodsbeginning on or after 1 July 2009). This revised standard did not had the material impact to the Group.

The following new or amended IFRS and IFRIC interpretations are effective in 2010 but not relevant to the Bank and theGroup:

IFRIC 12, ‘Service Concession Arrangements’ (effective for annual periods beginning on or after 1 January 2008;IFRIC 12 as adopted by the EU is effective for annual periods beginning on or after 30 March 2009).

IFRIC 15, ‘Agreements for the Construction of Real Estate’ (effective for annual periods beginning on or after 1January 2009; IFRIC 15 as adopted by the EU is effective for annual periods beginning after 31 December 2009).

Embedded Derivatives – Amendments to IFRIC 9 and IAS 39 (effective for annual periods ending on or after 30 June2009; amendments to IFRIC 19 and IAS 39 as adopted by the EU are effective for annual periods beginning after 30 June2009).

IFRIC 16, ‘Hedges of a Net Investment in a Foreign Operation’ (effective for annual periods beginning on or after 1October 2008; IFRIC 16 as adopted by the EU is effective for annual periods beginning after 30 June 2009).

IFRIC 17, ‘Distribution of Non-cash Assets to Owners’ (effective for annual periods beginning on or after 1 July 2009;IFRIC 17 as adopted by the EU is effective for annual periods beginning after 31 October 2009).

IFRIC 18, ‘Transfers of Assets from Customers’ (effective prospectively to transfers of assets from customers receivedon or after 1 July 2009; IFRIC 18 as adopted by the EU is effective for annual periods beginning after 31 October 2009).

CITADELE BANKAS AB


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Note 2 Significant accounting policies (continued)

Basis for preparation

IFRS 3, ‘Business Combinations’ (revised in January 2008) (effective for business combinations for which theacquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009).

Eligible Hedged Items – Amendment to IAS 39 (effective with retrospective application for annual periods beginning onor after 1 July 2009).

IFRS 1, ‘First-time Adoption of International Financial Reporting Standards’ (revised in December 2008) (effectivefor the first IFRS financial statements for a period beginning on or after 1 July 2009; restructured IFRS 1 as adopted by theEU is effective for annual periods beginning after 31 December 2009).

Group Cash-settled Share-based Payment Transactions - Amendments to IFRS 2 (effective for annual periodsbeginning on or after 1 January 2010).

Additional Exemptions for First-time Adopters – Amendments to IFRS 1 (effective for annual periods beginning on orafter 1 January 2010).

Improvements to International Financial Reporting Standards (issued in April 2009; amendments to IFRS 2, IAS 38,IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS 8,IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods beginning on or after 1 January 2010).

Standards approved but not yet effective

Classification of Rights Issues – Amendment to IAS 32 (issued in October 2009) (effective for annual periodsbeginning on or after 1 February 2010). These amendments will not have any impact on the Bank’s and the Group'sfinancial statements.

Amendment to IAS 24, ‘Related Party Disclosures’ (issued in November 2009) (effective for annual periods beginningon or after 1 January 2011). The amended standard simplifies the disclosure requirements for government-related entitiesand clarifies the definition of a related party. These amendments will not have any impact on the Bank’s and the Group'sfinancial statements.

IFRS 9, ‘Financial Instruments Part 1: Classification and Measurement’ (issued in November 2009) (effective forannual periods beginning on or after 1 January 2013; not yet adopted by the EU). IFRS 9 replaces those parts of IAS 39relating to the classification and measurement of financial assets. Key features are as follows:

Financial assets are required to be classified into two measurement categories: those to be measured subsequentlyat fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initialrecognition. The classification depends on the entity’s business model for managing its financial instruments andthe contractual cash flow characteristics of the instrument.

An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective ofthe entity’s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset’s contractualcash flows represent only payments of principal and interest (that is, it has only “basic loan features”). All otherdebt instruments are to be measured at fair value through profit or loss.

All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for tradingwill be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can bemade at initial recognition, to recognise unrealised and realised fair value gains and losses through the statement ofcomprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profitor loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit orloss, as long as they represent a return on investment.

The Group and the Bank are considering the implications of the standard at the Group level and the timing of its adoption.

CITADELE BANKAS AB


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Basis for preparation

IFRIC 19, ‘Extinguishing Financial Liabilities with Equity Instruments’ (effective for annual periods beginning on orafter 1 July 2010). This interpretation will not have any impact on the Group’s and Company’s financial statements.

Prepayments of a Minimum Funding Requirement – Amendment to IFRIC 14 (effective for annual periods beginningon or after 1 January 2011). These amendments will not have any impact on the Bank’s and the Group's financialstatements.

Limited exemption from comparative IFRS 7 disclosures for first-time adopters – Amendment to IFRS 1 (effectivefor annual periods beginning on or after 1 July 2010). These amendments will not have any impact on the Bank’s and theGroup's financial statements.

Improvements to International Financial Reporting Standards (issued in May 2010; effective dates vary standard bystandard, most improvements are effective for annual periods beginning on or after 1 January 2011; the improvementshave not yet been adopted by the EU).

Disclosures—Transfers of Financial Assets – Amendments to IFRS 7 (effective for annual periods beginning on orafter 1 July 2011; not yet adopted by the EU).

Deferred Tax: Recovery of Underlying Assets – Amendment to IAS 12 (effective for annual periods beginning on orafter 1 January 2012; not yet adopted by the EU).

Severe hyperinflation and removal of fixed dates for first-time adopters – Amendment to IFRS 1 (effective for annualperiods beginning on or after 1 July 2011; not yet adopted by the EU).

Basis of consolidation

The consolidated financial statements include the financial results of the Bank and wholly owned Citadele Faktoringas irLizingas UAB.

Subsidiaries

Subsidiaries, which are those entities in which the Bank has an interest of more than one half of the voting rights, orotherwise has power to exercise control over their operations, are consolidated. Subsidiaries are consolidated from thedate on which control is transferred to the Bank and are no longer consolidated from the date that control ceases. All inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated;unrealised losses are also eliminated but may result in recognising an impairment loss where the transaction providesevidence of an impairment of the asset transferred. Accounting policies applied by subsidiaries are consistent with thoseapplied by the Group.

Investments in a subsidiary in the Bank’s separate financial statements are accounted for at cost which is adjusted byimpairment losses, if any.

Foreign currencies

Starting from 2 February 2002 LTL is pegged to EUR at the rate of LTL 3.4528 for EUR 1.

Amounts denominated in other currencies than LTL are translated into LTL at the official exchange rate of the Bank ofLithuania prevailing at the date of transaction. Gains and losses resulting from the settlement of monetary items and fromthe translation of monetary assets and liabilities denominated in other currencies than LTL are recognised in the statementof comprehensive income.

Monetary assets and liabilities denominated in other currencies than LTL are revalued to LTL at the rates established bythe Bank of Lithuania at the balance sheet date. The official exchange rates of the main currencies, used for therevaluation of balance sheet items as at the year end were as follows (LTL units to currency unit):

CITADELE BANKAS AB


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Foreign currencies

31 December 2010 31 December 2009

EUR 3.4528 3.4528

USD 2.6099 2.4052

LVL 4.8643 4.8679

100 RUB 8.5535 7.9465

Non-monetary items carried at cost are translated using the exchange rate at the date of the transaction, whilst assetscarried at fair value are translated at the exchange rate when the fair value was determined.

Revenue and expense recognition

Interest income and expense are recognised on an accrual basis calculated using the effective interest method. Loanorigination fees for loans issued to customers are deferred (together with related direct costs) and recognised as anadjustment to the effective yield of the loans. Fees, commissions and other income and expense items are generallyrecorded on an accrual basis when the service has been provided. Portfolio and other management advisory and servicefees are recorded based on the applicable service contracts. Fines income comprise income for delay payments. Fines arerecognised when it is highly probable to receive them.

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and ofallocating the interest income or interest expense over the relevant period. The effective interest rate is the rate thatexactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, whenappropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating theeffective interest rate, the Group estimates cash flows considering all contractual terms of the financial instruments (forexample, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paidor received between parties to the contract that are an integral part of the effective interest rate, transaction costs and allother premiums or discounts.

Intangible assets

Intangible assets include computer software and licences.

Intangible assets acquired separately are initially measured at cost. Following initial recognition, intangible assets arecarried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangibleassets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful lives of1 to 5 years and assessed for impairment whenever there is an indication that the intangible asset may be impaired.Amortisation periods and methods for intangible assets with finite useful lives are reviewed at least at each financial year-end.

The Bank and the Group do not have intangible assets with infinite useful life.

Costs associated with maintaining computer software programmes are recorded as an expense as incurred.

Property, plant, and equipment

Property, plant and equipment, excluding land and buildings, are stated at historical cost less accumulated depreciationand accumulated impairment losses. Cost includes property, plant and equipment part replacement expenses, as incurred,if these expenses correspond the recognition criterion. Land and buildings are recorded at revalued amounts, being its fairvalue at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulatedimpairment losses. Revaluations are made with sufficient regularity such that the carrying amount does not differ materiallyfrom that which is determined using fair value at the balance sheet date. The fair value of the buildings is determined byappraisals undertaken by certified independent appraisers. The depreciation of buildings is calculated on a straight-linebasis over the estimated useful lives of assets. The revaluation reserve for buildings is being reduced in conformity withdepreciation of revalued buildings.

In case of revaluation, when the estimated fair value of an asset is lower than its book value, the book value of this asset isimmediately reduced to the amount of fair value and such impairment is recognised as expenses. However, suchimpairment is deducted from the amount of increase of the previous revaluation of this asset accounted for in therevaluation reserve, to the extent it does not exceed the amount of such increase.

CITADELE BANKAS AB


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Property, plant, and equipment

In the case of revaluation, when the estimated fair value of an asset is higher than its book value, the book value of thisasset is increased to the amount of fair value and such increase is recorded in the revaluation reserve of property, plantand equipment under the shareholder’s equity. However, such increase in value is recognised as income only to the extentit does not exceed the amount of the previous revaluation decrease recognised as expenses.

Parts of some items of property and equipment may require replacement at regular intervals. Items of property andequipment may also be acquired to make a less frequently recurring replacement. Under the recognition principles forproperty, plant and equipment, the Bank and the Group recognise in the carrying amount of an item of property, plant andequipment the cost of replacing part of such an item when that cost is incurred if the recognition criteria are met.

Leasehold improvements are amortised over the shorter of the lease term and the life of the related leased asset. Theasset’s residual values, useful lives and methods are reviewed, and adjusted as appropriate, at each financial year-end.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expectedfrom its use or disposal. Any gain or loss arising from the derecognition of property, plant and equipment (estimated as thedifference between net proceeds from disposal and the carrying value of the assets) is accounted for in the statement ofcomprehensive income in the reporting period during which assets were derecognised.

Depreciation is calculated on a straight-line basis over estimated useful lives, as follows:

Category of assets Depreciation (in years)Buildings 70 - 80 yearsOffice equipment 4 - 6 yearsVehicles 6 years

Land is not depreciated.

Useful lives are reviewed periodically to ensure that the period of depreciation is consistent with the pattern of economicbenefits expected to be derived from items of property, plant and equipment. Depreciation expenses for the year areincluded into the statement of comprehensive income.

Repairs, and renewals that do not meet the recognition criteria for property, plant and equipment, are charged to thestatement of comprehensive income when the expenditure is incurred.

Investment property

Property held for long-term rental yields or for capital appreciation or both, and not occupied by the group companies, isclassified as investment property. Investment property comprises buildings leased out under operating lease agreements.

Investment property is recognised if it is probable that future economic benefits that are attributable to the asset will flow tothe entity and the cost of asset can be measured reliably. Investment property is usually recognised when all risks aretransferred.

Investment property is measured initially at cost, including transaction costs. Subsequently, investment property is carriedat cost, less accumulated depreciation and any accumulated impairment.

Depreciation is calculated on a straight-line basis over the average estimated useful lives (the same as for property, plantand equipment).

Non-current assets held for sale

Non-current assets (or group of assets) held for sale is classified to this category by the Group if the value of the asset isexpected to be recovered during the disposal, management is obliged to sell this asset, the active search for the buyer andadvertising campaign offering reasonable price of the asset, which approximates to its fair value, are in progress. The saleis to be finished during one year from the date of reclassification of the asset to this category. The assets so designatedare measured at the lower of carrying amount and fair value, less costs to sell. The depreciation is not computed for theseassets. In case the sale settlement is prolonged due to certain circumstances, which do not depend on the Bank, theassets held for sale is not reclassified. The increase in sale expenses associated with the prolonged transaction isrecognised in the statement of comprehensive income. In other cases the assets could not be recognised as held for sale.The Bank and Group measure a non-current asset that ceases to be classified as held for sale at the lower of its carryingamount before the asset was classified as held for sale, adjusted for any depreciation, amortisation or revaluations thatwould have been recognised had the asset not been classified as held for sale, and its recoverable amount at the date ofthe subsequent decision not to sell.

CITADELE BANKAS AB


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Financial assets and financial liabilities

The Bank and the Group recognise financial asset on its balance sheet when, and only when, the Bank and the Groupbecome a party to the contractual provisions of the instrument.

Financial assets in the scope of IAS 39 are classified as either financial assets held at fair value through profit or loss,loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. Financial assetsare initially recognised at fair value plus directly attributable transaction costs for all financial assets not carried at fair valuethrough profit or loss. The Bank and the Group determine the classification of its financial assets on initial recognition and,where allowed and appropriate, re-evaluates this classification at each financial year-end.

All “regular way” purchases and sales of investments are recognised using settlement date accounting. Settlement dateaccounting refers to the recognition of an asset on the day it is transferred to the Bank and the Group and to thederecognition of an asset on the day that it is transferred by the Bank and the Group. All other purchases or sales arerecognised as derivative instruments until settlement occurs. When settlement date accounting is applied, the Bank andthe Group account for any change in the fair value of the asset to be received during the period between the trade dateand the settlement date in the same way as it accounts for the acquired asset.

Financial assets and financial liabilities at fair value through profit or loss

At the balance sheet dates, the Bank and the Group did not have financial assets or financial liabilities designated at fairvalue through profit or loss.

Financial assets or financial liabilities held for trading

Financial assets or financial liabilities classified as held for trading other than derivatives are included in the category“financial assets at fair value through profit or loss”. Financial assets or financial liabilities are classified as held for tradingif they are acquired for the purpose of selling in the near term. Such assets or liabilities are initially accounted for at fairvalue and are subsequently revalued at the fair value, which is market price. Related profit or loss on revaluation ischarged directly to the statement of comprehensive income. Interest income and expense and dividends on suchinvestments are recognised as interest revenue and expense and dividend revenue respectively.

In the normal course of business, the Group and the Bank enter into various derivative financial instruments includingfutures, forwards and swaps in the financial markets. Such financial instruments are primarily held for trading and areinitially recognised in accordance with the policy for initial recognition of financial instruments and are subsequentlymeasured at fair value. The fair values are estimated based on quoted market prices or pricing models that take intoaccount the current market and contractual prices of the underlying instruments and other factors. Derivatives are carriedas assets when their fair value is positive and as liabilities when it is negative. Gains and losses resulting from theseinstruments are included in the statement of comprehensive income as gains less losses from derivative instruments.

Held-to-maturity investments

Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturitywhen the Bank and the Group have the positive intention and ability to hold to maturity. Investments intended to be heldfor an undefined period are not included in this classification. Other long-term investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost. This cost is computed as the amount initiallyrecognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method ofany difference between the initially recognised amount and the maturity amount. This calculation includes all fees andpoints paid or received between parties to the contract that are an integral part of the effective interest rate, transactioncosts and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised inthe statement of comprehensive income when the investments are derecognised or impaired.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in anactive market, other than:

- those that the entity intends to sell immediately or in the near term, which shall be classified as held for trading, andthose that the entity upon initial recognition designates as at fair value through profit or loss;

- those that the entity upon initial recognition designates as available for sale; or- those for which the holder may not recover substantially all of its initial investment, other than because of credit

deterioration, which shall be classified as available for sale.

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Financial assets and financial liabilities (continued)

Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in thestatement of comprehensive income when the loans and receivables are derecognised or impaired.

Loans and receivables are recognised on drawdown. From the date of signing a contractual agreement till the drawdowndate they are accounted for as off-balance sheet items.

Write-offs

When the loans and receivables cannot be recovered and all collateral has been realised, they are written-off and chargedagainst impairment for incurred credit losses. The management of the Bank and the Group makes the decision on writing-off loans. Recoveries of loans previously written off are credited to the statement of comprehensive income.

