SOCIETE GENERALE BANKA MONTENEGRO A.D., PODGORICA

Transcription

1 SOCIETE GENERALE BANKA MONTENEGRO A.D., PODGORICA FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2012

2 SOCIETE GENERALE BANKA MONTENEGRO A.D., PODGORICA CONTENTS Page Independent Auditors Report 1-2 Income Statement 3 Balance Sheet 4 Statement of Changes in Equity 5 Cash Flow Statement 6 Notes to Financial Statements 7 36 Analysis to the financial statements for Short form 50-55

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9 1. FOUNDATION AND BUSINESS ACTIVITY Podgorička Banka A.D., Podgorica was established by separating from Montenegrobanka D.D., Podgorica in the course of On November 21, 2001, the Central Bank of Montenegro issued an approval enabling the Bank to continue its operations pursuant to Decision 27. Following the aforementioned privatization process that took place in 2005, the majority interest in the Bank is held by Societe Generale, Paris, France. On September 26, 2006, the Bank was inscribed in the Central Register of the Commercial Court in Podgorica under the registration number /019, operating the activities as Podgorička Banka Societe Generale Group A.D., Podgorica. Under registration number /41 on May 7, 2012, the Bank was inscribed in Central Register of the Commercial Court in Podgorica as Societe Generale banka Montenegro A.D. The Bank is licensed to perform credit, depositary and guarantee operations, as well as foreign payments transactions, depo transaction, to provide safekeeping services, issuance, processing and recording of payment instruments (including credit cards, travellers and banks cheques). The Bank is headquartered in Bulevar Revolucije 17, Podgorica. As of 2012, the Bank was comprised of a Central Office located in Podgorica and 20 branch offices located throughout Montenegro. As of 2012, the Bank has 275 employees ( 2011: 267 employees). 7

10 2. BASIS FOR PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS 2.1. Basis for preparation and presentation of the financial statements The Bank maintains its accounting records and prepares its statutory financial statements in accordance with the Accounting and Auditing Law of Montenegro (Official Gazette of Montenegro, no. 69/2005, no. 80/2008 and no. 32/2011) and specifically, in accordance with the relevant Decision pertaining to the application of International Accounting Standards ( IAS ) in Montenegro (Official Gazette of Montenegro, no. 69/2002). Accordingly, International Financial Reporting Standards (IFRS) are applicable for financial statements for annual periods beginning from January 1, The financial statements are presented in the format required under Articles 17 and 18 of the Accounting and Auditing Law of Montenegro and European Union Directive numbered 86/635/EEC dated December 8, 1986, which relates to the annual reports of banks and other financial institutions. Such statements represent the complete set of financial statements as defined under the law, which differ in some respects from those defined by IAS 1, Presentation of Financial Statements. The accounting policies adopted in the preparation and presentation of the financial statements for the period ended 2012 differ from the IFRS requirements primarily in respect with the allowances for the impairment of financial instruments as required by IAS 39 Financial instruments: Recognition and measurement and disclosures of financial instruments as required by IFRS 7 Financial instruments: Disclosures. The impairment of financial instruments was estimated in accordance with the applicable Regulations of the Central Bank of Montenegro (Note 3.7). Such policy might result in significant differences from the amounts which would be determined, had the allowances for the impairment of financial instruments been estimated based on discounted expected future cash flows by applying the original effective interest rate, as required by IAS 39, Financial Instruments: Recognition and Measurement. In addition, the Bank suspended calculation of interest on loans classified in categories C, D and E ( impaired assets in accordance with the Decision of the Central Bank on minimum standards for risk management in banks), the decision also stipulates that the risk assets classified as category E should be written off from balance sheet assets and recorded as off balance sheet under written-off loans. Due to the potentially significant effects of the above-described matters, the accompanying financial statements cannot be described as having been prepared in accordance with International Financial Reporting Standards. In the preparation of the accompanying financial statements, the Bank has adhered to the accounting policies described in Note 3, which are in conformity with the accounting, banking and tax regulations prevailing in Montenegro. The official currency in Montenegro and the Bank s functional currency is Euro (EUR). 8

