PRINCIPLES OF ACCOUNTING

General Principles

The Financial Statements have been prepared in accordance with the Law on the Central Bank of the Republic of Estonia and the Statute of Eesti Pank, which was amended during 1996. Estonian Accounting Law, from which Eesti Pank is exempted, and International Accounting Standards have been adopted only where Management consider them to be appropriate and applicable to the activities of a central bank.

The Financial Statements have been prepared in accordance with the historical cost basis of accounting, modified to include the revaluation of certain assets as referred to in the notes below.

The Financial Statements and notes have been prepared using accounting policies consistent with those used in previous years. The published balance sheet of Eesti Pank has been structured so that the domestic and foreign assets and liabilities can be separated. In addition, the balance sheet structure demonstrates the backing of the kroon by gold and freely convertible foreign currency assets.

In accordance with the Law on the Central Bank of the Republic of Estonia, Eesti Pank is not subject to taxes or any other payments connected with its economic activities to the State budget or to local budgets, except for taxes connected with natural persons.

The principal accounting policies adopted for the preparation of the Financial Statements are set out below.

Income and Expenses

Realised income and expenses are accounted for in the profit and loss account in the relevant reporting period on an accruals basis, notwithstanding the actual date the money is received or paid. Unrealised gains and losses are credited or charged to reserves.

Foreign Currency Translation

Transactions denominated in foreign currencies are translated into kroons, the legal tender of the Republic of Estonia, using the official exchange rates of Eesti Pank valid on the day of the transaction. Foreign currency assets and liabilities are translated into Estonian kroons at the Eesti Pank official exchange rate valid on the balance sheet date. IMF balances have been revalued using the SDR exchange rate, calculated on the basis of the SDR basket currencies using Eesti Pank official rates valid on the last day of the year. Assets and liabilities denominated in the currencies of CIS countries, Latvia and Lithuania are translated into kroons using the official DEM exchange rate of the relevant country's central bank valid at the end of 1996 and the Eesti Pank official DEM exchange rate of the same date. Unrealised foreign exchange gains and losses are credited or charged to reserves.

Official exchange rates used at 31 December 1995 and 1996 were as follows:

 

1996

1995

DEM

8.00000

8.00000

USD

12.43560

11.46240

SDR

 17.85838

 17.03455

Gold

Gold reserves are valued at the market value valid at the end of the year using the quoted London Bullion Market price. Revaluation gains and losses are credited or charged to reserves.

Bonds and Other Securities

Foreign treasury bills and other quoted securities denominated in freely convertible currencies are recorded at their market value valid at the end of the year. Unrealised revaluation gains and losses are credited or charged to reserves. Reverse repurchase agreements and unquoted securities are valued at their purchase price.

Investments in Shares

Investments in shares are included at their purchase price, less provisions for any permanent diminution in value.

Fixed Assets

Fixed assets are recorded at original cost or values as determined by Management, less depreciation which is provided for on a straight line basis over the estimated useful lives of the assets at the following rates:

 

1996

1995

Buildings

3%

3%

Computers

  33%

 33%

Other

20%

20%

Building renovation costs are charged to the profit and loss account as expenses except where the expenditure results in an increase to the external floor area of the building or a change in its use, in which case such costs are added to fixed assets. Provisions are made where it is known or probable that the market value of the asset is less than the value recorded in the accounts. In 1996 the properties transferred to the Bank by the Government of Estonia were revalued using the amounts at which they had been included in Tallinn Building Register.

Loans and Provisions

Loans are reassessed periodically and specific provisions are established against those considered to be bad or doubtful due to the borrower's insolvency. Loan provisions are recorded as expenses of the reporting period and are included in the balance sheet as a deduction against the assets concerned. Loans are maintained in the balance sheet until they are repaid or written off. They are written off only after all legal measures to recover them have been taken.

Provisions for Guarantees

Provisions for guarantees are established as liabilities in the balance sheet, where it is considered probable that future events will result in payments being made by the Bank under the terms of guarantees. Such provisions are recorded as expenses of the reporting period.

ITEM 1 - GOLD

The Bank's gold reserves of 8,250.171 ounces remained the same as at the end of 1995. The market value at 31 December 1996 was EEK 4,572.57012 (USD 367.70) per ounce compared to EEK 4,432.51008 (USD 386.70) per ounce at 31 December 1995.

ITEM 2 - CONVERTIBLE FOREIGN CURRENCY ASSETS

These comprise current account balances, over-night loans, deposits, foreign government bonds, short-term investments in gilts and securities managed by a foreign investment bank and reverse repurchase agreements denominated in convertible foreign currency, together with accrued interest where applicable.

During 1996, Eesti Pank’s convertible foreign currency assets have increased by almost one fifth due primarily to foreign currency purchases from Estonian commercial banks, income earned on foreign currency reserves and favourable exchange rate movements. These factors have been offset partially by a decline in the value of German government bonds during the year. In 1996 the Bank increased the proportion of DEM denominated assets within its net foreign currency reserves to 75% (1995 -- 69%).