Factoring

A factoring transaction is a funding transaction wherein the Bank and the Group finance its customers through buying theirclaims. Companies assign rights to invoices due at a future date to the Bank and the Group. Factoring transactionsprovided by the Bank and the Group comprise factoring transactions with a right to recourse (the Bank and the Group areentitled to selling the overdue claim back to the customer) and factoring transactions without a right to recourse (the Bankand the Group are not entitled to selling the overdue claim back to the customer). The factor’s revenue comprises thelump-sum contract fee charged on the conclusion of the contract, commission fees charged for processing the invoices,and interest income depending on the duration of the payment term set by the purchaser. The fees are treated andaccounted for in similar manner as loans related fees.

The factoring balance includes the aggregate amount of factored invoices outstanding as of the reporting date and allamounts accrued for the unpaid amount.

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or arenot classified in any of the three preceding categories.

After initial recognition available-for-sale financial assets are measured at fair value based on available market prices orquotes of brokers. For investments where there is no active market, fair value is determined using valuation techniques.Such techniques include using recent arm’s length market transactions, reference to the current market value of anotherinstrument, which is substantially the same, and discounted cash flow analysis. The result of revaluation of available-for-sale securities is recognised in revaluation reserve of financial assets, reported under equity. Revaluation of available-for-sale debt securities is calculated as difference between market value and amortised cost calculated using the originaleffective interest rate. When the securities are disposed of, the related accumulated fair value revaluation is included in thestatement of comprehensive income as gain (loss) from sale of available-for-sale securities. If there is objective evidencethat the value of an investment has been impaired, the cumulative net loss that has been recognised directly in equity ischarged to profit (loss) for the year. Interest earned while holding available-for-sale financial assets is reported as interestincome.

Other liabilities carried at amortised cost.

Financial liabilities that are not classified as at fair value through comprehensive income fall into this category and aremeasured at amortised cost. Financial liabilities measured at amortised cost are deposits from banks or customers, otherloans for which the fair value option is not applied, and subordinated debts.

Derecognition of financial assets and liabilities

Financial assets are derecognised when the contractual rights to receive the cash flows from these assets have ceased toexist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are alsotransferred (that is, if substantially all the risks and rewards have not been transferred, the Bank and the Group test controlto ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognition).Financial liabilities are derecognised when they have been redeemed or otherwise extinguished.

Collateral (shares and bonds) furnished by the Bank under standard repurchase agreements and securities lending andborrowing transactions is not derecognised because the Bank retains substantially all the risks and rewards on the basis ofthe predetermined repurchase price, and the criteria for derecognition are therefore not met. This also applies to certainsecuritisation transactions in which the Bank retains a portion of the risks.

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Reclassification of financial assets

The Group and Bank may choose to reclassify a non-derivative financial asset held for trading out of the held-for-tradingcategory if the financial asset is no longer held for the purpose of selling it in the near-term. Financial assets other thanloans and receivables are permitted to be reclassified out of the held for trading category only in rare circumstances arisingfrom a single event that is unusual and highly unlikely to recur in the near-term. In addition, the Group and the Bank maychoose to reclassify financial assets that would meet the definition of loans and receivables out of the held-for-trading oravailable-for-sale categories if the Group and the Bank have the intention and ability to hold these financial assets for theforeseeable future or until maturity at the date of reclassification.

Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or amortised costas applicable, and no reversals of fair value gains or losses recorded before reclassification date are subsequently made.Effective interest rates for financial assets reclassified to loans and receivables and held-to-maturity categories aredetermined at the reclassification date. Further increases in estimates of cash flows adjust effective interest ratesprospectively.

Offsetting

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a currentlyenforceable legal right to set off the recognized amounts and there is an intention to settle on a net basis, or to realize theasset and settle the liability simultaneously.

Impairment of financial assets

The Bank and the Group assesses at each balance sheet date whether there is any objective evidence that a financialasset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired ifthere is objective evidence of impairment as a result of one or more events that have occurred after the initial recognitionof the asset (an incurred ‘loss event’) and that loss event (or events) has a negative impact on the estimated future cashflows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment mayinclude indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default ordelinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisationand where observable data indicate that there is a measurable decrease in the estimated future cash flows, such aschanges in arrears or economic conditions that correlate with defaults.

Due from banks and loans and advances to customers

For amounts due form banks and loans and advances to customers measured at amortised cost, the Bank and the Groupfirst assess individually whether objective evidence of impairment exists for financial assets that are individually significant,or collectively for financial assets that are not individually significant. If the Bank and the Group determine that no objectiveevidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the assetin a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assetsthat are individually assessed for impairment and for which an impairment loss is, or continues to be recognised, are notincluded in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as thedifference between the asset’s carrying amount and the present value of estimated future cash flows (excluding futureexpected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of anallowance account and the amount of the loss is recognised in the statement of comprehensive income. If, in a subsequentyear, the amount of the estimated impairment loss increases or decreases because of an event occurring after theimpairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowanceaccount.

The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. Ifloan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cashflows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure isprobable.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Bank’s and theGroup’s internal credit rating system that considers credit risk characteristics such as asset type, industry, geographicallocation, collateral type, past-due status and other relevant factors.

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Impairment of financial assets

Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis ofhistorical loss experience for assets with credit risk characteristics similar to those in the Bank and the Group. Historicalloss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did notaffect the years on which the historical loss experience is based and to remove the effects of conditions in the historicalperiod that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with,changes in related observable data from year to year. The methodology and assumptions used for estimating future cashflows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.


For held-to-maturity investments the Bank and the Group assess individually whether there is objective evidence ofimpairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measuredas the difference between the assets’ carrying amount and the present value of estimated future cash flows. The carryingamount of the asset is reduced and the amount of the loss is recognised in the statement of comprehensive income.

If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after theimpairment was recognised, any amounts formerly charged are credited to the statement of comprehensive income.

Available-for-sale investments

The Group and the Company assess at each date of the preparation of the statement of financial position whether there isobjective evidence that a financial asset or a group of financial assets is impaired.

Renegotiated loans

Where possible, the Bank and the Group seek to restructure loans rather than to take possession of collateral. This mayinvolve extending the payment arrangements and the agreement of a new loan conditions. Once the terms have beenrenegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensurethat all criteria are met and that the future payments are likely to occur. The loans continue to be the subject to anindividual or collective impairment assessment, calculated using the loan’s original effective interest rate.

The criteria that the Group and the Bank use to determine that there is objective evidence of an impairment loss include:

(a) significant financial difficulties of the borrower or issuer;(b) breach of the contract, such as a default or delinquency in interest or principal payments for more than 30 days;(c) due to economic or legal reasons pertaining to financial difficulties of the borrower, the borrower benefits fromallowance, which otherwise would not be granted by the lender;(d) the borrower has entered bankruptcy or other financial reorganisation procedure;(e) decrease in value or liquidity of collateral object in case of assessment of loans the repayment conditions whereofdirectly depend upon the collateral object value;(f) there is information on the lien attached upon the funds in the Bank and the Group account or other assets of theborrower to whom the loan has been granted, where the occurrence of the fact may affect the discharge of the borrower'sobligations in the future;(g) there is information on a deterioration of the financial performance of the persons related to the borrower, where suchdeterioration may affect the discharge of the borrower's obligations;(h) the disappearance of an active market for that financial asset because of financial difficulties;(i) the implementation of financed investment project is postponed for more than 1 year, where this may affect thedischarge of the borrower's obligations;(j) loan has not been used according to the purpose, stated in the loan agreement, where this fact may affect the dischargeof the borrower's obligations;(k) there is information on the change of management bodies or shareholders of the borrower, where this may affect thedischarge of the borrower's obligations(l) there is other information, that allows to conclude, that the borrower may face significant financial difficulty.

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Impairment of non-financial assets

The Bank and the Group assess at each reporting date whether there is an indication that an asset may be impaired. If anysuch indication exists, or when annual impairment testing for an asset is required, the Bank and the Group makes anestimate of the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash- generatingunit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does notgenerate cash inflows that are largely independent of those from other assets or groups of assets. Where the carryingamount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to itsrecoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value usinga pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to theasset. Impairment losses of continuing operations are recognised in the statement of comprehensive income in thoseexpense items that are consistent with the function of the impaired asset.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairmentlosses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. Apreviously recognised impairment loss is reversed only if there has been a change in the estimates used to determine theasset's recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of theasset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would havebeen determined, net of depreciation (if any), had no impairment loss been recognised for the asset in prior years. Suchreversal is recognised in profit or loss. After such a reversal the depreciation charge (if any) is adjusted in future periods toallocate the asset's revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

Repossessed property

In certain circumstances, property is repossessed following defaults with respect to repayment of loans. Repossessedproperty is initially recognised at fair value. Subsequently repossessed properties are measured at the lower of carryingamount and fair value less costs to sell and reported within ‘Other assets’.

Fair values of financial assets and liabilities

The fair value of financial instruments traded in active financial markets is determined by reference to quoted market prices.Bid prices are used for financial assets and offer prices are used for financial liabilities. The fair value of interest-bearingfinancial instruments is estimated based on discounted cash flows using the interest rates for items with similar terms andrisk characteristics. For unquoted equity investments fair value is determined using valuation techniques. Such techniquesinclude using recent arm’s length market transactions, reference to the current market value of another instrument, whichis substantially the same, and discounted cash flows analysis. Where the fair values of financial assets and liabilities differmaterially from their book values, such fair values are separately disclosed in the notes to the financial statements.

Leases

Finance lease – the Bank and the Group are lessees

The Bank and the Group recognise finance leases as assets and liabilities in the balance sheet at the date ofcommencement of the lease term at amounts equal to the fair value of the leased property or, if lower, at the present valueof the minimum lease payments, each determined at the inception of the lease. In calculating the present value of theminimum lease payments the discount factor used is the interest rate implicit in the lease, when it is practicable todetermine; otherwise, the Bank and the Group’s incremental borrowing rate is used. Initial direct costs incurred areincluded as part of the asset. Lease payments are apportioned between the finance charge and the reduction of theoutstanding liability. The finance charge is allocated to periods during the lease term so as to produce a constant periodicrate of interest on the remaining balance of the liability for each period.

Direct costs incurred by the lessee during lease term are included in the value of leased assets.

Finance lease – the Bank and the Group are lessors

The Bank and the Group recognise finance lease receivables at an amount equal to the net investment in the lease,starting from the date of commencement of the lease term. Income from finance lease is based on a pattern reflecting aconstant periodic rate of return on the net investment outstanding. Initial direct costs are added during the initial recognitionof finance lease receivables.

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Leases

Operating lease – the Bank and the Group are lessees

Leases of assets under which the risks and rewards of ownership are effectively retained by the lessor are classified asoperating leases. Lease payments under an operating lease are recognised as expenses on a straight-line basis over thelease term and included into operating expenses.

Operating lease – the Bank and the Group are lessors

The Bank and the Group present assets subject to operating leases in the balance sheets according to the nature of theasset. Income from operating leases is recognised as income in the statement of comprehensive income on a straight-linebasis over the period of the lease. The aggregate cost of incentives provided to lessees is recognised as a reduction ofrental revenue over the lease term on a straight-line basis. Initial direct costs incurred specifically to earn revenues from anoperating lease are added to the carrying amount of the leased asset.

The depreciation policy for depreciable leased assets is consistent with the lessor’s normal depreciation policy for similarassets, and depreciation is calculated in accordance with accounting policies, used for the Bank’s and the Group’sproperty and equipment.

Loans and deposits granted to the Bank

Loans and deposits granted to the Bank are classified as held-to-maturity financial liabilities and are estimated atamortised value using effective interest rate method or historical value if the settlement date is not known.

Sale and repurchase agreements

Securities sold subject to repurchase agreements (‘repos’) are reclassified in the financial statements as pledged assetswhen the transferee has the right by contract or custom to sell or repledge the collateral; the counterparty liability isincluded in deposits from banks or deposits from customers, as appropriate. Securities purchased under agreements toresell (‘reverse repos’) are recorded as loans and advances to other banks or customers, as appropriate. The differencebetween sale and repurchase price is treated as interest and accrued over the life of the agreements using the effectiveinterest method. Securities lent to counterparties are also retained in the financial statements.

Share capital

Share capital is shown in the balance sheet at the amount subscribed.

Income tax

Income tax charge is based on profit for the year and considers deferred taxation. Income tax is calculated based on theLithuanian tax legislation.

Standard income tax rate in Lithuania was 15 per cent in the year 2010 (in year 2009 – 20 per cent).

Tax losses can be carried forward for indefinite period, except for the losses incurred as a result of disposal of securitiesand/or derivative financial instruments. Such carrying forward is disrupted if the Bank and the Group change their activitiesdue to which these losses incurred except when the Bank anf the Group do not continue their activities due to reasonswhich do not depend on the Bank and the Group itself. The losses from disposal of securities and/or derivative financialinstruments can be carried forward for 5 consecutive years and only be used to reduce the taxable income earned from thetransactions of the same nature.

Deferred taxes are calculated using the balance sheet liability method. Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes, except where the deferred income tax arises from the initial recognition of goodwillor of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affectsneither accounting profit nor taxable profit. Deferred tax assets and liabilities are measured using a tax rate that isexpected to be used when deferred tax assets are utilised or deferred tax liability is covered taking account of tax ratesadopted or actually effective at the balance sheet date.

Deferred tax assets have been recognised in the balance sheet to the extent the management believes it is probable thatthey will be realised in the foreseeable future, based on taxable profit forecasts. If it is believed that part of the deferred taxasset is not going to be realised, this part of the deferred tax asset is not recognised in the financial statements.

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Off-balance sheet items

All obligations that, depending on how they evolve, might give rise to the balance sheet exposures are accounted for asoff-balance sheet exposures. This allows the Bank and the Group to assess capital requirement and to allocate fundsrequired to cover those obligations.

Related parties

In accordance with IAS 24 “Related Party Disclosures”, parties are considered to be related if one party has the ability tounilaterally or jointly control the other party or exercise significant influence over the other party in making financial oroperational decisions, or where parties are under common control. In addition, members of key management personnel aswell as their close family members, and close family members of individuals that unilaterally or jointly control the Bank orexercise significant influence over it are related parties. In considering each possible related party relationship, attention isdirected to the substance of the relationship, not merely the legal form.

Credit-related commitments and financial guarantees

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guaranteesor letters of credit. The Bank and the Group has the authority to cancel such agreement if the client’s risk increases.Commitments to extend credit are treated as risk assets for capital adequacy calculation purposes.

In the ordinary course of the business the Bank and the Group gives financial guarantees, consisting of letters of credit,guarantees and acceptances. Financial guarantees are initially recognised in the financial statements at fair value, under‘other liabilities’, being premium received. Subsequent to initial recognition, the Bank’s and the Group's liability under eachguarantee is measured at the higher of the unamortised premium and the best estimate of probable expenditure requiredin settling any financial obligation arising as a result of the guarantee.

Any increase in the liability relating to financial guarantees is recorded to the statement of comprehensive income under‘Impairment expenses'. The premium received is recognised in the statement of comprehensive income as net fee andcommission income on a straight-line basis over the life of guarantee.

Guarantees represent irrevocable assurances that the Bank and the Group will make payments in the event when acustomer cannot meet its obligations to the third parties. In case that payments under such a guarantee have becomeprobable it is subsequently accounted for as balance sheet item and is subject for impairment assessment. Until guaranteeis executed, it is treated as risk asset for capital adequacy calculation purposes.

Documentary and commercial letters of credit represent written undertakings by the Bank and the Group on behalf of acustomer authorising a third party to draw drafts on the Bank and the Group up to a stipulated amount under specific termsand conditions. Letters of credit are collateralised by the underlying shipments of goods. Letters of credit are treated as riskassets for capital adequacy calculation purposes.

Provisions

Provisions are recognised when the Bank and the Group has a present obligation (legal or constructive) as a result of apast event, and it is probable that an outflow or recourses embodying economic benefits will be required to settle theobligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision isrecognised in the statement of comprehensive income. If the effect of the time value of money is material, provisions arediscounted using current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting isused, the increase in the provision due to the passage of time is recognised as borrowing costs.

Employee benefits

Social security contributions

The Company pays social security contributions to the state Social Security Fund (hereinafter “the Fund”) on behalf of itsemployees based on the defined contribution plan in accordance with the local legal requirements. A defined contributionplan is a plan under which the Company pays fixed contributions into the Fund and will have no legal or constructiveobligations to pay further contributions if the Fund does not hold sufficient assets to pay all employees benefits relating toemployee service in the current and prior period. The social security contributions are recognised as an expense on anaccrual basis and are included within staff costs. Social security contributions each year are allocated by the Fund forpension, health, sickness, maternity and unemployment payments.