11 2. BASIS FOR PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (continued) 2.2. Use of estimates The presentation of financial statements requires the Bank s management to make best estimates and reasonable assumptions that affect the assets and liabilities amounts, as well as the disclosure of contingent liabilities and assets as of the date of the preparation of the financial statements, and the income and expenses arising during the accounting period. These estimations and assumptions are based on information available as of the date of preparation of the financial statements. However, actual outcome may vary from the estimated values. The most important estimates were performed on the following balance sheet positions: Provisions on loans and interest receivables Provisions on deposits placed in other banks Provision on equity investments Provisions on off - balance sheet items Provisions on employee benefits Provisions on litigations and claims Useful life of intangible and tangible assets Bank's financial statements include provisions, calculated by an actuary, based on the estimated present value of retirement benefits and jubilee awards to employees upon vesting in respective rights, using of Projected Unit Credit method. However, the Bank s future operating results may vary from the estimated values. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1. Income and Expense Recognition Interest income and expense are recognized in the income statement for all instruments measured at amortized value using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts over the expected life of a financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (i.e. prepayment options) but does not consider future credit losses. The calculations include all fees and commissions paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Interest income and interest expense, including penalty interest and operating income and expenses related to interest-bearing assets and liabilities are accounted for on an accrual basis. Fees for banking services and fee and commission expenses are recorded when due, i.e., when realized. Income and expenses arising from loan and guarantee origination are accounted for on an accrual basis using effective interest method. 9

12 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.2. Foreign Exchange Translation Transactions denominated in foreign currencies are translated in Euros using official average exchange rates determined on the Interbank Market effective on date of each transaction. Assets and liabilities denominated in foreign currencies are translated in Euros by applying the official average exchange rates, as determined on the Interbank Market, effective on the balance sheet date. Net foreign exchange gains or losses arising from transactions in foreign currencies and from translation of balance sheet items denominated in foreign currencies are credited or charged to the income statement. Commitments and contingent liabilities denominated in foreign currencies are translated in Euros by applying the official average exchange rates, as determined on the Interbank Market, effective on the balance sheet date Leasing The leases entered into by the Bank are operating leases. The payments made under operating leases are charged to operating expenses in the income statement on a straight-line basis over the period of the lease agreement duration Taxes and Contributions Income Taxes Current income taxes Income taxes are calculated and paid in accordance with income tax regulations defined under the Montenegrin Income Tax Law, Article 28 (Official Gazette of Montenegro, no. 80/2004, no. 40/2008, no.86/2009 and no.14/2012) as per the effective proportional tax rate of 9% on taxable income. The base for the income tax calculation is determined based on the income stated in its statutory statements of income following certain adjustments to its income and expenses performed in accordance with the Montenegrin Income tax Law (Articles 8 and 9, regarding the adjustment of income and Articles 10 to 20 pertaining to the adjustment of expenses). Capital losses may be set off against capital gains earned in the same year. In case there are outstanding capital losses after the set-off of capital losses against capital gains earned in the same year, these outstanding losses are available for carry-forward in the following 5 years. The Montenegrin tax regulations do not envisage any tax losses of the current period to be used to recover taxes paid within a specific carry-back period. However, any current year losses reported in the annual corporate income tax returns may be carried forward and used to reduce or eliminate taxes to be paid in future accounting periods, but only for a period of a maximum of five years. Deferred income taxes Deferred income tax is determined using the balance sheet liability method, for the temporary differences arising between the tax bases of assets and liabilities, and their carrying values in the stand alone financial statements. The currently-enacted tax rates at the balance sheet date are used to determine the deferred income tax amount. Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for the deductible temporary differences, and the tax effects of income tax losses and credits available for carry forward, to the extent that it is probable that future taxable profit will be available against which deferred tax assets may be utilized. 10