The Bank's investment policies allow transactions only with highly rated banks and other financial institutions. Under the Bank’s general investment principles the foreign currency reserves are intended to secure full convertibility of the kroon into other selected currencies, sufficient liquidity to meet the Bank's obligations and reasonable returns within the given risk constraints. To fulfill these investment policies the Bank keeps its foreign currency reserves in liquid instruments with an average duration of approximately two years and low risk levels.

ITEM 3 (AND ITEM 12) - SPECIAL DRAWING RIGHTS (SDR'S)

These items comprise the unutilised assets and liabilities, denominated in SDR's, arising from loans granted by the International Monetary Fund (IMF) to Estonia.

Between 1992 and 1995 the IMF granted a Standby Agreement (SBA) loan to Eesti Pank which at the end of 1994 was invested more efficiently in securities denominated in the SDR basket currencies than holding the money on the IMF account. Repayment of the SBA loan began in 1995 and its final maturity date is March 2000. Its major tranches will be repaid in 1997 and 1998.

Between 1993 and 1995 a Systemic Transformation Facility (STF) was granted by the IMF to the Government of the Republic of Estonia and was mediated by Eesti Pank, who acted as agent for the Government. The final maturity date of the STF is January 2005, with repayments beginning in 1998.

The following table in Estonian kroons shows the above described changes:

 

SBA

STF

Total

Balance as of 31.12.1995

150,449.15

3,253,258.36

3,403,707.51

Interest and other income

819,832.35

25,560.86

845,393.21

Purchases of SDR's

165,453,695.98

14,741,509.31

180,195,205.29

Loans repaid to the IMF

-134,885,435.28

 

-134,885,435.28

Interest and other expenses

-29,285,804.22

-18,031,838.96

-47,317,643.18

Exchange rate differences

-134,555.53

13,778.44

-120,777.09

Balance as of 31.12.1996

2,118,182.45

2,268.01

2,120,450.46

The balances at the end of 1995 and 1996 include accrued but not received interest of EEK 35,976.97 (SDR 2,112) and EEK 30,627.12 (SDR 1,715), respectively.

ITEM 4 (AND ITEM 12) - PARTICIPATION IN IMF

Participation in the IMF is recorded in the assets’ side of the balance sheet and equals the country’s quota in the IMF, which is recorded in the liabilities’ side of the balance sheet ("IMF kroon accounts"). Estonia’s quota in the IMF was SDR 46,500,000 (EEK 830,414,670) at the end of 1996:

 

SDR

EEK

Balance as of 31.12.1995

46,500,000.00

792,106,575.00

Exchange rate differences

 

38,308,095.00

Balance as of 31.12.1996

46,500,000.00

830,414,670.00

ITEM 5 - OTHER FOREIGN CURRENCY ASSETS

This item shows the accounts of Eesti Pank held with the central banks of CIS countries, Latvia and Lithuania and used for settlement of payment transactions with those countries on behalf of Estonian commercial banks and the Government of Estonia. The compensating balances with those organisations in kroons are shown as demand deposits of the Estonian banks and the Government in item 18 "Other foreign currency deposits".

ITEM 6 - LOANS

Total loans, net of provisions, decreased during 1996 by nearly EEK 22 million, due mainly to repayments of intermediary loans. Set out below is an analysis of the loan movements followed by additional explanations:

 

Balance as of
31.12.1995

New loans
extended

Loans repaid

Provisions

Balance as of
31.12.1996

Estonian financial institutions

72,714,204.46

1,229,653.40

-25,593,078.04

-452,567.50

47,898,212.32

     Other normally operating banks

7,481,588.00

1,229,653.40

-992,684.00

 

7,718,557.40

     Intermediary loans

65,232,616.46

 

-24,600,394.04

-452,567.50

40,179,654.92

Other loans

15,302,836.49

8,436,028.04

-5,216,200.43

0.00

18,522,664.10

     Other enterprises

780,723.68

939,055.00

-1,719,778.68

 

0.00

     Staff loans

14,522,112.81

7,496,973.04

-3,496,421.75

 

18,522,664.10

Accrued interest

3,365,003.25

33,160,981.04

-22,629,637.61

-10,428,693.94

3,467,652.74

Total

91,382,044.20

42,826,662.48

-53,438,916.08

-10,881,261.44

69,888,529.16

Intermediary loans

The reduction in intermediary loans by more than one third is due to the repayment of loans granted to Estonian commercial banks by the Finnish export credit agency, Vientiluotto OY, for which Eesti Pank acts as agent. The final maturity date for these intermediary loans falls in November 2001. In addition, a provision was established against an overdue loan, together with interest, of EEK 467,091.44. This loan had been granted to the Association UNI-EST in December 1992 by the former Eesti Sotsiaalpank for buying block peat machinery for Tootsi, Sangla and Oru peat-briquette works.

Loans to Estonian commercial banks

Loans to Estonian commercial banks include loans for crediting farmers that were issued to commercial banks by the order of the Eesti Vabariigi Ülemnõukogu (the Supreme Council of the Republic of Estonia) in 1991 and 1992. These loans have been partially repaid in 1996. Most of these loans fell due for repayment in the first quarter of 1997 and have now been fully repaid.