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Termination benefits

Termination benefits are payable when employment is terminated by the Company before the normal retirement date, orwhenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognisestermination benefits when it is demonstrably committed to either: terminating the employment of current employeesaccording to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offermade to encourage voluntary redundancy. Benefits falling due more than 12 months after balance sheet date arediscounted to present value.

Contingencies

Contingent liabilities are not recognised in the financial statements. They are disclosed unless the possibility of an outflowof resources embodying economic benefits is remote. A contingent asset is not recognised in the financial statements butdisclosed when an inflow of income or economic benefits is probable.

Use of critical estimates and judgements in the preparation of the financial statements

The preparation of the financial statements in conformity with the International Financial Reporting Standards requiresmanagement to make estimates and assumptions that affect the reported amounts of assets, liabilities, income andexpenses and disclosure of contingencies. The significant areas of estimation used in the preparation of the accompanyingfinancial statements relate to assessment of impairment for loans, receivables and other assets, recognition of deferredincome tax assets, retention of held-to-maturity investments as well as volatility in financial markets.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts ofassets and liabilities within the next financial year are outlined below.

Assessment of impairment for loans and receivables and other assets

The Bank and the Group regularly review its loans and receivables to assess impairment. The Bank and the Group usesits experienced judgement to estimate the amount of any impairment loss in cases where a borrower is in financialdifficulties and there are few available historical data relating to similar borrowers. Similarly, the Bank and the Groupestimate changes in future cash flows based on the observable data indicating that there has been an adverse change inthe payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assetsin the group. Management uses estimates based on historical loss experience for assets with credit risk characteristicsand objective evidence of impairment similar to those in the group of loans and receivables when scheduling its futurecash flows. The Bank and the Group use experienced judgement to adjust observable data for a group of loans orreceivables, finance lease receivables and repossessed assets to reflect current circumstances. The methodology andassumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce anydifferences between loss estimates and actual loss experience. For carrying amounts see Note 9, Note 10 and Note 15.

Were the net present value of estimated cash flows from loans and receivables differs by -/+5%, the impairment loss of theBank and the Group is to be estimated LTL 2,361 thousand higher or LTL 2,107 thousand lower as at 31 December 2010(LTL 10,554 thousand higher or LTL 8,066 thousand lower as at 31 December 2009).

Were the net present value of estimated cash flows from repossessed assets differs by +/-5%, the impairment loss of theGroup is to be estimated LTL 235 thousand higher/lower as at 31 December 2010 (LTL 664 thousand higher/lower as at31 December 2009).

Deferred income tax

Deferred income tax assets are recognised for all unused tax looses to the extent that it is probable that taxable profit willbe available against which the losses can be utilised. Significant management judgment is required to determine theamount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profitstogether with future tax planning strategies. For carrying amounts see Note 14. As at 31 December 2010, the Bank andGroup had unrecognised deferred tax assets of LTL 18,287 thousand and LTL 22,262 thousand, respectively (31December 2009: LTL 12,020 thousand and LTL 15,523 thousand, respectively).

Future events may cause the assumptions used in arriving at the estimates to change. The effect of such changes in theestimates will be recorded in the financial statements when determined.

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Use of critical estimates and judgements in the preparation of the financial statements (continued)


The Group and the Bank follow the IAS 39 guidance on classifying non-derivative financial assets with fixed ordeterminable payments and fixed maturity as held-to-maturity. This classification requires significant judgement. In makingthis judgement, the Group and the Bank evaluate their intentions and ability to hold such investments to maturity. If theGroup or the Bank fails to keep these investments to maturity other than for certain specific circumstances – for example,selling an insignificant amount close to maturity – it will be required to reclassify the entire class as available-for-sale. Theinvestments would therefore be measured at fair value not amortised cost. If all held-to-maturity investments were to be soreclassified, the carrying value would increase by LTL 2,165 thousand (31 December 2009: LTL 2,329 thousand), with acorresponding entry in the revaluation reserve of financial assets in shareholders’ equity.

Volatility in global and Lithuanian financial markets

The situation in the financial sector remains sensitive as the economy recovers. Tension has risen in global financialmarkets following the increase in uncertainty concerning the financial stability of the public sector of some euro-zonecountries in the second quarter of 2010. Financial problems in the public sector raised concerns in international marketsand encumbered receipt of borrowed funds. Changes in risk assessment negatively affected the market of debt securitiesof euro-zone countries and the banking sector. The financial sector saw the increase in market and liquidity risks, long-term interbank lending was restricted, value of financial assets suffered impairment losses. Determined and coordinatedactions taken by the European institutions and governments aimed at the reduction of the deficit of the public financeshelped to restore stability. Volatility in the financial system receded in the second half of the year, nevertheless, thesituation is still rather tense.

Low interest rate policy and qualitative monetary strategy were continued by global central banks in 2010. Currencymarkets suffered severe volatilities in 2010. In the first-half of the year the euro weakened against the US dollar. In thesecond-half of the year the US dollar weakened because of the lower rate of recovery of the US economy, whereas theexchange rate of the euro started to rise. The Japanese yen strengthened against other currencies.

Uncertainties prevailed in equity markets as well. Concerns of investors regarding a slower than expected recovery of theglobal economy caused high fluctuations in indices of global equity markets.

Management is unable to reliably estimate the effects on the Bank’s and the Group’s financial position of any furtherdeterioration in the liquidity of the financial markets and volatility in the currency and equity markets. Managementbelieves it is taking all the necessary measures to support the sustainability and growth of the Bank’s and the Group’sbusiness in the current circumstances.To the extent that information is available, management have properly reflectedrevised estimates of expected future cash flows in their impairment assessments.

Future events may cause the assumptions used in arriving at the estimates to change. The effect of such changes in theestimates will be recorded in the financial statements when determined.

Post-balance-sheet events

Post-balance-sheet events that provide additional information about the Bank’s and the Group’s position at the balancesheet date (adjusting events) are reflected in the financial statements. Post-balance-sheet events that are not adjustingevents are disclosed in the notes when material.

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Note 3 Balances with the central bank

Bank Group31 December

201031 December

200931 December

201031 December

2009

Compulsory reserves 27,627 42,325 27,627 42,325

Total 27,627 42,325 27,627 42,325

The compulsory reserves held in the Bank of Lithuania comprise an amount which is based on the value of attracted funds.The amount is estimated on the monthly basis with reference to possessed liabilities of the Bank in the previous month. Anaverage monthly amount should be equal to the compulsory reserve estimated according to the requirements of the Bankof Lithuania. Since November 2008 the compulsory reserve rate is 4 per cent.

The portion of the compulsory reserve calculated in accordance with the requirements of the European Central Bank(ECB) is held as interest bearing deposits. Interest rate for interest bearing part equals to the ECB refinance rate valid onthe day of transaction.

Note 4 Balances with banks and credit institutions


201031 December

200931 December

201031 December

2009

Current accounts with correspondent banks 4,261 32,186 4,261 32,186Overnight deposits 41,434 - 41,434 -

Term deposits 1,733 40,799 1,733 40,799

Total 47,428 72,985 47,428 72,985

Note 5 Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are held for trading.


201031 December

200931 December

201031 December

2009

Derivative financial instruments 210 103 210 103Total 210 103 210 103

Note 6 Derivative financial instruments

Below presented are notional amounts and fair values of financial derivatives of the Bank and the Group:

At 31 December 2010Notional amount Fair value

Assets Liabilities Assets LiabilitiesSpots 56,200 56,187 - -Swaps 49,086 49,037 162 113Forwards 129,844 129,847 48 51Total 235,130 235,071 210 164

At 31 December 2009Notional amount Fair value

Assets Liabilities Assets LiabilitiesSpots 1,701 1,700 - -Swaps 23,006 22,948 73 15Forwards 105,708 105,697 30 18Total 130,415 130,345 103 33

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Note 7 Available-for-sale financial assets

As at 31 December 2010, available-for-sale debt securities of the Bank and the Group represented bonds issued by theLithuanian Government (LTL 79,259 thousand). As at 31 December 2009, available-for-sale debt securities representedbonds issued by the Lithuanian Government (LTL 48,127 thousand) and debt securities issued by foreign financialinstitutions (LTL 4,459 thousand).

As at 31 December 2010 and 2009, available-for-sale equity securities of the Bank and the Group represented equitysecurities of unlisted companies.

Initial yields and maturities of debt securities are as follows:

2010 2009

Yield Maturity Yield Maturity

Securities of the Republic of Lithuania 3.10%-6.27% 2012.01-2016.02 4.25%-10.97% 2010.02-2015.02

Debt securities of financial institutions - - 9.50%-9.76% 2013.05-2017.05

Note 8 Held-to-maturity investments

As at 31 December 2010, held-to-maturity investments represented debt securities issued in foreign markets by thefollowing entities: public institutions (LTL 7,699 thousand), financial institutions (LTL 27,401 thousand) and companies(LTL 6,624 thousand). As at 31 December 2009, held-to-maturity investments represented debt securities issued in foreignmarkets by the following entities: banks (LTL 18,923 thousand), public institutions (LTL 7,891 thousand), financialinstitutions (LTL 28,130 thousand) and companies (LTL 11,055 thousand).

2010 2009Yield Maturity Yield Maturity

Held-to-maturity investments 0.84%-5.97% 2011.02-2016.04 0.57%-5.97% 2010.02-2016.04

As at 31 December 2009, held-to-maturity investments amounting to LTL 50,440 thousand were pledged to Parex BankaAS for repurchase agreements.

On 1 December 2009, the Bank reclassified CIT Group Inc. debt securities amounting to LTL 5,527 thousand based onthe restructuring plan, which resulted in the exchange of debt securities of CIT Group Inc. and charged impairment of LTL1,602 thousand (Note 25). Under the restructuring plan the new debt securities received of CIT Group Inc. were classifiedas available-for-sale financial assets.

Due to changed market conditions a part of the available-for-sale financial assets comprising debt securities issued byforeign entities was reclassified to held-to-maturity investments as of 1 July 2008. As at 31 December 2008, the carryingvalue of these reclassified securities was LTL 97,852 thousand. Had the mentioned securities not been reclassified fromavailable-for-sale financial assets to held-to-maturity investments, the Bank would have incurred revaluation deficit of LTL1,036 thousand in 2010 and LTL 1,240 thousand in 2009. As at 31 December 2010, the fair value of debt securitiesreclassified in 2008 was LTL 43,593 thousand (31 December 2009: LTL 68,328 thousand).

CITADELE BANKAS AB


35

Note 9 Finance lease receivables

Group


Categories of assets:

Vehicles 27,815 49,476

Railway carriages 14,618 21,231

Real estate 5,258 9,650

Manufacturing equipment 8,141 13,143

Other assets 74 192

Total 55,906 93,692

Less: impairment recognised with respect to corporateentities (7,269) (7,174)

Less: impairment recognised with respect to privateindividuals (209) (544)

Finance lease receivables, net 48,428 85,974

Gross investment in thelease

Present value of minimumlease payments

31December

2010

31December

200931 December

201031 December

2009

Finance lease payments receivable:

Up to one year 28,837 42,380 26,614 38,383

One to five years 28,616 56,364 26,512 51,579

Over five years 3,067 4,307 2,780 3,730

Total 60,520 103,051 55,906 93,692

Less: unearned income (4,614) (9,359) - -

Minimum finance lease payments receivablebefore impairment 55,906 93,692 55,906 93,692

Less: impairment (7,478) (7,718) (7,478) (7,718)

Present value of minimum finance lease payments 48,428 85,974 48,428 85,974

Group


Finance lease portfolio:

Corporate entities 50,661 84,391

Private individuals 5,245 9,301

Total 55,906 93,692

impairment (note 28) (7,478) (7,718)

Finance lease portfolio, net 48,428 85,974

CITADELE BANKAS AB


36

Note 10 Loans and advances


201031 December

200931 December

201031 December

2009

Loans to financial institutions 2,371 6,194 644 745

Loans to corporate entities:

Public sector 5,037 5,308 5,037 5,308

Large corporate customers 31,911 78,830 31,911 78,830

Small and medium-sized enterprises 189,099 462,216 189,099 462,216

Loans to individuals:

Mortgages 380,140 455,959 380,140 455,959

Other loans 129,650 243,732 129,650 243,732

Reverse repurchase agreements 2,938 2,936 2,938 2,936

Total 741,146 1,255,175 739,419 1,249,726

impairment (note 28) (39,941) (87,822) (39,941) (87,822)

Loans and advances, net 701,205 1,167,353 699,478 1,161,904

In 2010, the Latvian Government passed a decision to initiate the restructuring process of Parex Banka AS according tothe restructuring plan developed by the international consulting company Nomura International. During the restructuringprocess assets of Parex Banka AS attributable to its operating activities were spinned off and transferred to a newlyestablished bank in Latvia under the procedure prescribed by the laws – Citadele Banka AS. In view of the restructuring ofParex Banka AS, the shareholders of the parent bank (the Latvian Government and the European Bank for Reconstructionand Development) resolved that Lithuania based Parex Bankas AB is to become a part of the new Latvian bank groupCitadele as well. As a result, Citadele Banka AS became the sole shareholder of Lithuania based Parex Bankas ABinstead of the Latvian bank Parex Banka AS. Thus, the Bank’s name Parex Bankas AB was changed to Citadele BankasAB.

During the restructuring of the parent bank in an attempt to improve efficiency of the Bank’s operating activities, a decisionwas made to transfer loans exposing the Bank to the highest risk and losses that amount to LTL 311,459 thousand toParex Bank AS and reduce debts of the Bank to Parex Banka AS by the corresponding amount.

As at 31 December 2010, the Bank and the Group entered into reverse repurchase agreements amounting toLTL 2,938 thousand (31 December 2009: LTL 2,936 thousand). The Bank and the Group have the possibility to trade inunderlying securities in absence of clients’ default with the obligation to sell such securities back at the maturity date. Incase of clients’ default underlying securities remains with the Bank and the Group. Fair value of the securities pledged wasLTL 3,614 thousand as at 31 December 2010 (31 December 2009: LTL 6,218 thousand).

CITADELE BANKAS AB


37

Note 11 Property, plant, and equipment

Changes in property, plant and equipment during the year 2010 are presented in the tables below:

BankLand andbuildings Vehicles

Officeequipmentand other Total

Cost or revalued amount

Balance at 31 December 2009 10,962 1,336 11,264 23,562

Additions - 1 262 263

Disposals and write-offs - (582) (4,340) (4,922)

Balance at 31 December 2010 10,962 755 7,186 18,903

Accumulated depreciation and impairment

Balance at 31 December 2009 - 810 8,332 9,142

Charge for the year 132 131 1,023 1,286


Balance at 31 December 2010 132 452 5,614 6,198

Net book amount



Group

Land, buildingsand other real

estate Vehicles





Disposals and write-offs - (1,127) (4,289) (5,416)



Balance at 31 December 2009 - 1,065 8,412 9,477



Balance at 31 December 2010 132 555 5,773 6,460

Net book amount



Property, plant and equipment of the Bank and the Group with a net book value of LTL 2,250 thousand as at31 December 2010 and 2009 was pledge as collateral for loans received.

As at 31 December 2010 and 2009, Bank’s buildings and land were accounted for at the revalued amounts. Valuationswere performed by independent valuers on the basis of the real estate market data analysis in 2010 and 2009.

Had valuations not been performed, the value of the Bank’s and the Group’s land and buildings would have amounted toLTL 9,185 thousand as at 31 December 2010 (31 December 2009: LTL 9,286 thousand).

CITADELE BANKAS AB


38

Note 11 Property, plant and equipment (continued)

Changes in property, plant and equipment during the year 2009 are presented in the tables below:

BankLand andbuildings Vehicles




Additions - - 83 83

Revaluation (3,874) - - (3,874)

Reclassification (20) - - (20)






Revaluation (176) - - (176)


Balance at 31 December 2009 - 810 8,332 9,142

Net book amount



Group

Land, buildingsand other real

estate Vehicles





Revaluation (3,874) - - (3,874)

Reclassification (20) - - (20)






Revaluation (176) - - (176)



Net book amount



The net book value of buildings leased under finance lease agreements amounted to LTL 7,546 thousand as at 31December 2010 (31 December 2009: LTL 7,666 thousand).

Depreciation is included in operating expenses.