13 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.4. Taxes and Contributions (continued) Taxes, contributions and other duties not related to operating results Taxes, contributions and other duties that are not related to the Company s operating results, include property taxes, employer contributions on salaries, and various other taxes and contributions paid pursuant to republic and municipal regulations Cash and Cash Equivalents Cash and cash equivalents comprise cash (EUR and foreign currencies) and balances with the Central Bank of Montenegro and other banks Loans Loans approved by the Bank are recorded in the books when funds are transferred to the loan beneficiary s account. Loans are stated in the balance sheet in the amount of placement approved, as decreased by the principal repaid and allowance for impairment which is based on the assessment of risk inherent in certain placements and risks which have been historically identified in the credit portfolio. The Bank s management applies the methodology prescribed by the Central Bank of Montenegro in its evaluation of the risks (Note 3.7) Allowances for Impairment and Provisions for Potential Losses The Decision issued by the Central Bank of Montenegro regarding minimal standards for management of credit risks in banks ( Official Gazette of Montenegro, no. 60/2008, 41/2009) and the Decision regarding temporary measures for management of credit risks in banks ( Official Gazette of Montenegro, no. 64/2009, 87/2009, 66/2010, 70/2010, 02/2012) sets forth the following: elements of credit risk management, minimum criteria and manner of classifying assets and balance sheet items which render the Bank susceptible to credit risk, manner of calculating and suspending uncollected interest, manner of determining the minimum provisions for potential losses contingent on the Bank's exposure to credit risk. The Bank's risk-weighted assets, within the meaning of this Decision, are comprised of loans, interest, fees and commissions, lease receivables, deposits with banks, advances and all other items included in the balance sheet exposing the Bank to default risk, as well as guarantees issued, other sureties, effectuated letters of credit and approved, but undrawn loan facilities, as well as all other off-balance sheet items being the Bank's contingent liabilities. Pursuant to the aforementioned Decision, loans and other risk bearing assets are classified into the following categories: A category ( Good ) including assets assessed as collectible in full pursuant to the agreement; B category ( Special Mention ) with B subcategory including items for which there is low probability of loss, but which, still the same, require special attention, as the potential risk, if not adequately monitored, could diminish their collectability; C category ( Substandard assets ) with C1, C2 and C3 subcategories for which there is high probability of loss, due to the clearly identified collectability issues; D category ( Doubtful assets ) including items the collection of which is, given the creditworthiness of loan beneficiaries, value and marketability of collaterals, highly unlikely; E category ( Loss ) including the items which are uncollectible in full, or will be collectible in an insignificant amount. 11

14 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7. Allowances for Impairment and Provisions for Potential Losses (continued) In accordance with the amendments to the above stated decisions on minimal standards for management of credit risks in banks, the Bank applied the following percentages and days of delay by categories of risk: As of December As of December Risk category % provisions Days of delay % provisions Days of delay A 0% <30 0% <30 B1 3% % C1 15% % C2 30% % C3 50% % D 75% % E 100% > % >365 The amount of provision for potential losses has not been provided for Bank's placements classified into category A. The estimated amount of provision for potential losses is computed by applying the following percentages to the corresponding categories: 3% for placements classified into category B, from 15% to 50% for placements classified into category C, 75% for placements classified into category D and 100% for placements classified into category E. As in accordance with the Decision issued by the Central Bank of Montenegro, the Bank is to suspend any accrued, uncollected interest and should terminate any further accruals of interest on its non-performing assets, unless the non-performing assets are secured by quality collateral and are in the process of collection, to the extent that such asset recoveries are anticipated within a reasonable period of time (generally, not exceeding three months). Following the suspension of interest accruals on non-performing assets, the Bank remains under an obligation to record the subsequent, matured interest on the same basis, on its off-balance sheet records and upon classification, designates the accrued income into E category. The Decision further prescribes that the risk bearing assets classified into E category should be written off from balance sheet items and recorded in the off-balance sheet records under Loans written off. Pursuant to the Decision, provisions for potential losses on assets are calculated based on the carrying value net of any deductible items of collaterals based on: cash deposits, irrevocable guarantees of the Government of Montenegro and irrevocable guarantees of the countries or central banks of the OECD member countries, banks with credit rating better than BBB+ pursuant to the ratings of the agency Standard & Poor s, i.e., any equivalent rating of other internationally acclaimed rating agencies and legal entities whose business operations are under the control of the Central Bank of Montenegro. Central Bank of Montenegro adopted the Decision on Minimum Standards for Credit Risk Management (Official Gazette of Montenegro, no. 22/12 dated April , 55/12 dated November 2, 2012) which application will start from January 1, Most important change which will be implemented with the Decision is that the Bank evaluates balance sheet and off-balance sheet positions in accordance with International Accounting Standards and reports them in accordance with International Financial Reporting Standards. In the future period the bank will use methodology used by Societe Generale Group for calculation of credit risk provisions. Societe Generale Bank of Montenegro AD used this methodology in the previous period for the calculation of impairment of receivables for the purpose of reporting to parent bank. 12