Loans to other enterprises

In 1995 and 1996 Arrow AS, a property holding company, received financial aid of EEK 0.3 million and 0.9 million, respectively, for the maintenance of a building under construction. Under an agreement signed at the end of 1996, Eesti Pank assigned its claim against Arrow AS worth EEK 1.2 million to Põhja-Eesti Pank, who will pay it on 1 May 1998 at the latest.

Loans to the employees of Eesti Pank

Home purchasing loans guaranteed by property and consumer loans to the employees of Eesti Pank are provided for a maximum of 25 and 2 years, respectively.

ITEM 7- BONDS

Bonds held in Estonian institutions are analysed as follows:

 

1996

1995

Eesti Maapank

 

2,000,000.00

Eesti Tööstuse ja Ehituse Kommertspank

 

15,019,791.97

Total

 

17,019,791.97

At 31 December 1995 the Bank held 50 interest free 10-year debentures in Eesti Maapank, with an aggregate nominal value of EEK 5 million. These debentures, which matured on 1 September 2002, had been purchased for EEK 2 million and had been reflected in the balance sheet at that amount. Under an agreement between Eesti Pank and Eesti Maapank in 1996, the latter redeemed the debentures prior to the actual maturity date and the proceeds of EEK 5 million were used by Eesti Pank to pay certain obligations to Eesti Maapank in respect of Painküla Starch Factory.

The fifteen 1.25% marketable two-year bonds of Eesti Tööstuse ja Ehituse Kommertspank, total nominal value of EEK 15 million, together with accrued interest, held at 31 December 1995 were contributed during 1996 to Eesti Hoiupank in part settlement of obligations under Eesti Pank’s guarantee to that bank (see item 23). Accordingly, the amount of the bond and accrued interest were expensed in the 1996 profit and loss account.

ITEM 8 - SHARES

Shares held by Eesti Pank comprise the following:

 

1996

1995

Percentage
holding (%)

EEK

Percentage
holding (%)

EEK

Eesti Investeerimispank
(Estonian Investment Bank)

44,121 shares nominal value 1,000 EEK

33.3

47,523,488.00

33.3

47,523,488.00

Eesti Hoiupank (Estonian Savings Bank)
2,250,433 shares nominal value 10 EEK

13.6

22,504,330.00

24.1

32,000,000.00

Bank for International Settlements (BIS)
700 shares including 200 voting shares

N/A

7,837.50

N/A

7,837.50

SWIFT
1 share nominal value 5,000 BEF

N/A

12,426.24

N/A

12,426.24

Joint-stock company Inkassaator
(security services)

100 shares nominal value 10,000 EEK

 

 

100

1,000,000.00

Väärtpaberite Keskdepositoorium
(Central Depository for Securities)

2 shares nominal value 100,000 EEK

7.1

200,000.00

10

200,000.00

Eesti Sotsiaalpank (Estonian Social Bank)
5,950 A shares nominal value 5,000 EEK
10,640 E shares nominal value 500 EEK

 

 

45.2

28.00

Joint-stock company Arrow
516 A shares nominal value 5,000 EEK
84 B shares nominal value 5,000 EEK

97.2

 

8.4

3,000,000.00

Põhja-Eesti Pank (North Estonian Bank)
200,000 shares nominal value 100 EEK

33.3

 

33.3

20,000,000.00

Tallinna Väärtpaberibörs
(Tallinn Stock Exchange)

10 shares nominal value 10,000 EEK

4.2

100,000.00

4.3

100,000.00

Total

 

70,348,081.74

 

103,843,779.74

Eesti Pank’s general policy continues to be to reduce its shares in Estonian commercial banks.

Eesti Investeerimispank (Estonian Investment Bank)

In accordance with a shareholders agreement dated December 1995, the share capital of Eesti Investeerimispank was converted from ECU’s to Estonian kroon using the official 1995 year-end exchange rate of ECU 1 = EEK 14.7072 EEK. At the same time, the number of shares in issue was increased. Eesti Pank’s share in the share capital of Eesti Investeerimispank remains the same.

Eesti Hoiupank (Estonian Savings Bank)

In connection with the merger in September 1996 of Eesti Hoiupank and Eesti Tööstuse ja Ehituse Kommertspank, Eesti Pank sold 949,567 shares in Eesti Hoiupank at their nominal value of EEK 10 each to the owners of Eesti Tööstuse ja Ehituse Kommertspank. As a result of this transaction, Eesti Pank’s share of Eesti Hoiupank’s share capital was reduced to 13.6%.

Bank for International Settlements (BIS)

BIS shares (25% paid in) with a total book value of EEK 7,837.50 are included at their historical cost established in 1930 (when Eesti Pank joined the BIS). The historical cost reflects the conversion from Estonian kroons to rubles in 1940 and from rubles to Estonian kroons in 1992. The BIS has not made any further calls for share capital against Eesti Pank, although such calls might possibly arise in the future.

Inkassaator AS

In accordance with a purchase and sale agreement dated August 1996, 100 shares in Inkassaator AS, representing the Bank’s entire holding of those shares, were sold to Tallinna Pank at an agreed price of EEK 30,000 per share, generating a profit for Eesti Pank of EEK 2,000,000.