CITADELE BANKAS AB


39

Note 12 Investment property

BankLand andbuildings Total

Cost

Balance at 31 December 2008 - -

Reclassified from assets held for sale 2,250 2,250

Balance at 31 December 2009 2,250 2,250


Additions - -

Disposals and write-offs - -




Charge for the year 7 7

Balance at 31 December 2009 7 7




Net book amount




GroupLand andbuildings Total

Cost


Reclassified from assets held for sale 2,250 2,250

Reclassified from finance lease receivables 2,133 2,133



Reclassified from finance lease receivables 3,536 3,536

Disposals (2,302) (2,302)





Impairment (Note 28) 871 871




Impairment (Note 28) 198 198


Net book amount




The fair value of investment property of the Bank and the Group as at 31 December 2010 approximates its net book value.The fair value of investment property was estimated by independent valuers in 2009 using the income capitalisationmethod, whereas in 2010 the market value analysis method was used. Impairment was recognised due to fall in real estatemarket prices.

CITADELE BANKAS AB


40

Note 12 Investment property (continued)

In 2010, income from lease of investment property earned by the Bank and the Group amounted to LTL 10 thousand andLTL 135 thousand, respectively. In 2009, the Bank did not earn such income, the Group’s income from lease amounted toLTL 44 thousand. The Bank’s and the Group’s direct operating expenses associated with investment property recognisedin the statement of comprehensive income amounted to LTL 73 thousand (2009: LTL 68 thousand).

Note 13 Intangible assets

Changes in intangible assets during the year 2010 are presented in the tables below:

Bank Software Licenses Total

Cost

Balance at 31 December 2009 2,292 11,881 14,173

Additions 95 3 98

Disposals and write-offs (233) (154) (387)


Accumulated amortisation


Charge for the year 255 1,550 1,805



Net book amount

Balance at 31 December 2009 446 4,438 4,884


Group Computersoftware Licenses Total

Cost


Additions 95 3 98








Net book amount



Changes in intangible assets during the year 2009 are presented in the tables below:

BankComputersoftware Licenses Total

Cost


Additions 156 49 205






Net book amount



CITADELE BANKAS AB


41

Note 13 Intangible assets (continued)

Group Software Licenses Total

Cost


Additions 156 49 205






Net book amount



Amortisation expenses are included into operating expenses.

Note 14 Deferred income tax assets

Bank Group

2010 2009 2010 2009

Current income tax expenses - - - -

Change in deferred income tax 355 (1,859) 355 (2,151)

Income tax benefit (expenses) 355 (1,859) 355 (2,151)

Components of deferred income tax Bank Group

2010 2009 2010 2009

Fair value reserve 320 264 320 264

Vacation pay and other accruals 361 31 361 31

Deferred income tax assets 681 295 681 295

Deferred income tax liability

Revaluation of property, plant and equipment (253) (270) (253) (270)

Revaluation of derivatives (7) (48) (7) (48)

Capitalised VAT (112) (242) (112) (242)

Other (8) (10) (8) (10)Deferred income tax liability (380) (570) (380) (570)

Deferred income tax, net 301 (275) 301 (275)

Deferred income tax change recognised in equity 221 77 221 77

Deferred income tax change recognised in profit (loss) 355 (1,859) 355 (2,151)Deferred income tax change, total 576 (1,782) 576 (2,074)

Income tax at the rate of 15 per cent was used in the calculation of deferred income tax in 2010 and 2009.

CITADELE BANKAS AB


42

Note 14 Deferred income tax assets (continued)

As at 31 December 2010, the Bank’s and the Group’s did not recognise deferred income tax assets in respect of tax lossescarried forward on financial instruments that expire in the following periods: LTL 5,653 thousand in 2012; LTL 3,335thousand in 2013 and LTL 3,125 thousand in 2014. As at 31 December 2009, the Bank’s and the Group’s did notrecognise deferred income tax assets in respect of tax losses carried forward on financial instruments that expire in thefollowing periods: LTL 1,248 thousand in 2011; LTL 5,653 thousand in 2012 and LTL 2,566 thousand in 2013.

As at 31 December 2010, the Bank’s and the Group’s other tax losses carried forward for indefinite period for which nodeferred income tax assets were recognised amounted to LTL 109,672 thousand and LTL 120,903 thousand, respectively(2009: LTL 70,667 thousand and LTL 75,673 thousand). Moreover, as at 31 December 2010, the Group had accumulatedfinance lease and repossessed assets‘ impairment of LTL 15,271 thousand (2009: LTL 18,353 thousand) for which nodeferred income tax assets were recognised.

Deferred income tax assets were not recognised for all these components as the Bank and the Group do not expect toearn sufficient taxable profit against which these incurred taxable losses could be utilised in near future.

The changes in deferred income tax related to revaluation of property, plant and equipment and available-for-salesecurities are recognised directly in equity.

Income tax expenses on the result for the year can be reconciled with income tax expenses calculated using a statutoryincome tax rate for profit before tax as follows:

Bank Group2010 2009 2010 2009

Profit/(loss) before tax (41,809) (89,644) (41,202) (83,465)

Tax calculated at statutory 15% tax rate (20% - in 2009) 6,271 17,929 6,180 16,693Income not subject to tax and expenses not deductible fortax purposes (79) (6,827) 1,261 (6,294)

Write-off of previously recognised deferred income tax assets - (1,507) - (1,799)

Effect of income tax rate change - (2,863) - (3,601)

Change in unrecognised deferred income tax assets (5,837) (8,591) (7,086) (7,150)

Total income tax benefit/(expense) 355 (1,859) 355 (2,151)

CITADELE BANKAS AB


43

Note 15 Other assets


201031 December

200931 December

201031 December

2009

Financial assets

Payments through cards 467 516 467 516Transactions in the stock exchange related to

operations with securities 261 819 261 819

Payments in transit - 146 - 146

Travel receipts paid by foreign banks till settlement 42 83 42 83

VAT receivable - - - 190

770 1,564 770 1,754

Non-financial assets

Supplies for operations 636 474 636 474

Deferred expenses 584 710 586 714

Advanced payments for goods and services 84 95 131 142

Repossessed assets* - - 11,425 23,457

Other assets 142 168 422 407

1,446 1,447 13,200 25,194

Impairment for repossessed assets (Note 28) - - (6,725) (10,192)

Impairment for other assets (Note 28) (91) (137) (91) (137)

Total other assets, net 2,125 2,874 7,154 16,619

* The amount of repossessed assets has decreased significantly due to a large number of items realised in 2010 and asmall number of new repossessions. Heavy vehicles represent the major portion (90 per cent) of all repossessed assets.The purpose of the Company is to realise repossessed assets in the shortest possible period.

Note 16 Due to banks and other credit institutions


201031 December

200931 December

201031 December

2009

Funds in correspondent accounts 5,810 480 5,810 480

Overnight deposits 43,464 - 43,464 -

Term deposits 77,002 646,718 77,002 646,718

Deposits from other credit institutions 840 135 840 135

Loans* - - 53,162 97,006

Repurchase agreements from Parex Banka AS** - 50,440 - 50,440

Transfers till settlement date 5,879 5,148 5,879 5,148

Total 132,995 702,921 186,157 799,927

* Borrowings received from Citadele Banka AS as at 31 December 2010 and from Parex Banka AS as at 31 December2009 included a borrowing in US dollars with maturity date 15 January 2014 and interest rate linked with 6-month USDLIBOR and a credit line in the euro (limit of credit line is EUR 21,000 thousand, equivalent to LTL 72,509 thousand) withthe maturity date 25 March 2011 and interest rate linked with 6-month EUR LIBOR. The management believes that thiscredit line will be renewed in 2011.

** The securities repurchase agreements of the Bank and Parex Banka AS (Latvia). For the repurchase agreements fromParex Banka AS the Bank and the Group pledged securities issued by foreign entities with carrying amount of LTL 50,440thousand as at 31 December 2009.

CITADELE BANKAS AB


44

Note 17 Due to customers


201031 December

200931 December

201031 December

2009

Demand deposits 224,618 152,828 223,591 152,678

Term deposits 386,833 368,757 386,833 367,757

Total 611,451 521,585 610,424 520,435

Amounts due to customers include accounts with the following types of customers:


201031 December

200931 December

201031 December

2009

Individuals 361,815 338,530 361,815 338,530

Corporate clients 214,325 157,249 214,325 157,249

Financial institutions 24,598 20,724 23,571 19,574Government institutions 9,791 3,884 9,791 3,884State and municipalities enterprises 922 1,198 922 1,198

Amounts due to customers 611,451 521,585 610,424 520,435

Note 18 Finance lease liabilities

Minimum lease paymentsPresent value of minimum lease

payments

Bank31 December

201031 December

200931 December

201031 December

2009

Minimum lease payments:

Up to one year 3,139 3,208 3,063 3,086

One to five years 2,449 5,440 2,295 5,355

Total 5,588 8,648 5,358 8,441

Less: future interest charges (230) (207) - -Present value of minimum finance lease

payments 5,358 8,441 5,358 8,441

Minimum lease paymentsPresent value of minimum lease

payments

Group31 December

201031 December

200931 December

201031 December

2009

Minimum lease payments:

Up to one year 3,139 3,182 3,063 3,060

One to five years 2,449 5,440 2,295 5,355

Total 5,588 8,622 5,358 8,415

Less: future interest charges (230) (207) - -Present value of minimum finance lease

payments 5,358 8,415 5,358 8,415

CITADELE BANKAS AB


45

Note 19 Other loans


Investicijų ir Verslo Garantijos UAB LTL 14,607 14,847 Žemės Ūkio Paskolų Garantijų Fondas UAB EUR 16,158 3,353

30,765 18,200

Loans from Investicijų ir Verslo Garantijos UAB are granted from European Union structural Funds, established by the Rural Credit Guarantee Fund and will be allocated for financing small and medium-sized companies.

Loans from Žemės Ūkio Paskolų Garantijų Fondas UAB are for financing of agricultural projects.

Note 20 Other liabilities


201031 December

200931 December

201031 December

2009

Financial liabilities

Taxes other than income tax 771 732 900 778

Incoming payments till settlement date 345 461 345 461

Amounts paid by residents to suppliers 111 606 175 606

Other payment related liabilities 545 582 545 582

Outgoing payments till settlement date 338 83 338 83

Clients’ cash for acquisition of securities - 40 - 40

Other financial obligations 1,622 1,791 1,622 1,791

3,732 4,295 3,925 4,341

Non-financial liabilities

Accrued vacation pay 1,299 1,416 1,397 1,512

Accrued expenses 2,232 1,147 2,260 1,290

Other liabilities 39 41 185 375

3,570 2,604 3,842 3,177

7,302 6.899 7,767 7,518

Note 21 Capital and reserves

As at 31 December 2010 and 2009, the authorised share capital of the Bank amounted to LTL 286,207 thousand and wasdivided in 2,862 thousand ordinary registered shares with par value of LTL 100 each. The share capital was increased in2009 by issuing 1,062 thousand ordinary shares. As at 31 December 2010 and 2009 all shares were fully paid.

Revaluation reserve of property, plant and equipment

The revaluation reserve of property, plant and equipment is used to record increases in the fair value of land and buildingsand decreases, net of deferred taxes, to the extent that such decrease relates to the increase on the same assetpreviously recognised in equity.

Revaluation reserve of financial assets

The revaluation reserve of financial assets is used to record changes in the fair value of available-for-sale financial assets,net of deferred taxes. No gain or loss is recognised in the statement of comprehensive income as long as assets have notbeen disposed or impaired.

CITADELE BANKAS AB


46

Note 22 Commitments and guarantees

Commitments and guarantees consist of:


201031 December

200931 December

201031 December

2009

Commitments and guarantees

Lending commitments 55,983 68,377 55,232 68,342

Guarantees and warranties issued 12,694 9,216 12,694 9,216

Letters of credit issued 1,068 569 1,068 569

Total commitments and guarantees 69,745 78,162 68,994 78,127

The amounts for guarantees in the above table represent the maximum amount that could become payable. Theunamortised contributions in relation to such guarantees are recognised as liabilities.

Note 23 Interest income and interest expense

Bank Group

2010 2009 2010 2009

Interest income arising on:

loans and advances 39,721 72,182 39,587 72,547

available-for-sale debt securities 2,897 2,460 2,897 2,460

held-to-maturity investments 1,346 2,483 1,346 2,483

cash with banks and other credit institutions 123 1,226 123 1,226

loans past due and receivables (late payment interest) 2,522 3,533 4,958 5,417

finance lease receivables - - 3,865 7,637

compulsory reserves at the Bank of Lithuania 208 411 208 411

Total interest income 46,817 82,295 52,984 92,181

Interest expense for:

amounts due to banks and other credit institutions (9,524) (32,987) (11,767) (37,715)

amounts due to customers (23,063) (23,465) (23,052) (23,267)

finance leases (123) (279) (113) (270)

Total interest expense (32,710) (56,731) (34,932) (61,252)

Interest income, net 14,107 25,564 18,052 30,929

CITADELE BANKAS AB


47

Note 23 Interest income and interest expense (continued)

Compulsory deposit insurance contributions are recognised as interest expense. Insurance contributions (LTL 2,595thousand in 2010 and LTL 1,819 thousand in 2009) are calculated as established percentage from the deposit base and,in principal, represent a part of effective interest on deposits.

Note 24 Service fee and commission income and expense

Bank Group

2010 2009 2010 2009

Service fee and commission income

Commission on money transfers 3,580 3,493 3,580 3,493

Payment cards servicing 5,473 5,951 5,473 5,951

For operations with securities 526 328 526 328

Currency exchange commission 1,121 1,475 1,121 1,475

Cash disbursement commission 713 804 713 804

Payment collection services 650 748 650 748

For guarantees and warranties issued 124 143 124 143

Other income 1,473 1,008 1,470 1,007

Total service fee and commission income 13,660 13,950 13,657 13,949

Service fee and commission expense

Accounts servicing (457) (807) (459) (807)

Payment cards servicing (6,755) (4,969) (6,755) (4,969)

For operations with securities (474) (320) (474) (320)

Base currency exchange (169) (153) (169) (153)

Other expense (101) (210) (765) (1,096)

Total service fee and commission expense (7,956) (6,459) (8,622) (7,345)

Net service fee and commission income 5,704 7,491 5,035 6,604

Note 25 Net gain (loss) on operations with securities

Bank Group

2010 2009 2010 2009

Realised gain (loss) on trading in securities held for trading 29 70 29 70

Realised gain (loss) on sale of available-for-sale securities 4,049 (20) 4,049 (20)

Impairment in respect of held-to-maturity securities (Note 8) - (1,602) - (1,602)

Dividends received - 1 - 1

Net gain (loss) on operations with securities 4,078 (1,551) 4,078 (1,551)

Note 26 Net gain (loss) on other operations

Bank Group

2010 2009 2010 2009

Realised gain on foreign exchange operations, net 4,732 4,741 4,723 4,746

Balance sheet revaluation gain, net 309 1,445 326 1,442

Gain (loss) on revaluation of derivatives, net (24) (883) (24) (883)

Net gain (loss) on other operations 5,017 5,303 5,025 5,305

CITADELE BANKAS AB


48

Note 27 Other income

Bank Group

2010 2009 2010 2009

Income on disposal of repossessed assets - - 1,648 1,009

Lease of movable and immovable property 234 67 377 223

Gain on disposal of fixed assets - 407 - 407Income from termination of deposit agreements in previous

year 31 478 31 478

Other income 369 275 404 398

Net gain (loss) on other operations 634 1,227 2,460 2,515

Note 28 Impairment expenses

Bank Group

2010 2009 2010 2009

Impairment expenses

Impairment in respect of loan portfolio (31,243) (62,524) (31,243) (62,524)

Impairment in respect of finance lease portfolio - - (699) (3,383)

Recoveries of loans - - - -

(31,243) (62,524) (31,942) (65,907)

Impairment of investments in subsidiaries (1,765) (18,271) - -

Impairment of other assets and investment property (61) (43) (3,062) (11,217)

Impairment expenses (33,069) (80,838) (35,004) (77,124)

Bank

2010 2009

Investments in subsidiary

Cost of investments 26,737 23,814

Impairment (25,579) (23,814)

Investments in subsidiary, net 1,158 -

In 2010, a provision recognised by the Bank for impairment of investments in the subsidiary amounted to LTL 1,756thousand as the subsidiary incurred losses which were covered (2009: LTL 18,271 thousand).