15 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.8. Equity Investments in legal entities and securities available-for-sale Securities available-for-sale include securities which cannot be classified as trading financial assets or as held to maturity and are comprised of equity investments in other legal entities and investment in five-year bonds issued by the Ministry of Finance of Montenegro. Equity instruments of legal entities that do not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are inappropriate and unworkable, are measured at cost, less any allowance for impairment. Investments in Plantaže A.D., Podgorica and investments in bonds issued by the Ministry of Finance of Montenegro are recorded at fair value. After initial recognition, unrealized gains and losses arising from changes in the fair value of available-for-sale financial assets are recognized directly in equity (revaluation reserves), until the financial asset is derecognized or impaired at which time the cumulative gain or loss previously recognized in equity should be recognized in profit or loss. Dividends on available for sale equity instruments are recognized in the income statement when the entity s right to receive payment is established. After initial recognition, securities available for sale are recorded at fair value. Unrealized gains and losses on securities available for sale are recorded within unrealized gains and losses in equity, until the securities are sold, collected or otherwise realised or until such securities are impaired. When securities available for sale are sold or when their value is impaired, the accumulated fair value adjustments, previously recognised in equity, are recognised in the income statement. Interest income on securities is calculated and accrued monthly Held to maturity securities Held to maturity securities relates to purchase of Treasury bills with maturity of 182 days, which are issued by the Government of Montenegro. Income is recognized on a monthly bases based on approved (contracted) discount. Part of the T-bills was funded from obligatory reserve, which the Bank holds with the Central Bank of Montenegro. In accordance with Article 8 and 17a of The decision on reserve requirements for banks to be Held with the Central Bank of Montenegro (Official Gazette of Montenegro no. 35/2011 dated July 27, 2011 and no. 22/2012 and 61/2012) the Bank can hold up to 35% of the Bank s obligatory reserve requirements in the form of treasury bills issued by the Government of Montenegro. 13

16 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Business Premises, Other Property and Equipment and Intangible Assets Business premises, other property, equipment and intangible assets on 2012 are recorded at cost less accumulated depreciation and/or amortisation. Purchase value represents the prices billed by suppliers together with all costs incurred in bringing the respective asset to the location and condition necessary for its intended use. Depreciation and/or amortization are calculated on a straight-line basis on cost of business premises and other property, equipment and intangible assets in order to write them off over their expected useful lives. Depreciation and/or amortization are calculated using the following prescribed annual rates: Rate in % Property 3.3 Computer equipment 25.0 Furniture and other equipment 15.0 Air conditioning system 10.0 Vehicles 15.0 Intangible assets 30.0 The calculation of depreciation and/or amortization commences when asset is placed into use. Pursuant to the Article 13, paragraph 6 of the Income Tax Law ("Official Gazette of Montenegro" no. 80/2004, 40/2008, 86/2009 and 14/2012) value of buildings for tax purposes is calculated using the proportional method and value of equipment and application software by applying digressive method for the entire period, regardless the date of activation Impairment of tangible and intangible assets On each balance sheet date, the Bank s management reviews the carrying amounts of the Bank s tangible and intangible assets. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying value, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense of the current period and is recorded under other operating expenses. Where impairment loss subsequently reverses, the carrying amount of the asset is increased up to the revised estimate of its recoverable value. However, this is performed so that the increased carrying amount does not exceed the carrying value that would have been determined had no impairment loss been recognised for the asset in prior years Provisions Provisions are recognised when the Bank has a present legal or constructive obligation as a result of past events, and when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. 14