Väärtpaberite Keskdepositoorium (Estonian Central Depository for Securities Ltd.)

In 1996 the share of Eesti Pank in the share capital of the Estonian Central Depository for Securities Ltd, was reduced to 7,1% due to an increase in the Depository’s share capital, in which the Bank did not participate, to EEK 2.8 million.

Eesti Sotsiaalpank (Estonian Social Bank)

By a decision of the Board of Eesti Pank, the licence of Eesti Sotsiaalpank was revoked on 10 May 1995. The legal successor of Eesti Sotsiaalpank became a joint-stock company ESB Finantskontor AS whose task is to collect the loans remaining in the balance sheet of Eesti Sotsiaalpank. In accordance with a decision of the Tallinn City Court in August 1996, ESB Finantskontor AS was declared bankrupt. Based on the above decision, the shares of Eesti Sotsiaalpank, the predecessor of ESB Finantskontor AS, were written off from the balance sheet of Eesti Pank.

Arrow AS

In June 1995 Eesti Pank purchased shares in the joint-stock company Arrow from Eesti Sotsiaalpank, with the consideration settled by the write-off of EEK 3 million of Eesti Sotsiaalpank loans. In accordance with the decision of a shareholders meeting of Arrow AS in April 1996, the share capital of Arrow AS was reduced by EEK 32.4 million. As a result of this, Eesti Pank’s share of the total share capital of Arrow AS was increased, but it has been decided to establish a provision at the end of 1996 against the whole of the Bank’s interest in this company on the grounds that it is unlikely that it will be possible to sell these shares.

Põhja-Eesti Pank (North Estonian Bank Ltd.)

In accordance with the shareholders meeting in January 1997 the shares of Põhja-Eesti Pank were annulled. A provision was made at the end of 1996 against the whole of the Bank’s interest in Põhja-Eesti Pank.

Tallinna Väärtpaberibörs (Tallinn Stock Exchange)

In 1996 the share of Eesti Pank in the share capital of the Tallinn Stock Exchange was reduced to 4,2% due to an increase in the share capital of Tallinn Stock Exchange, in which the Bank did not participate, to EEK 2.4 million.

Eesti Ühispank (Union Bank of Estonia)

In January 1997, the Ministry of Finance, as representative of the Republic of Estonia, pledged 1,658,360 ordinary shares of Eesti Ühispank, each with a nominal value of EEK 10, to Eesti Pank. These shares had secured a loan of EEK 45 million made by Eesti Pank to the Government of the Republic of Estonia in June 1992. Both the shares and the rights to the loan have been transferred to Põhja-Eesti Pank under an agreement of January 1997.

ITEM 9 - OTHER ASSETS

This item includes the difference between the nominal value and selling price of Eesti Pank certificates of deposit sold to banks, prepayments for services and goods to be provided in 1997 and the cost of Eesti Pank sundry assets. It also includes an amount recoverable of EEK 800,000, based on an agreement between Eesti Pank and Eesti Maapank under which Eesti Pank paid the latter’s moving expenses from the Bank’s building at 11 Estonia pst. (see item 10).

ITEM 10 - FIXED ASSETS

Details of movements in fixed assets during 1996 are as follows:

 

Buildings

Computers

Furniture
and fixtures

Software

Vehicles

Total

Cost or valuation of fixed assets

Balance as of 31.12.1995

21,768,052.00

24,651,660.00

36,408,041.00

6,916,384.00

7,341,588.00

97,085,725.00

Additions

28,470,788.00

7,170,708.00

8,173,604.00

2,121,437.00

6,321.00

45,942,858.00

Disposals

-3,942.00

-1,387,126.00

-937,686.00

-8,312.00

-489,625.00

-2,826,691.00

Balance as of 31.12.1996

50,234,898.00

30,435,242.00

43,643,959.00

9,029,509.00

6,858,284.00

140,201,892.00

Depreciation

Balance as of 31.12.1995

1,003,635.00

10,918,407.00

14,337,273.00

1,299,062.00

3,581,646.00

31,140,023.00

Charge for the year

744,380.00

8,261,379.00

7,548,532.00

1,603,886.00

1,447,464.00

19,605,641.00

Disposals

-3,462.00

-1,268,900.00

-412,489.00

-4,045.00

-368,117.00

-2,057,013.00

Balance as of 31.12.1996

1,744,553.00

17,910,886.00

21,473,316.00

2,898,903.00

4,660,993.00

48,688,651.00

Net book value as of:

31.12.1995

20,764,417.00

13,733,253.00

22,070,768.00

5,617,322.00

3,759,942.00

65,945,702.00

31.12.1996

48,490,345.00

12,524,356.00

22,170,643.00

6,130,606.00

2,197,291.00

91,513,241.00

The increase in the net book value of fixed assets in 1996 compared to 1995 arises primarily due to the acquisition and renovation of buildings.

In 1996 the renovation of the building at 4 Sakala was concluded, the cost of which formed the bigger part of the acquisition and renovation cost of the Eesti Pank buildings.