CITADELE BANKAS AB


49

Note 28 Impairment expenses (continued)

Change in impairment of financial assets during 2010 and 2009 is presented in the table below:

Bank Group

Impairment at 1 January 2009 31,021 38,125

Impairment charged to the statement of comprehensive income

Financial institutions (7) (7)


Public sector 6 6

Large corporate customers 6,790 6,790

Small and medium-sized enterprises 33,642 33,642


Mortgages 3,065 3,065

Other loans 19,028 19,028


Corporate entities - 2,944

Private individuals - 439

Other assets and investment property 43 11,217

Investment in subsidiary 18,271 -

Impairment charged to the statement of comprehensive income 80,838 77,124

Repossessed asset impairment written off for realised assets - (3,755)

Finance lease impairment written off for terminated contracts:

Corporate entities - (4,583)

Private individuals - (145)

Effect of foreign exchange rates (86) (86)

Impairment at 31 December 2009 111,773 106,680

Impairment charged to the statement of comprehensive income

Financial institutions - -


Public sector (2) (2)

Large corporate customers (70) (70)

Small and medium-sized enterprises 16,968 16,968


Mortgages 3,439 3,439

Other loans 10,908 10,908


Corporate entities - 520

Private individuals - 179

Other assets and investment property 61 3,062

Investment in subsidiary 1,765 -

Impairment charged to the statement of comprehensive income 33,069 35,004

Transfer of impairment to Parex Banka AS (79,440) (79,440)

Impairment written off for other assets (106) (139)

Repossessed asset impairment written off for realised assets - (6,177)

Finance lease impairment written off for terminated contracts:

Corporate entities - (425)

Private individuals - (514)

Effect of foreign exchange rates 315 315

Impairment at 31 December 2010 65,611 55,304

CITADELE BANKAS AB


50

Note 29 Operating expenses

Bank Group2010 2009 2010 2009

Wages and salaries of employees 13,737 17,005 14,813 18,376

Termination benefits 875 319 942 376

Social security contributions 4,513 5,342 4,866 5,780

Rent of buildings 1,948 2,749 2,036 2,849

Maintenance expenses of buildings 1,180 1,202 1,216 1,275

Amortisation and depreciation 3,119 4,726 3,342 5,006

Taxes other than income tax 2,832 3,527 2,991 3,795

Office equipment maintenance expenses 4,280 4,874 4,326 4,937

Transportation, post and communication expenses 1,028 1,324 1,164 1,527

Impairment losses of assets held for sale - 1,738 - 1,738

Payments to servicing organisations 1,260 915 1,455 1,244

Insurance expenses 674 697 696 769

Advertising and marketing 586 628 586 634

Expenses related to loan recovery 578 298 591 298

Write-off losses related to assets not fully depreciated 674 141 674 141

Office stationary 104 118 114 133

Shortages and loss 80 822 80 822

Other expenses 812 415 956 443

Total 38,280 46,840 40,848 50,143

In 2008, the Bank management decided to sell the premises of the Bank in Kaunas city, located at Gedimino St. 47 - 1 /K. Donelaičio St. 24 - 1. The premises were planned to be sold during one year. No depreciation was charged on this asset held for sale. However, due to deterioration in economic conditions in Lithuania the sale transaction of real estatecame to a halt leading to the Bank’s failure to sell the mentioned premises. As a result, this asset was reclassified to thecategory of investment property on 30 September 2009 expecting to earn rental income. The calculated depreciationexpenses of this asset amounted to LTL 52 thousand and the loss recognised in respect of the asset held for sale was LTL1,738 thousand in 2009.

CITADELE BANKAS AB


51

Note 30 Capital adequacy

Capital adequacy refers to the sufficiency of the Bank’s capital resources to cover the credit and similar risks arising fromthe portfolio of assets of the Bank and off-balance sheet item exposures of the Bank.

The capital adequacy calculation rules include assessment of credit, market, foreign exchange, interest rate, equitysecurities and other risks. The required minimum capital adequacy ratio is 8% of risk-weighted assets.

Capital adequacy ratio calculation summary is presented in the table below:

Bank

2010 2009

Capital adequacy calculation Nominal Weighted Nominal Weighted

Tier I capital 141,451 141,451 182,965 182,965

Tier II capital 1,220 1,220 1,205 1,205

Deductions from capital (4,218) (4,218) (4,884) (4,884)

Calculated capital 138,453 139,453 179,286 179,286

Capital adequacy ratio, % 18.53 15.23

The calculated capital consists of Tier I capital, which comprises the authorised share capital, retained earnings (current yearprofit is not included, current year los sis included), revaluation reserve of financial assets and reserve capital. The othercomponent of the calculated capital is Tier II capital, which includes subordinated long-term loans, legal reserve andrevaluation reserve of non-current assets.

Group

2010 2009

Capital adequacy calculation Nominal Weighted Nominal Weighted

Tier I capital 141,944 141,943 182,851 182,851

Tier II capital 1,220 1,220 1,205 1,205

Deductions from capital (3,378) (3,378) (5,168) (5,168)

Calculated capital 139,786 139,785 178,888 178,888

Capital adequacy ratio, % 17.56 13.52

CITADELE BANKAS AB


52

Note 31 Related party transactions

During the year 2010 and 2009 a number of banking transactions were entered into with related parties in the normalcourse of business. The related parties of the Bank and the Group are considered Citadele Group companies and keymanagement personnel.

The Bank and the Group earn income from foreign currency transactions, servicing of payment cards, operations withsecurities, and interest income from related parties. The Bank and the Group incur servicing of payment cards expenses,interest expenses and other expenses due to transactions with related parties.

Transactions conducted by the Bank with related parties during 2010 and balances arising from these transactions as at31 December 2010 were as follows:

Amountsdue to

Amountsdue from Income Expenses

Citadele Banka AS (Latvia) 120,820 42,974 250 10,834

Citadele Faktoringas ir Lizingas UAB 1,027 1,727 147 29

Citadele Investicijų Valdymas UAB 378 3 26 6

Transactions conducted by the Group with related parties during 2010 and balances arising from these transactions as at31 December 2010 were as follows:

Amountsdue to


Citadele Banka AS (Latvia) 173,982 42,974 250 10,834

Citadele Investicijų Valdymas UAB 378 3 26 6

Transactions conducted by the Bank with related parties during 2009 and balances arising from these transactions as at31 December 2009 were as follows:

Amountsdue to


Parex Banka AS (Latvia) 697,625 31,982 1,240 34,512

AP Anlage & Privatbank AG (Switzerland) - - - 709

Parex Investicijų Valdymas UAB 405 - 31 19

Parex Faktoringas ir Lizingas UAB 1,150 5,448 284 18,503

Nekilnojamojo Turto Valdymo Fondas UAB 10 - - -

Transactions conducted by the Group with related parties during 2009 and balances arising from these transactions as at31 December 2009 were as follows:

Amountsdue to

Amounts duefrom Income Expenses

Parex Banka A/S (Latvia) 794,631 31,982 1,240 39,240

AP Anlage & Privatbank AG (Switzerland) - - - 709

UAB Parex Investicijų Valdymas 405 - 31 19

Nekilnojamojo Turto Valdymo Fondas UAB 10 - - -

Besides the above mentioned balances and transactions, as at 31 December 2010 the Bank and the Group had severalfinancial derivative contracts entered into with Citadele Banka AS. Assets and liabilities arising from the financial derivativecontracts amounted to LTL 91 thousand and LTL 104 thousand, respectively, as at 31 December 2010. Assets andliabilities arising from financial derivative contracts entered into with Parex Banka AS amounted to LTL 6 thousand andLTL 15 thousand, respectively, as at 31 December 2009.

CITADELE BANKAS AB


53

Note 31 Related party transactions (continued)

Management Board of the Bank consists of the Chairman of the Board and four Board members, each being responsiblefor a specific division: Retail, Corporate, Business Development, Finance and Treasury. Remuneration of the Boardamounted to LTL 1,189 thousand and related social security contributions of LTL 395 thousand in 2010 (LTL 1,334thousand and LTL 444 thousand in 2009). Management Board of the Bank received loans amounting to LTL 989 thousandin 2010 (LTL 1,395 thousand in 2009). Deposits placed by the Board amounted to LTL 1,048 thousand in 2010 (LTL 823thousand in 2009).

Management of the Group consists of five members of the Bank’s Board and four members of the subsidiary’s Board, eachbeing responsible for a specific division. Remuneration of the Management amounted to LTL 1,460 thousand and relatedsocial security contributions of LTL 479 thousand in 2010 (LTL 1,507 thousand and LTL 497 thousand in 2009,respectively). Management of the Group received loans amounting to LTL 989 thousand in 2010 (LTL 1,405 thousand in2009). Deposits placed by the Group’s Management amounted to LTL 1,138 thousand in 2010 (LTL 897 thousand in 2009).

Loans with related parties are secured with collaterals. Land to the value of LTL 1,250 thousand is pledged.

Note 32 Off-balance sheet commitments and contingencies

The Bank and the Group have various operating lease agreements for premises and other facilities. Lease terms do notcontain restrictions on the Bank’s and the Group’s activities concerning dividends, additional loans or further leasing. Thefuture minimum lease payments under operating leases are as follows:

Bank Group

2010 2009 2010 2009

No later than 1 year 1,231 1,906 1,300 1,974

Later than 1 year and no later than 5 years 948 3,154 1,121 3,408

Total 2,179 5,060 2,421 5,382

Operating lease expenses of the Bank and the Group in 2010 amounted to LTL 1,948 thousand and LTL 2,036 thousand,respectively (LTL 2,749 and LTL 2,849 in 2009) and are included in operating expenses.

Based on the agreement signed between the Bank and American Express Limited, in case the Bank does not fulfilcontractual obligations, American Express Limited has the right to claim for a compensation of EUR 400 thousand. In2010, a compensation of EUR thousand was claimed because of the Bank’s failure to fully meet volume-related indicatorsspecified in the agreement, which was paid by the Bank. As at 31 December 2010 the Bank and the Group accrued for theEUR 300 thousand, as it probable that the outflow of the resource will be required to settle this obligation. At 31 December2009, the Bank and the Group did not recognise any provisions in respect of this contingent liability as based on the pastexperience the Bank and the Group estimated that it is not probable that the outflow of the resource will be required tosettle this possible obligation.

The tax authorities did not carry out a tax audit at Citadele Bankas AB in 2010. In 2004, a full-scope tax audit was carriedout for the period from 1998 to 2004. The tax authorities may at any time inspect the books and records within 5 yearssubsequent to the reported tax year, and may impose additional tax assessments and penalties. The Bank‘s managementis not aware of any circumstances which may give rise to a potential material liability in this respect.

Note 33 Compliance with the regulatory requirements of the Bank of Lithuania

As at 31 December 2010 and 2009, the Bank and the Group were in compliance with the maximum credit exposure to oneborrower, related parties and major loan, capital adequacy, open foreign currency position and liquidity limits establishedby the Bank of Lithuania.

Note 34 Cash and cash equivalents


201031 December

200931 December

201031 December

2009

Cash 11,717 16,888 11,717 16,888

Balances with the central bank 27,627 42,325 27,627 42,325

Balances with banks (Note 4) 47,428 72,985 47,428 72,985

Cash and cash equivalents 86,772 132,198 86,772 132,198

The Bank can freely dispose cash and cash equivalents except the compulsory reserve at central bank.

CITADELE BANKAS AB


54

Note 35 Risk management

Management of risk is an essential element of the Bank and Group’s regular management process. Risk management ofthe Group focuses on identifying all major categories of risk to which the Group might be exposed, assessing these risksand managing risk positions. The Group regularly reviews its risk management policy and procedures in view of marketchanges, services and products available in the market and the best practice principles. Risk management is theresponsibility of the Board of the Bank. Risk management is conducted by Risk Management and Treasury Units. Theinternal audit function of the Bank is responsible for conducting an independent risk management and control review.Broad risk management guidelines are applied across all Citadele Banka AS group companies. The risks control andreporting is arranged independently of business operations and it is organized through setting and follow-up of risk limits.The risk management process in the Bank and the Group is regulated by several Risk Management Policies.

The objective of the Bank and Group is to ensure low risk exposure, meanwhile maintaining the well-diversified assetportfolio, hedged risks on financial markets, and low operational risk.

Risks are assessed in relation to the expected yield. Risk exposures that are not acceptable for the Group are avoided.The Bank and the Group do not assume high or uncontrollable risks irrespective of the amount of benefits they bring.Operational risks are minimised.

The Bank and the Group pursue a prudent risk management policy, relevant for the Bank’s and the Group’s businessmodel in Lithuania and specifics ensuring the effective total risk mitigation across the Citadele Group.

Risk management is the responsibility of the Risk Management Committee and responsible employees who are monitoringrisks on the daily basis.

In the ordinary course of business, the Group is exposed to various risks. Those risks include mainly credit risk, market risk(currency risk and interest rate risk) and liquidity risk. In order to manage the above risks, the Group has approved the riskmanagement policies which are summarised below.

Credit risk

Credit risk is the risk that the Bank and the Group will incur the loss because its customers or counterparties failed todischarge their contractual obligations. The Bank and the Group manage and control credit risk by setting limits on theamount of risk they are willing to accept for individual counterparties and for industry concentrations, and by monitoringexposures in relation to such limits. The Bank and the Group have established a credit quality review process to provideearly identification of possible changes in the creditworthiness of counterparties, including regular collateral revision. Thecredit quality review process allows the Bank and the Group to assess the potential loss to which it is exposed and to takecorrective action. The Bank makes available to its customers guarantees which may require that the Bank makespayments on their behalf. They expose the Bank to similar risks as loans and these are mitigated by the same controlprocesses and policies.

Credit risk exposes the Group to the maximum operating risk, therefore this exposure is placed under a particularly closesurveillance. The Risk Management Department is responsible for the management and control of the credit risk. TheDepartment reports to the Bank’s Board on a regular basis.

CITADELE BANKAS AB


55

Note 35 Risk management (continued)

Maximum exposure to credit risk

The table below shows the maximum exposure to credit risk arising from the balance sheet and off-balance sheet items.The maximum exposure is shown gross, before the mitigation through the use of collateral agreements.

Bank Group

2010 2009 2010 2009Balance sheet items before trading and investing

activities

Balances with the central bank 27,627 42,325 27,627 42,325

Balances with banks 47,428 72,985 47,428 72,985

Loans and advances to customers 701,205 1,167,353 699,478 1,161,905

Finance lease receivables, net - - 48,428 85,974

Off-balance sheet items

Guarantees and letters of credit 13,762 9,785 13,762 9,785

Lending commitments 55,983 68,377 55,232 68,342

Total balance and off-balance sheet items before tradingand investing activities 846,005 1,360,825 891,955 1,441,316

Trading and investing activities

Financial assets at fair value through profit or loss 210 103 210 103

Available-for-sale financial assets 79,330 52,663 79,330 52,663

Held-to-maturity investments 41,724 65,999 41,724 65,999

Investments in subsidiary 1,158 - - -

Total trading and investing activities 122,422 118,765 121,264 118,765

Total credit exposure 968,427 1,479,590 1,013,219 1,560,081

CITADELE BANKAS AB


56


Credit exposure includes items with credit risk that form part of the Bank’s and the Group’s core banking operations.Trading and investing activities includes items with credit risk that form part of the Bank’s and the Group’s trading activities.

Tables below present breakdown of bonds and derivatives by the type and the rating:

Bank and Group 2010 2009

Bonds of the Lithuanian Government 79,259 48,128

Bonds of municipalities 7,699 7,891

Bonds of banks - 18,923

Bonds of financial institutions 27,401 32,588

Bonds of companies 6,624 11,055

Derivatives with positive fair values 210 103

Total 121,193 118,688

Bank and Group 2010 2009

Bonds and derivatives exposure by rating class:

High rating 25,819 44,972

Standard rating 95,164 69,154

Not rated 210 4,562

Total 121,193 118,688

For trading and investing activities the Bank and the Group have assigned “AAA” to “A” (based on S&P ratings or similarinternational rating agency equivalent) rating bonds to a high rating and “BBB” to “B” rating bonds to a standard rating.

Tables below present breakdown of trading and investing activities by geographical region:


Government Corporate Government Corporate

Bonds and derivatives by geographical region:

Lithuania 79,259 - 48,128 -

Latvia - 210 - 103

Australia - - - 12,048

Russia - 10,557 - 10,599

United Kingdom - - - 6,875

USA - 31,167 - 40,935

Total 79,259 41,934 48,128 70,560

The Bank and the Group have no impaired or overdue amounts within trading and investing activities.

CITADELE BANKAS AB


57


Risk concentration of the maximum exposure to credit risk

Concentration of risk is managed by client, by geographical region and by industry sector.

The Bank’s maximum credit exposure to 10 major clients or other parties as at 31 December 2010 was LTL 82,652thousand (LTL 153,464 thousand in 2009) before taking into account collateral.

The Group’s maximum credit exposure to 10 major clients or other parties as at 31 December 2010 was LTL 94,850thousand (LTL 170,160 thousand in 2009) before taking into account collateral.

Large entities are defined as entities employing more than 250 employees. Small and medium-sized entities are definedas entities employing less than 250 employees and operating result does not exceed LTL 93 million or annual turnoverdoes not exceed LTL 138 million.