17 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.13 Employee Benefits Employee Taxes and Contributions for Social Security In accordance with the current regulations in Montenegro, the Bank has an obligation to pay contributions to various State s social security funds. These obligations involve the payment of contributions on behalf of the employee, by the employer in an amount calculated by applying the specific, legally-prescribed rates. The Bank is also legally obligated to withhold contributions from gross salaries to employees, and on behalf of the employees, to transfer the withheld portions directly to government funds. These contributions payable on behalf of the employee and employer are charged to expenses in the period in which they arise. Retirement benefits and other long term employee benefits In accordance with the Collective Bargaining Agreement, the Bank has an obligation to disburse an employment retirement benefit to a retiree, in an amount equal to six average net salaries effective in the Bank in the month prior to the employee s retirement. In addition, employees are entitled to receive jubilee awards at their 10th, 20th and 30th employment anniversaries with the Bank as follows: - for 10 years of service one minimal salary in the Bank, - for 20 years of service two minimal salaries in the Bank, - for 30 years of service three minimal salaries in the Bank The Bank's financial statements as of 2012 include provisions calculated by an actuary based on the estimated present value of retirement benefits and jubilee awards to employees upon vesting in respective rights, using of projected unit credit method Financial Liabilities Borrowings Borrowings are initially recognised at fair value less transaction costs. Subsequently, borrowings are carried at their amortized value; all differences between the realized inflows (less transaction costs) and the amounts repaid are carried through profit and loss over the period of using the amounts borrowed by applying the effective interest rate method Fair Value In accordance with International Financial Reporting Standards the fair value of financial assets and liabilities should be disclosed in the Notes to the Financial Statements. For these purposes, the fair value is defined as an amount at which an asset can be exchanged, or a liability settled, between knowledgeable willing parties in an arm s-length transaction. The Bank should disclose the fair value information of those components of assets and liabilities for which published market information is readily available, and for which their fair value is materially different from their recorded amounts. In Montenegro, sufficient market experience, stability and liquidity do not exist for the purchase and sale of receivables, investments and other financial assets or liabilities, for which published market information is presently not available. Fair value cannot readily be determined in the absence of active capital and financial markets, as generally required under the provisions of IFRS/IAS. According to the opinion of the management of the Bank, the reported carrying amounts are the most valid and useful reporting values under the present market conditions and accounting regulations of Montenegro and Central Bank s regulations for financial reporting. In the amount of the identified estimated risk that the carrying value will not be realized, a provision is recognised based on a relevant decision of the Bank s management. 15

18 4. INTEREST INCOME AND EXPENSE a) Interest Income In EUR Deposits with: - foreign banks Central Bank Loans: - state institutions corporate customers 9,221 9,055 - retail customers 10,402 9,971 20,502 19,222 Securities: - Held to maturities Available for sale ,832 19,377 b) Interest Expense In EUR Deposits with: - financial institutions state institutions corporate customers 2, retail customers 1, ,303 2,010 Liabilities arising on loans and other borrowings 3,849 3,936 8,152 5, PROVISIONS FOR LOSSES a) Charge for the Period In EUR Net, provisions for: - loans 2,829 2,211 - interest and fees off-balance sheet items operating risk ,223 2,672 16