In 1996 the Government assigned to Eesti Pank free of charge two bank buildings located in Tallinn at 7 Suur-Karja and 11 Estonia pst. in order to recompense the Bank for the cost of meeting the Government’s debt liabilities in respect of the Painküla Starch Factory. In total, the Bank had repaid to Donau Bank AG and Eesti Maapank loans and interest amounting to EEK 87 million under guarantees given by it. Based on valuations performed by a real estate company, the open market values of the two properties assigned at the end of 1996 were EEK 19.5 million and EEK 23 million, respectively. These buildings have been included in the Bank’s balance sheet at 31 December 1996 at EEK 730,000 and EEK 1,162,260, respectively, representing the amounts at which these properties were included in Tallinn Building Register. These amounts have been credited to revaluation reserves.

Due to the expiry of the lease of a building at 11 Estonia pst. before the actual term, Eesti Pank paid to Eesti Maapank the renovation and moving costs of EEK 8,261,708 which they had incurred. The costs are included in the acquisition value of the building.

ITEM 11 - FOREIGN DEBTS

Foreign debts, which also include accrued but not yet received interest at the end of 1996 and 1995, comprise the following:

 

1996

1995

Vientiluotto OY. Finland

40,336,565.59

65,133,817.02

Donau Bank AG, Austria (guarantee liabilities
in respect of loans to Painküla Starch Factory)

 

18,013,744.48

Total

40,336,565.59

83,147,561.50

The related assets connected to the above items are included in "Loans to financial institutions" (see item 6). The maturity dates of loans received from Vientiluotto OY fall mainly between 1996 and 1998. All obligations to Donau Bank AG under guarantees in respect of loans to Painküla Starch Factory were settled in the year, as described under item 22 below.

ITEM 12 - IMF KROON ACCOUNTS

This item shows the Estonian kroon deposits of the IMF held with Eesti Pank, which include loans granted by the IMF to Eesti Pank and the quota of the Republic of Estonia in the IMF (see also items 3, 4 and 17). The following table (in kroons) shows the movements in the loans obtained from the IMF and participation in the IMF:

 

SBA

Participation

Total

Balance as of 31.12.1995

664,913,354.79

792,024,127.77

1,456,937,482.56

Accrued interest

45,823,436.86

 

45,823,436.86

Exchange rate differences

30,145,470.53

38,304,107.67

68,449,578.20

Loans repaid to the IMF

-134,885,435.28

 

-134,885,435.28

Interest paid

-46,643,077.56

 

-46,643,077.56

Balance as of 31.12.1996

559,353,749.34

830,328,235.44

1,389,681 984.78

The balances at the end of 1995 and 1996 include accrued but not yet paid interest of EEK 8,124,986.35 (SDR 476,971) and EEK 7,474,035.62 (SDR 418,517), respectively.

ITEM 13 - ACCOUNTS OF NON-RESIDENTS

This item includes non-interest bearing accounts held with Eesti Pank by the central banks of the CIS countries, Latvia and Lithuania, which are used for settling transactions between Estonia and those countries through Eesti Pank.

ITEM 14 - NOTES AND COINS IN CIRCULATION

This item shows banknotes and coins issued for circulation by Eesti Pank. An analysis of the notes and coins in circulation is shown on pages 71-73 of the Annual Report.

ITEM 15 - ACCOUNTS OF BANKS AND OTHER CURRENT LIABILITIES

This includes the clearing accounts of Estonian credit institutions with Eesti Pank. With effect from 1 July 1996 Eesti Pank has commenced paying interest at a rate calculated by reference to the Deutsche Bundesbank discount rate on the amount by which the average balance on a credit institution’s clearing account with Eesti Pank exceeds its minimum reserve requirement for a reporting month. At the same time, a daily charge was introduced calculated based on a rate of 15% per year when a credit institution fails to maintain the necessary minimum reserve requirement. In addition, from 1 July 1996 the Board of Eesti Pank has required a transaction charge of 10 sents per payment order received by the Bank’s Clearing Division from credit institutions. It has also introduced a further charge for managing the clearing account of an agent of a credit institution. This charge was EEK 5,000 per month until 31 December 1996, rising to EEK 10,000 per month from 1 January 1997.

ITEM 16 - SECURITIES

The short-term certificates of deposit (CD-s) shown here represent 28 day discountable paper issued to Estonian commercial banks in amounts of EEK 100,000 nominal value each. Up to June 1996 the auctions took place every two weeks. Since July 1996 the auctions have taken place once a month.

ITEM 17 - CONVERTIBLE FOREIGN CURRENCY DEPOSITS

The convertible foreign currency account shows demand deposits of the Republic of Estonia held with Eesti Pank. It includes the undistributed element of the Systemic Transformation Facility (STF) in SDR provided to the Republic of Estonia by the IMF, together with accrued interest payable. Eesti Pank acts as agent in the name of the borrower - the Republic of Estonia.