Exposure by industry sector

An industry sector split of the Bank’s and the Group’s loans and receivables (including finance lease receivables and off-balance sheet items) before taking into account collateral held is as follows:

Bank 2010Financialinstitu-tions

Loans to corporate entities Loans toindividuals Repur-

chaseagree-ments

Guaran-tees

issued TOTALPublicsector

Largecorporatecustomers

Small andmedium-sizedenterprises

Mort-gages

Otherloans

Mortgages to privateindividuals - - - - 376,563 - - - 376,563Retail and wholesaletrade - - 10,727 44,296 - - - 4,605 59,628

Real estate, rent andother 139 - 6,816 61,838 - - - - 68,793Financialintermediation 2,983 - - 157 - - - 14 3,154

Construction - 299 - 23,023 - - - 17 23,339Transport, storageandtelecommunications - - 14,277 5,579 - - - 6,906 26,762Agriculture, huntingand forestry - - - 25,515 - - - 92 25,607

Processing industry - - - 7,151 - - - - 7,151Other utility, socialand service activities - 68 - 5,988 - - - 919 6,975Hotels andrestaurants - - - 6,247 - - - - 6,247Electricity, gas andwater supply - 2,575 - - - - - - 2,575

Fishery - - - 325 - - - - 325

Other loans to privateindividuals - - - - - 155,893 2,938 - 158,831Other loans tocorporate clients - 2,124 - 1,667 - - - 141 3,932Total loans andreceivables, net ofimpairment 3,122 5,066 31,820 181,786 376,563 155,893 2,938 12,694 769,882

CITADELE BANKAS AB


58



Loans to corporate entitiesLoans to individuals

Repur-chaseagree-ments

Guaran-tees


Largecorpo-

ratecustom-

mers

Small andmedium-

sizedenterprises

Mort-gages

Otherloans

Mortgages to privateindividuals - - - - 451,699 - - - 451,699Retail and wholesale

trade - - 11,633 93,865 - - - 2,050 107,548

Real estate, rent andother 164 - 39,966 186,970 - - - - 227,100

Financial intermediation 5,598 - - 1,007 - - - 17 6,622

Construction - 290 - 58,138 - - - - 58,428Transport, storage andtelecommunications - 18,172 12,628 - - - 6,139 36,939Agriculture, hunting andforestry - - - 34,697 - - - 5 34,702

Processing industry - - - 13,060 - - - 218 13,278Other utility, social andservice activities - 107 - 10,526 - - - 10,633

Hotels and restaurants - - - 6,733 - - - 6,733Electricity, gas andwater supply - 2,009 894 - - - 2,903

Fishery - - - 568 - - - 568

Other loans to privateindividuals - - - - - 277,957 2,936 280,893Other loans tocorporate clients 466 2,938 - 2,709 - - - 787 6,900Total loans andreceivables, net ofimpairment 6,228 5,344 69,771 421,795 451,699 277,957 2,936 9,216 1,244,946

CITADELE BANKAS AB


59


Group 2010

Finan-cial

institu-tions

Loans to corporate entities Loans toindividuals

Repurchaseagree-ments

Financial leaseliabilities

Gua-ranteesissued

TOTALPublicsector

Largecorpo-

ratecusto-mers

Smalland

medium- sizedenter-prises

Mortga-ges

Otherloans Corpo-

ratecustom-mers

Priva-te

indivi-duals

Mortgages to privateindividuals - - - - 376,563 - - - - - 376,563Retail and wholesale

trade - - 10,727 44,296 - - - 5,480 - 4,605 65,108Real estate, rent andother 139 - 6,816 61,838 - - - 1,236 - - 70,029Financialintermediation 505 - - 157 - - - 175 - 14 851

Construction - 299 - 23,023 - - - 2,591 - 17 25,930Transport, storageandtelecommunications - - 14,277 5,579 - - - 25,063 - 6,906 51,825Agriculture, huntingand forestry - - - 25,515 - - - 1,131 - 92 26,738

Processing industry - - - 7,151 - - - 1,573 - - 8,724Other utility, socialand service activities - 68 - 5,988 - - - 5,827 - 919 12,802Hotels andrestaurants - - - 6,247 - - - 316 - - 6,563Electricity, gas andwater supply - 2,575 - - - - - - - - 2,575

Fishery - - - 325 - - - - - - 325Other loans to privateindividuals - - - - - 155,893 2,938 - 5,036 - 163,867Other loans tocorporate clients - 2,124 - 1,667 - - - - - 141 3,932Total loans andreceivables, net ofimpairment 644 5,066 31,820 181,786 376,563 155,893 2,938 43,392 5,036 12,694 815,832

CITADELE BANKAS AB


60


Group 2009

Finan-cial

institu-tions


Repurchaseagree-ments


Guaran-tees

issuedTOTAL

Publicsector

Largecorporate

custo-mers

Smalland


Mortga-ges

Otherloans Corpo-

ratecustom

-ers

Priva-te

indivi-duals

Mortgages toprivate individuals - - - - 451,699 - - - - 451,699Retail and

wholesale trade - - 11,633 93,865 - - 13,674 - 2,050 121,222Real estate, rentand other 164 - 39,966 186,970 - - 4,478 - - 231,578Financialintermediation 115 - - 1,007 - - 87 - 17 1,226

Construction - 290 - 58,138 - - 4,101 - - 62,529Transport, storageandtelecommunications - - 18,172 12,628 - - 40,611 - 6,139 77,550Agriculture, huntingand forestry - - - 34,697 - - 1,367 - 5 36,069Processing industry - - - 13,060 - - 2,893 - 218 16,171Other utility, socialand serviceactivities - 107 - 10,526 - - 9,606 - - 20,239Hotels andrestaurants - - - 6,733 - - 400 - - 7,133Electricity, gas andwater supply - 2,009 - 894 - - - - - 2,903

Fishery - - - 568 - - - - - 568Other loans toprivate individuals - - - - - 277,957 2,936 - 8,757 - 289,650Other loans tocorporate clients 466 2,938 - 2,709 - - - - 787 6,900Total loans andreceivables, net ofimpairment 745 5,344 69,771 421,795 451,699 277,957 2,936 77,217 8,757 9,216 1,325,437

Exposure by geographical area




Guaran-teesissued TOTAL

Publicsector

Largecorporatecustom-

mers

Small andmedium-

sizedenterprises

Mort-gages

Otherloans

Lithuania 2,634 5,066 21,093 181,786 376,125 155,865 2,938 10,578 756,085

Germany - - 10,727 - - - - - 10,727

Latvia - - - - - 1 - 2,051 2,052

Russia - - - - 438 6 - - 444

USA - - - - - 2 - - 2

United Kingdom 488 - - - - 4 - - 492

other - - - - - 15 - 65 80

Total 3,122 5,066 31,820 181,786 376,563 155,893 2,938 12,694 769,882

CITADELE BANKAS AB


61





Guaran-teesissued TOTAL

Publicsector

Largecorporatecustom-

mers

Small andmedium-

sizedenterprises

Mort-gages Other

loans

Lithuania 5,779 5,344 58,138 421,795 449,026 277,945 2,936 9,134 1,230,097

Germany - - 11,633 - - - - - 11,633

Latvia - - - - 2,176 4 - 14 2,194

Russia - - - - 459 5 - - 464

USA - - - - - 2 - - 2

United Kingdom 449 - - - 38 - - 68 555

other - - - - - 1 - - 1

Total 6,228 5,344 69,771 421,795 451,699 277,957 2,936 9,216 1,244,946

Group 2010

Finan-cialinstitu-tions




Guaran-tees

issuedTOTAL

Publicsector

Largecorporate

customers

Smalland

medium-sizedenter-prises

Mort-gages

Otherloans Corpo

-ratecusto-mers

Privateindivi-duals

Lithuania 156 5,066 21,093 181,786 376,125 155,865 2,938 43,231 5,036 10,578 801,874

Germany - - 10,727 - - - - - - - 10,727

Latvia - - - - - 1 - - - 2,051 2,052

Russia - - - - 438 6 - - - - 444

USA - - - - - 2 - - - - 2

UnitedKingdom 488 - - - - 4 - - - - 492

other - - - - - 15 - 161 - 65 241

Total 644 5,066 31,820 181,786 376,563 155,893 2,938 43,392 5,036 12,694 815,832

Group 2009





Guaran-tees

issuedTOTAL

Publicsector

Largecorpo-

ratecustom-mers

Smalland


Mortga-ges

Otherloans Corpo-

ratecustom-mers

Privateindivi-duals

Lithuania 296 5,344 58,138 421,795 449,026 277,945 2,936 76,957 8,757 9,134 1,310,328

Germany - - 11,633 - - - - - - 11,633

Latvia - - - - 2,176 4 - 260 - 14 2,454

Russia - - - - 459 5 - - - - 464

USA - - - - - 2 - - - - 2

UnitedKingdom 449 - - - 38 - - - - 68 555

other - - - - - 1 - - - - 1

Total 745 5,344 69,771 421,795 451,699 277,957 2,936 77,217 8,757 9,216 1,325,437

CITADELE BANKAS AB


62


Collateral and other credit enhancements

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. In addition,guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

The ability to repay loan is the primary criterion in loan evaluation, though the Bank and the Group always demandcollateral. Acceptable collaterals are classified into real estate, movable properties, guarantees, insurance, financial assetsand other. Assets accepted as collateral are estimated at their fair value, while estimating present value of loan taking intoaccount the costs for obtaining and selling the collateral. When real estate is appraised, the Bank and the Group also takesinto account its liquidity and useful life.

The main types of collateral by value of collateral as of the last appraisal date are as follows:

Bank 2010Financial

institutions


Guaran-tees


Largecorpo-

ratecustom

ers

Small andmedium-

sizedenterprises

Mort-gages

Otherloans

Commercial and other realestate 139 - 31,911 117,230 44,847 38,262 958 233,347

Residential buildings - - - 10,122 335,287 26,288 - 371,697

Guarantees - 2,197 - 3,997 - 14 - 6,208

Machinery - 712 - 24,884 - - - 25,596

Deposits 505 - - - - 1,010 4,495 6,010

Other pledged assets - 1,871 - 13,037 - 3,833 1,903 20,644

Unsecured loans 1,727 257 - 19,829 6 63,180 5,338 90,337

Total 2,371 5,037 31,911 189,099 380,140 132,587 12,694 753,839

Bank 2009Financial

institutions


Guaran-tees


Largecorpo-

ratecustom-

mers

Small andmedium-

sizedenterprises

Mort-gages

Otherloans

Commercial and other realestate 279 - 78,830 331,529 61,771 123,133 976 596,518

Residential buildings - - 35,591 393,986 41,876 - 471,453

Guarantees - 3,055 - 7,540 - - - 10,595

Machinery - - 32,307 - - - 32,307

Deposits 466 238 - 51 - 587 1,528 2,870

Other pledged assets - 2,015 - 25,003 - 4,048 1,888 32,954

Unsecured loans 5,449 - - 30,235 202 76,984 4,824 117,694

Total 6,194 5,308 78,830 462,256 455,959 246,628 9,216 1,264,391

CITADELE BANKAS AB


63


Group 2010



Guaran-teesissued


TOTALPublicsector

Largecor-poratecus-tomers

Small andmedium-sizedenter-prises

Mort-gages

Otherloans

Corpo-ratecustom-mers

Priva-teindivi-duals

Commercial andother real estate 139 - 31,911 117,230 44,847 38,262 958 4,450 - 237,797

Residentialbuildings - - - 10,122 335,287 26,288 - 709 99 372,505

Guarantees - 2,197 - 3,997 - 14 - - 6,208

Machinery - 712 - 24,884 - - 7,986 229 33,811

Deposits 505 - - - - 1,010 4,495 - - 6,010

Other pledgedassets - 1,871 - 13,037 - 3,833 1,903 37,516 4,917 63,077

Unsecured loans - 257 - 19,829 6 63,180 5,338 - - 88,610

Total 644 5,037 31,911 189,099 380,140 132,587 12,694 50,661 5,245 808,018

Group 2009



Guaran-teesissued


TOTALPublicsector

Largecorpo-ratecustom-mers

Small andmedium-sizedenterprises

Mort-gages

Otherloans

Corpo-ratecustom-mers

Privateindivi-duals

Commercial andother real estate 279 - 78,830 331,529 61,771 123,133 976 8,143 - 604,661

Residentialbuildings - - - 35,591 393,986 41,876 - 1,031 475 472,959

Guarantees - 3,055 - 7,540 - - - - - 10,595

Machinery - - - 32,307 - - 12,453 324 45,084

Deposits 466 238 - 51 - 587 1,528 - - 2,870

Other pledgedassets - 2,015 - 25,003 - 4,048 1,888 62,762 8,503 104,219

Unsecured loans - - - 30,235 202 76,984 4,824 - - 112,245

Total 745 5,308 78,830 462,256 455,959 246,628 9,216 84,389 9,302 1,352,633

Credit quality by the category of financial assets

The credit quality of financial assets is managed by the Bank and Group using an internal credit assessment system.

Rating of loans

During evaluation of loans, the Bank and the Group apply specific valuation criteria and procedures on the clients. Themain criteria for evaluation are those related client’s financial position assessment. The financial position of the client isanalysed based on constantly renewed financial information, also taking into account variations in certain financial ratios,affecting the position of the client. Ratings are assigned to the clients based on a set of defined assessment criteria. Lowerrisk is assigned to reliable transactions, i.e. clients’ operations are stable, the client complies with provisions of creditagreements, collateral is of good quality. Higher risk is assigned to transactions with identified default risk, clients withminor breaches in contractual provisions, client’s financial position and liquidity is unstable/doubtful.

As at 31 December 2010, the Bank had short-term deposits in Citadele Banka AS. The Latvian Government‘s long-termborrowing in foreign currency rating established by the international rating agency Moody‘s is ‘Baa3’ as at 31 December2010.

CITADELE BANKAS AB


64


The credit quality of loans and receivables and finance lease receivables by classes is presented below:

Bank 2010Neither past due nor impaired Past due or

individuallyimpaired TOTALLow risk Higher risk

Loans to financial institutions 2,371 - - 2,371


Public sector 3,166 1,871 - 5,037

Large corporate customers 31,911 - - 31,911

Small and medium-sized enterprises 84,089 38,060 66,950 189, 099


Mortgages 293,520 39,473 47,147 380,140

Other loans 73,829 15,148 40,672 129,649

Repurchase agreements 2,938 - - 2,938

TOTAL 491,824 94,552 154,769 741,145

Bank 2009Neither past due nor impaired Past due or


Loans to financial institutions 6,194 - - 6,194


Public sector 5,201 107 - 5,308

Large corporate customers 37,029 41,801 78,830

Small and medium-sizes enterprises 123,612 85,446 253,158 462,216


Mortgages 329,661 29,239 97,059 455,959

Other loans 105,109 36,153 102,470 243,732


TOTAL 609,742 150,945 494,488 1,255,175

Group 2010Neither past due nor impaired Past due or


Loans to financial institutions 644 - - 644


Public sector 3,166 1,871 - 5,037

Large corporate customers 31,911 - - 31,911

Small and medium-sized enterprises 84,089 38,060 66,950 189,099


Mortgages 293,520 39,473 47,147 380,140

Other loans 73,829 15,148 40,672 129,649



Corporate entities 31,092 2,245 17,324 50,661

Private individuals 3,352 286 1,607 5,245

TOTAL 524,541 97,083 173,700 795,324

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Group 2009Neither past due nor impaired Past due or


Loans to financial institutions 745 - - 745


Public sector 5,201 107 5,308

Large corporate customers 37,029 41,801 78,830Small and medium-sized

enterprises 123,612 85,446 253,158 462,216


Mortgages 329,661 29,239 97,059 455,959

Other loans 105,109 36,153 102,470 243,732



Corporate entities 13,532 11,309 59,550 84,391

Private individuals 6,279 - 3,022 9,301

TOTAL 624,104 162,254 557,060 1,343,418

Aging analysis of past due but not impaired loans by category of financial assets:

Bank 2010Less than30 days

31 to 60days

61 to 90days

More than91 days

TotalFair value of

collateral

Category of assets

Loans to financial institutions - - - - - -Loans to corporate entities:

Public sector - - - - - -Large corporate customers - - - - - -Small and medium-sized

enterprises 17,001 1,681 - 2,799 21,481 21,439Loans to individuals:

Mortgages 17,712 1,863 702 235 20,512 20,512Other loans 5,431 1,589 834 964 8,818 5,745

Repurchase agreements - - - - - -TOTAL 40,144 5,133 1,536 3,998 50,811 47,696

Bank 2009Less than30 days

31 to 60days

61 to 90days

More than91 days

TotalFair value of

collateral

Category of assets



enterprises 24,906 5,047 2,307 59,471 91,731 91,724Loans to individuals:

Mortgages 14,694 907 819 4,232 20,652 20,652Other loans 16,126 2,897 2,217 11,131 32,371 24,572

Repurchase agreements - - - - - -TOTAL 55,726 8,851 5,343 74,834 144,754 136,948

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Group 2010Less than30 days

31 to 60days

61 to 90days

More than91 days

TotalFair value of

collateral

Category of assets



enterprises 17,001 1,681 - 2,799 21,481 21,439Loans to individuals:

Mortgages 17,712 1,863 702 235 20,512 20,512Other loans 5,431 1,589 834 964 8,818 5,745

Repurchase agreements - - - - - -Finance lease portfolio:

Corporate entities 4,397 2,556 - - 6,953 5,347Private individuals 975 316 - - 1,291 1,142

TOTAL 45,516 8,005 1,536 3,998 59,055 54,185

Group 2009Less than30 days

31 to 60days

61 to 90days

More than91 days

TotalFair value of

collateral

Category of assets

Loans to financial institutions - - - - - -


Public sector - - - - - -

Large corporate customers - - - - - -Small and medium-sized

enterprises 24,906 5,047 2,307 59,471 91,731 91,724Loans to individuals:

Mortgages 14,694 907 819 4,232 20,652 20,652Other loans 16,126 2,897 2,217 11,131 32,371 24,572

Repurchase agreements - - - - - -Finance lease portfolio:

Corporate entities 13,595 7,480 - - 21,075 15,421Private individuals 1,372 645 - - 2,017 1,740

TOTAL 70,693 16,976 5,343 74,834 167,846 154,109

These past due loans are not considered impaired as they are covered by sufficient collateral. The Bank and the Group didnot have past due or impaired balances due from banks as at 31 December 2010 and 2009.