19 5. PROVISIONS FOR LOSSES (continued) b) Changes in allowances for impairment of uncollectible receivables and provisions in 2012 Loans and Lease Off-Balance Operating Operations Sheet Items Risk In EUR 000 (Note 11) Interest (Note 19) (Note 19) Total Balance, beginning of year 3, ,927 Charge for the year, net 2, ,223 Transfer to off-balance sheet items (3,261) (230) (3,490) Balance, end of year 2, ,660 Year 2011 In EUR 000 Loans and Lease Off-Balance Operating Operations Sheet Items Risk (Note 11) Interest (Note 19) (Note 19) Total Balance, beginning of year 2, ,052 Charge for the year, net 2, ,655 Transfer to off-balance sheet items (1,522) (258) - - (1,780) Balance, end of year 3, , FEE AND COMMISSION INCOME AND EXPENSE a) Fees and Commissions Income In EUR Loan origination fees 1,230 1,008 Fees and commissions income from off-balance-sheet operations Fees and commissions income from payment transactions and e- banking 1,115 1,114 Fees and commissions for foreign payments Fees and commissions on credit card business 1,265 1,208 Fees and commissions for payroll Other fees and commissions income b) Fees and Commissions Expense 5,760 5,254 In EUR Fees and commissions payable to the Central Bank Fees and commissions expense from payment transactions Deposit insurance premium fees Loan and guarantees fees Visa and Master card fees Fees and commissions for electronic banking Other fees and commissions expense ,001 1,595 17

20 7. OTHER INCOME, net In EUR Collected receivables previously written off Income from foreign exchange operations Dividend income Revenue from cancellation of prior year accruals Other income , GENERAL EXPENSES In EUR Net salaries 3,498 3,454 Taxes and contributions on salaries 2,548 2,194 Jubilee awards and severance pays for voluntary abandonment of workplace Remunerations to members of the Board of Directors Business trip expenses Other fees Rentals Maintenance Depreciation and amortization charge: - property and equipment (Note 12) intangible assets (Note 15) Security Insurance premiums Taxes Sponsorships and donations Advertising Electricity and fuel Telecommunication services and postal expenses Office material Cost of purchasing payment cards Professional services Provisions for employee benefits (Note 18) Expenses from operational losses 4 17 Other costs ,166 10,732 18

21 9. INCOME TAXES a) Components of Income Taxes In EUR Current income taxes Deferred income taxes 47 (12) b) Numerical reconciliation between tax expense and the product of accounting results multiplied by the applicable tax rate In EUR Profit before tax 2,228 4,707 Income tax at statutory rate of 9% Tax effects of expenses unrecognised for tax purposes Other (5) (6) Income tax reported in income statement Effective interest rate 9.59% 9.11% The tax rate used in 2012 and 2011 amounts to 9% and is applied to the taxable profit of legal entities in Montenegro as in accordance with the Corporate Income Tax Law. c) Deferred tax assets In EUR Temporary difference between the basis at which property and equipment are recognised in the tax balance and their carrying value - 24 Movement during the year was as follows: - 24 In EUR Balance, at the beginning of the year Calculated deferred tax during the year (24)

22 9. INCOME TAXES (continued) d) Deferred tax liabilities (Note 18) In EUR 000 Deferred tax liability as effect of booked unrealised losses on available for sale financial assets Deferred tax liabilities IAS Temporary difference between the basis at which property and equipment are recognised in the tax balance and their carrying value CASH AND DEPOSIT ACCOUNTS HELD WITH DEPOSITORY INSTITUTIONS In EUR Cash in hand: - in EUR 6,275 7,087 - in foreign currency Gyro account 8,006 11,804 Correspondent accounts with foreign banks 7,030 1,795 Obligatory reserves with the Central Bank of Montenegro 15,159 8,747 Term deposits with foreign banks 2,544 1,089 Other ,790 31,300 The Bank s obligatory reserves on 2012 were set aside in accordance with the Decision of Central Bank of Montenegro on obligatory reserve of the banks to be held with the Central Bank of Montenegro (Official Gazette of Montenegro no. 35/2011 dated July 27, 2011 and changes no. 22/2012 and 61/2012). Pursuant to the afforested, the obligatory reserve is calculated by applying rate of: - 9,5% on deposits base which is consisted of demand deposits and deposits with agreed maturity up to one year, or up to 365 days and - 8.5% on deposit base which is consisted of deposits with agreed maturity over one year, or over 365 days. On deposits with agreed maturity over one year, or 365 days, and clause on possibility of termination of the deposit within less than one year, the rate applied is 9.5%. The obligatory reserve is to be calculated by applying the aforementioned ratios on average amount of deposits during the previous week, two days before the expiry of the maintenance period. The Bank s obligatory reserves represent the minimum deposits set aside onto domestic accounts of obligatory reserves and/or onto the accounts of the Central Bank of Montenegro ( CBM ) held abroad, In accordance with the Decision, the Bank can hold up to 35% of the Bank s obligatory reserve requirements by restricting the treasury bills issued by the Government of Montenegro. For the amount of 15% of the obligatory reserve requirement deposited by banks, the Central Bank pays interest at the annual rate of 1% up to the eighth day of the month for the preceding month. The obligatory reserve is held in EUR. As of 2012, time deposits with foreign banks in the amount of EUR 2,544 thousand relate to a deposit placed with Societe Generale New York maturing over the period of two days with annual interest rate of 0.8%. 20