 

STF

Balance as of 31.12.1995

3,228,671.83

Additions

15,503,937.37

Interest income

52,803.46

Exchange rate differences

13,107.74

Interest and other expenses

  -18,481,545.36

Balance as of 31.12.1996

316,975.04

The above table (in kroons) shows the movements on the STF loan account, including amounts received from the Government to pay STF loan interest and other expenses.

ITEM 18 - OTHER FOREIGN CURRENCY DEPOSITS

This item includes non-interest bearing foreign currency demand deposits of the Government of the Republic of Estonia and of Estonian commercial banks with Eesti Pank. The deposits are related to transactions with the CIS countries, Latvia and Lithuania carried out through Eesti Pank.

ITEM 19 - PROVISIONS FOR GUARANTEES

In 1996 provisions have been made for the following guarantees where it is considered likely by the Bank’s Management that payments will have to be made in the future:

Eesti Hoiupank

36,377,000.00

Põhja-Eesti Pank

17,800,000.00

Other

500,000.00

Total

  54,677,000.00

Details of these guarantees are set out under the description to item 23. The provisions have been established taking into account the Bank’s experience over the past few years of providing liquidity and other support to Estonian commercial banks during restructuring and mergers and are considered by Management to reflect an appropriately prudent assessment of the current position. However, the Bank will be seeking recovery of amounts already paid or contributed under these guarantees, together with any amounts expected to be paid in the future, and interest thereon.

ITEM 20 - OTHER LIABILITIES

This item includes sundry other accounts payable in 1997 for 1996 costs. A long-term credit of EEK 8,019,703.10, including interest, granted to the Painküla Starch Factory by Eesti Maapank and guaranteed by Eesti Pank included here at 31 December 1995 was settled during 1996 (see item 22).

ITEM 21 - CAPITAL AND RESERVES

Capital and reserves can be analysed as follows:

 

Balance as of
31.12.1995

Transfers and
additional
contributions

Appropriation
of 1995 profit

Revaluation
adjustments

Balance as of
31.12.1996

Statutory capital

89,046,859.76

 

10,953,140.24

 

100,000,000.00

Reserve capital

89,046,859.76

 

10,953,140.24

 

100,000,000.00

Special reserve

884,128,997.83

112,460.16

40,125,970.10

 

924,367,428.09

Revaluation reserve

50,027,259.98

 

 

-30,873,546.27

19,153,713.71

Exchange rate differences

-122,172,271.96

 

 

108,290,535.41

-13,881,736.55

Gold revaluation reserve

3,740,232.17

 

 

1,155,519.29

4,895,751.46

Fixed assets reserve

2,930,798.64

-112,460.16

 

1,892,260.00

4,710,598.48

Total

996,748,736.18

0.00

62,032,250.58

80,464,768.43

1,139,245,755.19

In accordance with the Law on the Central Bank of the Republic of Estonia at least 25% of the annual profit must be allocated for increasing each of the statutory and reserve capital. After these allocations, part of the profit can be allocated for forming and supplementing special reserves, based on a decision of the Board of Eesti Pank. The remaining profit is transferred to the State budget.

In 1992 Eesti Pank covered from the special reserve the losses arising from revaluation of ruble assets and liabilities at the time of monetary reform, amounting in aggregate to more than half a billion kroons. In accordance with the 1993 decision of the Board of Eesti Pank, the Eesti Pank reserves have to be restored from the profits of the Bank of the next ten years.

From the 1995 profit, amounts of EEK 10,953,140.24 were transferred to each of the statutory and reserve capital, as a result of which both statutory and reserve capital reached the level of EEK 100 million. In accordance with a Decision of Riigikogu (the Parliament) in 1996, Eesti Pank is now permitted to continue increasing reserve capital up to EEK 500,000,000.

A further amount of EEK 40,125,970.10 was transferred from the 1995 profit for the restoration of the special reserve, with the balance of the 1995 profit of EEK 21,606,291.59 being paid in 1996 to the State budget.

The planned appropriations of the 1996 profit is shown in a table below the Profit and Loss Account on page 85. In accordance with the Bank’s budget for the year, approved by the Board of the Bank, an amount of EEK 82,000,000 is to be transferred to the special reserve in order to continue to restore the losses from monetary reform in 1992.

The revaluation reserve includes the unrealised difference between the cost and market price of foreign securities. Both at the end of 1995 and 1996 the market price of the foreign securities was higher than their cost price, although at the end of 1996 the excess of the market price of securities over their cost had fallen.

The exchange rate differences reflect the results of translating the assets and liabilities denominated in foreign currencies into kroons at the balance sheet date. The rise in value of certain foreign currencies, particularly the US dollar, against the German mark in 1996 has caused the deficit in respect of this item to be reduced significantly.

The fixed assets reserve reflects the revaluation of fixed assets, including the valuation attributed to 11 Estonia pst. and 7 Suur-Karja by Tallinn Building Register in 1996. The transfer from this reserve to the special reserve reflects the realisation of the revalued amount in line with depreciation on the related assets.