Impaired loans and receivables by category of assets:

Bank 2010Gross value of loans

impairedImpairment

Fair value of collateral

Loans to financial institutions - - -


Public sector - - -

Large corporate customers - - -

Small and medium-sized enterprises 45,469 11,412 34,054


Mortgages 26,635 3,185 23,450

Other loans 31,854 23,050 7,828

Repurchase agreements - - -

TOTAL 103,958 37,647 65,332

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Bank 2009Gross value of loans

impairedImpairment


Loans to financial institutions - -


Public sector - - -




Mortgages 76,408 4,645 71,763

Other loans 70,099 22,972 44,602


TOTAL 349,734 83,475 263,721

Group 2010Gross value of loans

impairedImpairment


Loans to financial institutions - - -


Public sector - - -

Large corporate customers - - -



Mortgages 26,635 3,185 23,450

Other loans 31,854 23,050 7,828



Corporate entities 10,371 6,639 3,596

Private individuals 316 102 223

TOTAL 114,645 44,388 69,151

Group 2009Gross value of loans

impairedImpairment


Loans to financial institutions - -


Public sector - -




Mortgages 76,408 4,645 71,763

Other loans 70,099 22,972 44,602



Corporate entities 38,512 6,518 32,118

Private individuals 969 462 523

TOTAL 389,215 90,455 296,362

Renegotiated loans and receivables (including finance lease receivables) of the Bank and the Group, unimpaired afterrenegotiation that otherwise be impaired, amounted to LTL 504 thousand and LTL 1,952 thousand, respectively, as at 31December 2010 (31 December 2009: LTL 6,719 thousand and LTL 10,545 thousand, respectively).

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Liquidity risk

The Bank’s and the Group’s liquidity risk management and control is regulated by the Bank’s and the Group’s liquidity riskmanagement and control procedure, in which the main limits for the control of the Bank’s and the Group’s liquidity risk areestablished.

Liquidity risk is the risk that the Bank or the Group will not have sufficient funds to meet commitments at any given point intime.

The Bank’s and the Group’s liquidity management is based on the current and desired profile of its Balance Sheetstructure. The Bank’s and the Group’s liquidity forecast is made when forecasting yearly budgets and the total amount andprofile of the required liability portfolio.

The Bank's and the Group’s policy is to be as liquid as it takes to cover all its obligations under all uncertain circumstancesthat might occur within the market environment within which the Bank and the Group operates.Other tasks of liquidity management are to:

Comply with the liquidity ratio requirements,

Optimise the Risk/Return ratio – sufficient liquidity compared with carry,

React adequately and in time to significant changes in the operating environment.

According to the requirements of the Bank of Lithuania the Bank and the Group have to comply with the requirement tokeep the liquidity ratio (liquid assets divided by current liabilities) at the level of not less than 30 per cent.

Liquidity risk ratio is monitored through Asset/Liability structure by maturity gaps reports.

Liquidity management

Liquidity management includes:

1. Liquidity risk management includes daily supply of funds by monitoring future cash flows in order to ensure that fundsrequirements are fully met. This involves replenishment of funds after they are paid out upon maturity. To this end theBank is actively involved in various tenders during which banks are selected for project financing using funds of the Satebudget and various funds of the EU. The parent bank Citadele Banka AS is a guaranteed source of financing in case noother sources are available.

2. Marketable asset portfolio which can be easily sold with the aim of safeguarding against an unexpected interruption incash flow. The Bank makes investments in debt securities issued by the Lithuanian Government.

3. Monitoring of the Bank’s and the consolidated liquidity ratio. Mnitoring and reporting procedures involve the assessmentof weekly and monthly cash flows. Monitoring results are presented to the supervisory authority – the Bank of Lithuania –on a weekly and monthly basis.

4. Management of debt maturity dates and concentration. The Treasury Department continuously monitors differentmaturity profiles of funds, unfulfilled commitments to extend credit and overdrafts.

Citadele Banka AS is committed to ensure the Bank’s liquidity by providing required funding. Funding mainly depends onchanges in customers deposits.

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The tables below present liquidity reporting (information on undiscounted financial liabilities distributed according to termsagreed upon is presented after liquidity information).

Maturity gap (Bank)31 December 2010 On demand

Up to 3month

3 – 12months

1 – 5years

Over 5years

Undefinedmaturity Total

Assets

Cash 11,717 - - - - - 11,717

Balances with central bank 27,627 - - - - - 27,627

Balances with banks 4,261 41,434 - - - 1,733 47,428Financial assets at fair value

through profit or loss - 140 70 - - - 210

Available-for-sale financial assets - - - 72,411 6,848 71 79,330

Held-to-maturity investments - 5,348 16,534 16,856 2,986 - 41,724

Investments in subsidiary - - - - - 1,158 1,158

Loans and advances - 37,415 97,394 170,545 372,495 23,356 701,205

Other assets - 859 - - - 19,663 20,522

Total assets 43,605 85,196 113,998 259,812 382,329 45,981 930,921

Liabilities

Financial liabilities at fair valuethrough profit or loss - 164 - - - - 164

Due to banks 5,813 127,182 - - - - 132,995

Due to customers 224,618 202,594 172,146 11,855 230 8 611,451

Equity - - - - - 142,886 142,886

Other liabilities 1,440 5,215 2,295 16,795 16,108 1,572 43,425

Total liabilities and equity 231,871 335,155 174,441 28,650 16,338 144,466 930,921

Net assets (liabilities) (188,266) (249,959) (60,443) 231,162 365,991 (98,485) -

Lending commitments (55,983) - - - - - (55,983)Net assets (liabilities) including

lending commitments (244,249) (249,959) (60,443) 231,162 365,991 (98,485) (55,983)

Gap as a percentage of totalassets (26.24) (26,85) (6.49) 24.83 39.32 (10,58) (6.01)

Bank

Total current assets 201,995

Total current liabilities 615,538Liquidity ratio, % 32.82

Current assets comprise liquid assets on demand and with maturity of less than 1 month and all debt securities. Currentliabilities comprise liabilities on demand and with maturity of less than 1 month and the total amount of individuals' termdeposits.

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Maturity gap (Bank)31 December 2009

Ondemand

Up to 3month

3 – 12months

1 – 5years

Over 5years


Assets

Cash 16,888 - - - - - 16,888Balances with central bank 42,325 - - - - - 42,325Balances with banks 32,186 39,517 - - - 1,282 72,985Financial assets at fair value

through profit or loss - 103 - - - - 103Available-for-sale financial assets - 1,160 23,288 17,727 10,411 77 52,663Held-to-maturity investments - 4,796 14,430 32,660 14,113 - 65,999Loans and advances - 83,075 124,424 259,438 457,297 243,119 1,167,353Other assets - 1,639 - - - 22,782 24,421

Total assets 91,399 130,290 162,142 309,825 481,821 267,260 1,442,737

Liabilities


Due to banks 480 93,250 609,191 - - - 702,921Due to customers 152,828 220,255 140,456 7,874 169 3 521,585Equity - - - - - 184,383 184,383Other liabilities 1,697 5,040 2,301 23,189 - 1,588 33,815

Total liabilities and equity 155,005 318,578 751,948 31,063 169 185,974 1,442,737

Net assets (liabilities) (63,606) (188,288) (589,806) 278,762 481,652 81,286Lending commitments (68,377) (68,377)Net assets (liabilities) including

lending commitments (131,983) (188,288) (589,806) 278,762 481,652 81,286 (68,377)

Gap as a percentage of totalassets (9.15) (13.05) (40.88) 19.32 33.39 5.63 (4.74)

BankTotal current assets 196,156Total current liabilities 481,438Liquidity ratio, % 40.74

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Maturity gap (Group)31 December 2010

Ondemand

Up to 3month

3 – 12months

1 – 5years

Over 5years


Assets

Cash 11,717 - - - - - 11,717Balances with central bank 27,627 - - - - - 27,627Balances with banks 4,261 41,434 - - - 1,733 47,428Financial assets at fair value

through profit or loss - 140 70 - - - 210Available-for-sale financial assets - - - 72,411 6,848 71 79,330Held-to-maturity investments - 5,348 16,534 16,856 2,986 - 41,724Loans and advances - 36,594 101,826 209,787 375,217 24,482 747,906Other assets 66 1,067 79 - - 26,860 28,072

Total assets 43,671 84,583 118,509 299,054 385,051 53,146 984,014

Liabilities


Due to banks 5,813 167,454 - 12,890 - - 186,157Due to customers 224,618 201,567 172,146 11,855 230 8 610,424Equity - - - - - 143,379 143,379Other liabilities 1,587 5,436 2,393 16,795 16,108 1,571 43,890

Total liabilities and equity 232,018 374,621 174,539 41,540 16,338 144,958 984,014

Net assets (liabilities) (188,347) (290,038) (56,030) 257,514 368,713 (91,812) -Lending commitments (55,232) - - - - - (55,232)Net assets (liabilities) including

lending commitments (243,579) (290,038) (56,030) 257,514 368,713 (91,812) (55,232)

Gap as a percentage of totalassets (24.75) (29.47) (5.69) 26.17 37.47 (9.33) (5.61)

GroupTotal current assets 201,322Total current liabilities 614,115Liquidity ratio, % 32.78

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Maturity gap (Group)31 December 2009 On demand

Up to 3month

3 – 12months

1 – 5years

Over 5years


Assets

Cash 16,888 - - - - - 16,888Balances with the Bank of Lithuania 42,325 - - - - - 42,325Balances with banks 32,186 39,517 - - - 1,282 72,985Financial assets at fair value

through profit or loss - 103 - - - - 103Available-for-sale financial assets - 1,160 23,288 17,727 10,411 77 52,663Held-to-maturity investments - 4,796 14,430 32,660 14,113 - 65,999Loans to customers, net - 78,164 128,040 328,397 465,099 248,179 1,247,879Other assets 73 2,035 3 47 - 38,072 40,230

Total assets 91,472 125,775 165,761 378,831 489,623 287,610 1,539,072

Liabilities


Due to banks 480 175,407 612,161 11,879 - 799,927Due to customers 152,678 219,255 140,456 7,874 169 3 520,435Equity - - - - - 184,269 184,269Other liabilities 2,030 4,911 2,415 23,189 1,863 34,408

Total liabilities and equity 155,188 399,606 755,032 42,942 169 186,135 1,539,072

Net assets (liabilities) (63,716) (273,831) (589,271) 335,889 489,454 101,475Lending commitments (68,342) (68,342)Net assets (liabilities) including

lending commitments (132,058) (273,831) (589,271) 335,889 489,454 101,475 (68,342)

Gap as a percentage of totalassets (8.58) (17.79) (38.29) 21.83 31.80 6.59 (4.44)

GroupTotal current assets 198,592Total current liabilities 485,956Liquidity ratio, % 40.87

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Note 35. Risk management (continued)

The table below breaks down the liabilities of the Bank and the Group by contractual due date.

Financial liabilities (Bank)31 December 2010

Ondemand

Up to 3month

3 – 12months

1 – 5years

Over 5years Total

Receivables under contracts for financialderivatives - 177,508 1,422 - - 178,930

Payables under contracts for financialderivatives - 177,531 1,353 - - 178,884

Due to banks 5,813 127,580 - - - 133,393Due to customers 224,618 205,673 177,184 13,236 1,250 621,961Financial lease liabilities - 773 2,366 2,449 - 5,588Other loans - 181 450 16,575 16,687 33,893Other financial liabilities 3,732 - - - - 3,732Lending commitments 55,983 - - - - 55,983Guarantees and warranties issued 13,762 - - - - 13,762

Total undiscounted financial liabilities 303,908 689,246 182,775 32,260 17,937 1,226,126

Financial liabilities (Bank)31 December 2009

Ondemand

Up to 3month

3 – 12months

1 – 5years

Over 5years Total

Receivables under contracts for financialderivatives - 130,415 - - - 130,415

Payables under contracts for financialderivatives - 130,345 - - - 130,345

Due to banks 480 93,514 616,151 - - 710,145Due to customers 152,828 221,072 146,319 8,932 823 529,974Financial lease liabilities - 820 2,388 5,440 - 8,648Other loans - 136 408 20,020 66 20,630Other financial liabilities 4,295 - - - - 4,295Lending commitments 68,377 - - - - 68,377Guarantees and warranties issued 9,785 - - - - 9,785

Total undiscounted financial liabilities 235,765 576,302 765,266 34,392 889 1,612,614

Financial liabilities (Group)31 December 2010

Ondemand

Up to 3month

3 – 12months

1 – 5years

Over 5years Total

Receivables under contracts for financialderivatives - 177,508 1,422 - - 178,930

Payables under contracts for financialderivatives - 177,531 1,353 - - 178,884

Due to banks 5,813 169,350 3,508 9,389 - 188,060Due to customers 223,591 205,673 177,184 13,236 1,250 620,934Financial lease liabilities - 773 2,366 2,449 - 5,588Other loans - 181 450 16,575 16,687 33,893Other financial liabilities 3,925 - - - - 3,925Lending commitments 55,232 - - - - 55,232Guarantees and warranties issued 13,762 - - - - 13,762

Total undiscounted financial liabilities 302,323 731,016 186,283 41,649 17,937 1,279,208

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Financial liabilities (Group)31 December 2009

Ondemand

Up to 3month

3 – 12months

1 – 5years

Over 5years Total

Receivables under contracts for financialderivatives - 130,415 - - - 130,415

Payables under contracts for financialderivatives - 130,345 - - - 130,345

Due to banks 480 176,159 619,315 12,664 - 808,618Due to customers 152,678 220,071 146,319 8,932 823 528,823Financial lease liabilities - 820 2,388 5,440 - 8,648Other loans - 136 408 20,020 66 20,630Other financial liabilities 4,341 - - - - 4,341Lending commitments 68,377 - - - - 68,377Guarantees and warranties issued 9,785 - - - - 9,785

Total undiscounted financial liabilities 235,661 657,946 768,430 47,056 889 1,709,982

Currency risk

Foreign exchange risk is the risk that the relevant exchange rates might move against the Bank’s and the Group's netopen position in foreign currencies emerging either because of foreign exchange trading positions and/or because of theexposures caused by its overall assets and liabilities.

The Bank and the Group hold a minimal (reasonable) level of foreign exchange positions necessary to offer services toclients. The Bank and the Group seek to minimise foreign exchange risk in its lending or asset taking and fundingoperations by matching the asset and liability side by currencies in such a way that it always complies with the establishedrisk ratios.

The Bank and the Group manage foreign exchange position risk by establishing maximum risk limits as a percentage ofthe capital.