ITEM 22 - PROFIT FOR THE YEAR

COMMENTS ON THE PROFIT AND LOSS ACCOUNT

Foreign net interest income and similar items

This includes principally interest income, realised exchange gains, income from the sale of securities and dividends less interest expense and losses on the sale of securities. The increase in net income by EEK 27.7 million was achieved mainly through the growth of foreign currency reserves achieved through the purchase of foreign currencies from the Estonian commercial banks. There were no transactions with gold in 1996.

Domestic net interest income and similar items

This includes principally interest earned on domestic loans, together with gains and losses on buying and selling kroons, interest payable on CD's issued by the Bank, interest payable and other bank charges received from the management of clearing accounts of domestic credit institutions. Interest earned by the Bank in 1996 has remained at approximately the same level as in 1995, although interest earned on loans has reduced as loans have been repaid or provided against. However, this reduction has been partly compensated for both by the settlement of balances with Eesti Maapank in 1996, as a result of which income from debt securities issued by Eesti Maapank was received before the actual maturity date, and by interest and other bank charges connected with the management of clearing accounts of domestic credit institutions (see item 15). Interest expenses have fallen by more than three times in 1996 because the payment of interest to Eesti Hoiupank on its extra reserve requirement was ended in 1995 and the number of Eesti Pank short-term certificate of deposit auctions was reduced in 1996.

Other operating income

This includes income connected with adjustments in respect of prior year items and with various charges for sundry non-banking related services including services which are not connected to Bank’s main objectives. In 1996, the present entry includes the profit received from the sale of shares of the joint-stock company Inkassaator, as well as other items, such as income from the usage of telephones and the sale of Eesti Pank Bulletins.

Other operating expenses

Other operating expenses have been analysed by principal category, consistent with the way in which the Bank's Management budget for and monitor costs. Staff related expenses comprise not only salaries and salary related expenses, including health insurance and social security taxes, but also training, business travel and sports expenses. The increase in staff related expenses is due mainly to salary rises and the related taxes. The costs of making notes and coins have decreased significantly in 1996 as the Bank has met most of the demand for new notes and coins from existing stocks. However, at the end of 1996 the Bank’s remaining contractual obligations to make additional notes in 1997 amounted to EEK 5.8 million. Depreciation costs have increased in line with additions to Bank buildings as well as acquisition of computers and fittings. Renovation costs have been reduced in 1996 by half and are budgeted to remain at the same level in 1997.

Provisions for bad and doubtful loans and guarantees

In December 1996 additional provisions for bad and non-performing loans, including accrued interest, and for guarantees were made as follows:

Painküla Starch Factory (see below)

18,004,427.28

Eesti Sotsiaalpank - Vientiluotto OY (see item 6)

467,091.44

Eesti Tööstuse ja Ehituse Kommertspank marketable bonds and interest (see item 7)

15,023,437.50

Eesti Hoiupank payments and provisions under guarantee agreement (see item 23)

59,400,000.00

Provisions for payments under Põhja-Eesti Pank guarantee (see item 23)

17,800,000.00

Other provisions (see item 23)

500,000.00

Total

  111,194,956.22

Painküla Starch Factory

Provisions have been established for claims under guarantees issued by Eesti Pank in 1990 and 1991 in respect of long-term loans and interest thereon from Donau Bank AG (Vienna, Austria) and Eesti Maapank. These loans became a liability of Eesti Pank on privatisation of the factory in 1993 because, according to the privatisation terms, these loans were not repayable by the new company formed on privatisation. In 1996 Eesti Pank signed an agreement with Donau Bank AG and Eesti Maapank which enabled payment to them of all remaining debt liabilities related to the factory ahead the actual maturity date. The maturity date of the loan from Donau Bank AG had been December 1997 and from Eesti Maapank August 2002.

Exceptional items

These include items of income and expense arising on transactions of an unusual or infrequent nature. In 1995 this included mainly the value of cancelled shares of Põhja-Eesti Pank owned by Eesti Pank. In 1996 this includes:

Income from sale of loans to N-Terminaal AS

35,000,000.00

Recovery of loans previously provided for

838,808.72

Provisions against Põhja-Eesti Pank shares

-20,000,000.00

Provision against investment in Arrow AS

-3,000,000.00

Other items

2,212.30

Total

  12,841,021.02

Under an agreement dated September 1995 between Eesti Pank and N-Terminaal, the Bank assigned to N-Terminaal all of its claims against Tartu Kommertspank (Tartu Commercial Bank) in respect of various old loans which had been previously fully provided against by the Bank. During 1996 certain amounts were recovered in respect of loans to LEA Pank, Põhja-Eesti Pank and Eesti Sotsiaalpank against which provisions had been made in previous years.

ITEM 23 - OFF-BALANCE SHEET ITEMS

Contingencies and commitments

Legal action

In September 1996 a petition was issued against the Bank and Mr. V. Kraft in a court in Texas, USA by Eastern Credit Limited, Inc. a stockholder of Estonian Innovation Bank, claiming damages, including exemplary damages, of at least EEK 203 million plus costs. The Management of Eesti Pank are of the opinion that this claim is without sound foundation and that the Bank has a strong defence against the claim, which will be defended vigorously. Accordingly, no provision has been made in respect of this claim.

Forward contracts

As of 31 December 1996 Eesti Pank had remaining forward contracts amounting to EEK 1,427,650,761.53, maturing on various dates up to 2002. Under these contracts, which are with Estonian commercial banks, Eesti Pank is committed to sell DEM at future specified dates for between 8.0010 and 8.0020. Such contracts were offered only until March 1995.

Guarantee to the European Investment Bank

On 27 November 1995 Eesti Pank entered into an agreement with the European Investment Bank and Eesti Investeerimispank (Estonian Investment Bank) whereby it guaranteed loans amounting to ECU 10 million which mature in 2006. This agreement annulled the previous loan agreement signed between Eesti Pank and the European Investment Bank in October 1993.

Guarantee to Põhja-Eesti Pank (PEP; North Estonian Bank Ltd.)

Under an agreement dated December 1995 with Põhja-Eesti Pank, the Government of the Republic of Estonia and Eesti Ühispank, Eesti Pank had agreed to provide special guarantees to PEP up to a maximum of EEK 220 million, conditional on the other parties to the agreement meeting their commitments under that agreement. In accordance with a further agreement signed between Eesti Pank and Põhja-Eesti Pank in January 1997, Eesti Pank’s obligations under the above guarantee agreement were settled in full. Under this latest agreement, Eesti Pank agreed to transfer to PEP property at 7 Suur-Karja and 13 Tartu mnt. in Tallinn, valued together according to the agreement at EEK 74 million, all of its claims against the VEB Fund (together with claims against the Fund transferred to Eesti Pank by the Government at the beginning of 1997), and an outstanding loan due to Eesti Pank from the Government. In addition, Eesti Pank paid to PEP in March 1997 a guarantee deposit of EEK 7.8 million and agreed to pay a further EEK 10 million in 1997 if certain conditions arise. At the same time, Eesti Pank obtained a legal claim over PEP loans with a principle value of EEK 123.9 million, against which PEP had established provisions. The full amount of the guarantee deposits paid and payable in 1997 have been provided by the Bank as at 31 December 1996, although PEP has indicated that the amounts will be repaid in May 1997.

Guarantee agreement between Eesti Pank and Eesti Hoiupank (Estonian Savings Bank)

In August 1996, Eesti Pank and Eesti Hoiupank signed a guarantee agreement covering the period to 22 December 1997. In accordance with this agreement, Eesti Pank guaranteed to protect the interests of the creditors and depositors of Eesti Tööstuse ja Ehituse Kommertspank and Eesti Hoiupank up to a maximum amount of EEK 74.4 million in respect of losses arising from assets and loan agreements taken over from Tööstuse ja Ehituse Kommertspank by Eesti Hoiupank on the merger of those two banks. In accordance with the agreement, Eesti Pank agreed to:

a) transfer the head office building of Eesti Tööstuse ja Ehituse Kommertspank at 7 Suur-Karja to Eesti Hoiupank free of charge or alternatively pay EEK 10,000,000 to the latter;
b) assign unconditionally and irrevocably to Hoiupank free of charge ownership of a debt security issued to Eesti Pank by Eesti Tööstuse ja Ehituse Kommertspank worth EEK 15,000,000 plus interest;
c) pay EEK 13,023,000 to Eesti Hoiupank in respect of the period to 31 December 1996.

Prudent provision has been made as at 31 December 1996 for the remaining conditional obligations under this agreement of EEK 36,377,000.

Other guarantees

In August 1996 Eesti Pank issued a letter of warranty for compensating the injured party for the medical treatment costs up to an amount of EEK 500,000 related to a traffic accident involving one of the Bank’s cars which took place on Merivälja tee in Tallinn at the beginning of 1996. This amount is expected to be recovered from the Bank’s employee involved.

Off-balance sheet assets (property rights)

By a Decision of Eesti Vabariigi Ülemnõukogu (the Supreme Council of the Republic of Estonia) on 23 January 1992 Eesti Pank was allocated forestry rights with a value estimated in 1992 of USD 150 million. These forestry rights are available to meet obligations, if any, at the discretion of Eesti Pank.

Based on the 1992 reports, the forestry rights available to Eesti Pank consisted of 3,677 lots covering a total of 14,984 hectares and with a standing forestry reserve of 3,996 thousand solid metres. Those rights now consist of 4,031 lots covering a total of 14,041 hectares and with a standing forestry reserve of 4,011 thousand solid metres, based on reports as of 20 November 1996.

Based on the Price List of Standing Forest confirmed by the Decree No 19/112 of 30 July 1993 of the Ministry of Environment and Ministry of Finance of the Republic of Estonia and market adjustments confirmed by the Regulations No 23 of 6 May 1996 of the Estonian National Forestry Board, the total stump price of Eesti Pank’s standing forestry rights is EEK 717.6 million which makes the average price of 1 solid metre EEK 179. This price is used as prime price when standing forest is sold at auction. Based on the average selling price of the auctions held in 1995, the total value of the Bank’s standing forestry rights would have been EEK 929.7 million. However, taking into account the criteria by which the felling areas were chosen, due to which the Bank’s areas are more productive than the average Estonian areas, their actual price may be higher in the future.