Below presented is information on the Bank’s and the Group’s open currency positions:

Bank Balance sheet Off-balance sheet items Openposition

Position as %of capital

31 December 2010Assets

Equity andliabilities

Claims Liabilities

LTL 285,581 521,555 174,366 - (61,608) (44.50)

EUR 570,386 287,809 5,852 228,254 60,176 43.46

USD 71,707 117,716 52,952 6,773 170 0.12

GBP 543 936 486 - 93 0.07

RUB 900 1,823 1,197 - 274 0.20

Other 1,804 1,083 277 44 954 0.69

Total 930,921 930,921 235,130 235,071 59 0.04

Long positions 61,667 44.54

Short positions (61,608) (44.50)

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Bank Balance sheet Off-balance sheet itemsOpen

positionPosition as %

of capital31 December 2009

AssetsEquity andliabilities

Claims Liabilities

LTL 474,956 480,356 56,792 52,500 (1,108) (0.62)

EUR 861,907 838,985 53,531 76,593 (140) (0.08)

USD 102,452 119,189 18,073 952 384 0.22

GBP 539 891 497 76 69 0.04

RUB 446 1,353 1,192 121 164 0.09

Other 2,437 1,963 330 103 701 0.39

Total 1,442,737 1,442,737 130,415 130,345 70 0.04



Group Balance sheet Off-balance sheet items Openposition




Claims Liabilities

LTL 302,946 521,497 174,366 - (44,185) (31.61)

EUR 593,223 328,068 5,852 228,254 42,753 30.58

USD 84,598 130,607 52,952 6,773 170 0.12

GBP 543 936 486 - 93 0.07

RUB 900 1,823 1,197 - 274 0.19

Other 1,804 1,083 277 44 954 0.69

Total 984,014 984,014 235,130 235,071 59 0.04



Group Balance sheet Off-balance sheet items Openposition




Claims Liabilities

LTL 514,758 479,684 56,792 52,500 39,366 22.01

EUR 902,591 920,143 53,531 76,593 (40,614) (22.70)

USD 118,301 135,038 18,073 952 384 0.21

GBP 539 891 497 76 69 0.04

RUB 446 1,353 1,192 121 164 0.09

Other 2,437 1,963 330 103 701 0.39

Total 1,539,072 1,539,072 130,415 130,345 70 0.04



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Sensitivity of foreign exchange risk

Foreign exchange (FX) risk is limited by amounts of open FX positions. For calculation of sensitivity to FX risk allexposures shall be converted into possible loss – i.e. open FX position is multiplied by possible FX rate change.

Bank and Group

Currency2011 2010

Possible change %Impact on profit or

loss and equityPossible change %

Impact on profit orloss and equity

GBP 12.0 11 12.5 9

LVL 0.5 - 2.0 1

RUB 16.6 46 12.0 20

SEK 15.0 11 10.0 8

USD 21.6 37 13.0 50

Other currencies 13.0 111 9.0 52

Total 216 140

Interest rate risk

Interest rate risk arises from the potential adverse effect arising from fluctuations of interest rates on the Bank’s and theGroup’s income and economic value.

Interest rate risk is assessed and decisions are made by the Risk Management Committee; further the decisions areapproved by the Bank’s Management Board. Risk is managed by competent structural units in accordance with theGroup’s internal regulations.

The Risk Management Committee sets the acceptable level of interest rate risk, defines the Bank’s and the Group’sinternal limit system, controls compliance with the limits set, and supervises how risk management instruments are used.

The fundamental element of interest rate risk management is clear, accurate, and timely risk assessment. To assessinterest rate risk on cash-flows and interest-bearing financial instruments, scenario analysis is applied.

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values offinancial instruments. The Board has established limits on the interest rate gaps for stipulated periods. Positions aremonitored on a monthly basis. Interest rate risk is managed by forecasting the market interest rates and managing themismatches between assets and liabilities by re-pricing maturities. The Bank and the Group apply the interest rate riskmanagement methods allowing to measure the Bank’s and the Group’s sensitivity to interest rate changes by computingthe impact to yearly net interest income (which equals the impact on profit before tax) in case of parallel shift by 1percentage point in the interest rates.

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Below presented is the Bank’s and Group’s interest rate gap reports as at 31 December 2010 and 2009.

Bank 31 December 2010

Lessthan 1

months1 to 3

months3 to 6

months

6months

to 1year

1 to 3years

Morethan 3year

Noninterestbearing Total

Assets:

Cash and due from banks 70,794 - - - - - 15,978 86,772Investments in equity

securities and derivatives - - - - - - 210 210Investments in available-for-

sale debt securities - - - - 31,120 48,139 71 79,330

Held-to-maturity investments - 5,348 - 16,534 7,811 12,031 - 41,724

Investments in subsidiary - - - - - - 1,158 1,158Loans and receivables

(including financial leasereceivables) 133,682 210,889 247,538 26,401 48,185 7,150 27,360 701,205

Other assets - - - - - - 20,522 20,522

Total 204,476 216,237 247,538 42,935 87,116 67,320 65,299 930,921

Liabilities:

Due to banks 62,315 58,987 - - - - 11,693 132,995

Due to customers 103,202 98,589 101,324 70,751 10,421 1,401 225,763 611,451

Other liabilities and equity 415 510 765 1,530 2,295 30,608 150,352 186,475

Total 165,932 158,086 102,089 72,281 12,716 32,009 387,808 930,921

Total interest sensitivitygap 38,544 58,151 145,449 (29,34) 74,400 35,311 (322,509) -

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Bank 31 December 2009Less

than 1months

1 to 3months

3 to 6months

6 monthsto 1 year

1 to 3years

Morethan 3year

Non interestbearing Total

Assets:


securities and derivatives - - - - - - 103 103Investments in available-for-

sale debt securities - 1,160 - - 3,655 24,484 23,364 52,663

Held-to-maturity investments - 4,796 14,430 - 25,519 21,254 - 65,999Loans and receivables(including financial leasereceivables) 166,331 289,270 347,182 15,925 80,009 26,960 241,676 1,167,353

Other assets - - - - - - 24,421 24,421

Total 249,455 295,226 361,612 15,925 109,183 72,698 338,638 1,442,737

Liabilities:

Due to banks 54,209 34,027 609,057 - - - 5,661 702,954

Due to customers 116,884 103,276 68,143 71,838 7,428 555 153,461 521,585


Total 171,722 137,825 677,970 73,368 12,772 18,401 350,679 1,442,737

Total interest sensitivity gap 77,733 157,401 (316,358) (57,443) 96,411 54,297 (12,041) -

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Group 31 December 2010Less

than 1months

1 to 3months

3 to 6mon-ths

6monthsto 1 year

1 to 3years

Morethan 3year

Noninterestbearing Total

Assets:


securities and derivatives - - - - - - 210 210

Investments in debt securities - - - - 31,120 48,139 71 79,330

Held-to-maturity investments - 5,348 - 16,534 7,811 12,031 - 41,724Loans and receivables

(including financial leasereceivables) 134,312 236,032 267,089 26,474 48,246 8,393 27,360 747,906

Other assets - - - - - - 28,072 28,072

Total 205,106 241,380 267,089 43,008 87,177 68,563 71,691 984,014

Liabilities:

Due to banks 62,327 99,247 12,890 - - - 11,693 186,157

Due to customers 102,175 98,589 101,324 70,751 10,421 1,401 225,763 610,424


Total 164,917 198,346 114,979 72,281 12,716 32,009 388,766 984,014

Total interest sensitivity gap 40,189 43,034 152,110 (29,273) 74,461 36,554 (317,075) -

Group 31 December 2009

Lessthan 1

months1 to 3

months3 to 6

months

6months

to 1year

1 to 3years

Morethan 3year

Non interestbearing Total

Assets:


securities and derivatives - - - - - - 103 103

Investments in debt securities - 1,160 - - 3,655 24,484 23,364 52,663

Held-to-maturity investments - 4,796 14,430 - 25,519 21,254 - 65,999Loans and receivables

(including financial leasereceivables) 165,232 334,673 377,826 16,001 85,511 26,960 241,676 1,247,879

Other assets - - - - - - 40,230 40,230

Total 248,356 340,629 392,256 16,001 114,685 72,698 354,447 1,539,072

Liabilities:

Due to banks 54,218 115,185 624,896 - - - 5,661 799,960

Due to customers 115,884 103,276 68,143 71,838 7,428 555 153,311 520,435


Total 170,723 218,971 693,803 73,368 12,772 18,401 351,034 1,539,072

Total interest sensitivity gap 77,633 121,658 (301,547) (57,367) 101,913 54,297 3,413 -

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The table below shows the impact of the interest rate increases/decreases by one percentage point on profit before taxand equity.

Bank Group

2010 2009 2010 2009

Impact of interest rate increase by 1% on profit before tax / equity * 1,690 (64) 1,621 (270)

Impact of interest rate decrease by 1% on profit before tax / equity * (1,690) 64 (1,621) 270

It is expected that EURIBOR interest rate will increase by around 0.65 per cent and VILIBOR interest rate will increase byaround 0.26 per cent in 2011.

2010

Bank GroupImpact of EURIBOR interest rate increase by 0.65 % on profit

before tax / equity * 1,376 1,277Impact of VILIBOR interest rate increase by 0.26 % on profit

before tax / equity * (90) (67)

*Impact on equity does not include fair value interest rate risk presented below.

Fair value interest rate risk

The table below shows the impact of change in the value of debt securities if the yield increases / decreases by onepercentage point on equity:

Impact on equity, LTL

Yield change 2010 2009

Available-for-sale debt securities 1% (1,680) (1,619)

(1%) 1,646 1,587

Operational risk

Operational risk is the risk to encounter direct and indirect losses due to inappropriate or unimplemented internalprocesses, technologies, employees’ actions or external factors.

The aim of operational risk is to seek that processes of the Bank or its subsidiary activities are organised in the way theyare profitable, secure and able to guarantee the continuous process of providing services to the clients by appropriatemeans, minimising possible activities’ losses in the future by taking priority of operational risk prevention.

The risk management of operational risk is a composite part of the Bank’s general risk management system and isincluded into the general risk management policy of the Bank.

The Bank and the Group apply various means and methods of operational risk management in its daily activities: “4 eyes”principle and functions’ separation method using continuous monitoring of the level of operational risk, as well asintroducing preventative means for the growing risk minimisation. The Bank has created the database of operational riskmanagement events, which includes historical data and allows forecasting the sources of operational risk and preventingthe upcoming losses.

The worst case scenario

The analysis of testing of the worst conditions and scenarios is widely used in estimation of great risk, which the Bankcould encounter, including concentration risk. This analysis helps to evaluate the factors with great risk and to estimate allpossible effects to the Bank. Testing of the worst case scenario helps to determine the losses incurred in the worst caseconditions of the Bank’s activity. While performing the testing, the consequences of unfavourable risk factors aredetermined and testing is performed by evaluating the main types of the risk: credit, market, liquidity and operation. Themain objective of the worst case scenario is to evaluate a possible effect to the Bank‘s and the Bank‘s Group equity in theworst conditions and prepare certain action plans should these circumstances appear, in order to secure the continuity ofthe activity. The test of the worst case scenario which includes four main types of risk is performed at least once a year.

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Note 36 Fair values of financial instruments

The following methods and assumptions are used by the Bank and the Group to estimate the fair value of these financialinstruments:

Cash. Cash represents cash on hand nominal value of which equals its fair value.

Balances with the Bank of Lithuania. Balances in current account at the Bank of Lithuania are stated at fair value.

Investments at fair value through profit or loss. Such investments are measured at fair values, therefore their fairvalues are equal to their carrying amounts.

Amounts due from banks. For assets maturing within three months, the carrying amount approximates fair value due tothe relatively short- term maturity of these financial instruments. For longer term deposits, the estimate of fair value wasmade by discounting scheduled future cash flows of the individual items using prevailing market rates as of the respectiveyear-end.

Available-for-sale and held-to-maturity investments. The fair values of investments are established based on quotedmarket prices.

Loans to customers and finance lease receivables. The estimate was made by discounting scheduled future cash flowsof the individual loans through the estimated maturity using prevailing market rates as of the respective year-end.

Amounts due to customers and banks, finance lease and other loans. For balances maturing within three months thecarrying amount approximates fair value due to the relatively short maturity of these financial instruments. For longer termfixed interest bearing deposits and other financial liabilities the estimated fair value is based on discounted cash flowsusing interest rates for new debts with similar remaining maturity.

The following table shows the analysis of financial instruments recorded at fair value, between those whose fair value isbased on quoted market price and those involving valuation techniques where all the model inputs are observable in themarket.

Bank / Group 2010

Quoted marketprice

Valuation techniques– market observable

inputs TotalFinancial assets

Derivative financial instruments - 210 210Available-for-sale investments 79,330 - 79,330

Total financial assets at fair value 79,330 210 79,540


Derivative financial instruments - 164 164

Total financial liabilities at fair value - 164 164

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Note 36 Fair values of financial instruments (continued)

Bank / Group 2009

Quoted marketprice

Valuation techniques– market observable

inputs TotalFinancial assets

Derivative financial instruments - 103 103Available-for-sale investments 52,663 - 52,663

Total financial assets at fair value 52,663 103 52,766


Derivative financial instruments - 33 33

Total financial liabilities at fair value - 33 33

The fair value of financial instruments is determined in accordance with the requirements of IAS 39 “Financial Instruments:Recognition and Measurement”. Fair value is defined as the amount at which the instrument could be exchanged in acurrent transaction between knowledgeable willing parties on arm’s length conditions, other than in forced or liquidationsale. As no readily available market exists for a large part of the Bank’s and the Group’s financial instruments, judgementis necessary in arriving at fair value, based on current economic conditions and the specific risks attributable to theinstrument. Below presented fair values of financial instruments were calculated based on market observable inputs,except for debt and equity securities and investment funds units acquired which were calculated based on market orredemption prices.

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Bank 31 December 2010 31 December 2009Carryingamount Fair value

Carryingamount Fair value

Financial assets

Cash 11,717 11,717 16,888 16,888Balances with the central bank 27,627 27,627 42,325 42,325Financial assets at fair value through profit or

loss 210 210 103 103Available-for-sale financial assets 79,330 79,330 52,663 52,663Held-to-maturity investments 41,724 43,593 65,999 68,328Investments in subsidiary 1,158 1,158 - -Balances with banks 47,428 47,428 72,985 72,982Loans granted

Financial institutions 2,370 2,469 6,193 6,038Loans to corporate entities:

Public sector 5,022 5,044 5,291 5,536Large corporate customers 31,820 33,087 69,770 70,540Small and medium-sized enterprises 177,041 180,790 414,091 430,419

Loans to individuals:Mortgages 376,563 363,844 449,963 453,483Other loans 105,451 107,625 219,109 222,530

Repurchase agreements 2,938 2,938 2,936 2,936Total financial assets 910,399 906,860 1,418,316 1,444,771


Due to banks 132,995 133,097 702,921 707,899Financial liabilities at fair value through profit or

loss 164 164 33 33Due to customers 611,451 614,756 521,585 528,597Finance lease liabilities 5,358 5,585 8,441 8,908Other financial liabilities 3,732 3,732 4,295 4,295Other loans 30,765 38,983 18,200 15,975

Total liabilities 784,465 796,317 1,255,475 1,265,707

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Group 31 December 2010 31 December 2009Carryingamount Fair value

Carryingamount Fair value

Financial assets

Cash 11,717 11,717 16,888 16,888Balances with the central bank 27,627 27,627 42,325 42,325Financial assets at fair value through profit or

loss 210 210 103 103Available-for-sale financial assets 79,330 79,330 52,663 52,663Held-to-maturity investments 41,724 43,593 65,999 68,328Balances with banks 47,428 47,428 72,985 72,982Loans granted

Financial institutions 643 649 744 751Loans to corporate entities:

Public sector 5,022 5,044 5,291 5,536Large corporate customers 31,820 33,087 69,770 70,540Small and medium-sized enterprises 177,041 180,790 414,092 430,419

Loans to individuals:Mortgages 376,563 363,844 449,963 453,483Other loans 105,451 107,625 219,109 222,530

Repurchase agreements 2,938 2,938 2,936 2,936Finance lease portfolio:

Corporate entities 43,392 43,755 77,217 72,825Private individuals 5,036 4,993 8,757 8,242Total financial assets 955,942 952,630 1,498,842 1,520,551


Due to banks 186,157 187,312 799,927 793,744Financial liabilities at fair value through profit

or loss 164 164 33 33Deposits 610,424 613,729 520,435 527,446Finance lease liabilities 5,358 5,585 8,415 8,908Other financial liabilities 3,925 3,925 4,341 4,341Other loans 30,765 28,550 18,200 15,975

Total liabilities 836,793 839,265 1,351,351 1,350,447

The main part of the loans granted to clients bears variable interest rates.

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