23 11. LOANS AND LEASES In EUR Due loans: - municipalities (public organisations) privately-owned companies 7,547 2,249 - state owned companies retail customers 1,491 1,455 - other Short-term loans: - Government 3,000 8,000 - municipalities (public institutions) privately-owned companies 37,934 37,383 - state owned companies retail customers 2,039 2,054 - other - 7 Long-term loans: - Government 10, privately-owned companies 4,015 74,862 - state owned companies 68,595 8,312 - municipalities (public organisations) 8,015 2,419 - retail customers 102,113 96,077 - other , ,301 Less: Provisions for credit losses on loans (Note 5) (2,990) (3,422) 241, ,879 Short-term loans to corporate entities are mostly approved for current assets with maturities from 1 to 12 months, while long-term loans are mostly approved with maturities from 12 to 180 months and mostly relate to corporate entities operating in the field of trade, mining and energy and construction industry. Short-term loans to corporate entities are mostly approved at an interest rate of 5.31% to 12.9% per annum. Short-term loans to retail customers are approved with maturities from 6 to 12 months at rates ranging from 8% to 15.9% annually. Long-term loans to retail customers include loans for housing construction, adaptation of residential and business premises, financing the purchase of consumables and other purposes, maturing within 13 to 300 months at an annual interest rate from 6.26% to 15.9%. As for the geographic concentration of loans to customers, the Bank s portfolio mostly includes loans to customers residing on the territory of Montenegro. As of 2012, the total amount of loans that are secured by parent bank guarantees, guarantees of some other members of the Societe Generale Group or guarantee issued by Government of Montenegro is EUR 28,756 thousand. These loans are secured by guarantees in the amount of EUR 28,456 thousand. 21

24 11. LOANS AND LEASES (continued) The concentration of the Bank s gross loan placements with clients per separate industries was as follows: In EUR Agriculture, hunting and fishing 7,577 7,600 Construction 15,439 16,139 Mining industry and energy 6,267 6,116 Real-estate trade 20,797 23,169 Trade 44,839 47,772 Service industry, tourism and accommodation industry 1,551 1,356 Transport, storage, post and communication 5,697 4,503 Administration and other public utilities 14,474 9,602 Retail customers 102,547 99,587 Other 25,773 17, BUSINESS PREMISES AND OTHER FIXED ASSETS Movements in 2012 and 2011 are presented in the following table: 244, ,301 In EUR 000 Equipment and Buildings Other Assets Total Cost Balance, January 1, ,644 5,241 8,885 Additions 7, ,713 Sale and disposal - (575) (575) Balance, ,203 4,820 16,023 Additions 2,039 1,415 3,454 Sale and disposal - (777) (777) Transfer to Fixed asset held for sale (1,311) - (1,311) Balance, ,931 5,458 17,389 Accumulated Depreciation Balance, January 1, ,139 3,962 5,101 Depreciation (Note 8) Sale and disposal (555) (555) Balance, ,260 3,974 5,234 Depreciation (Note 8) Sale and disposal - (748) (748) Transfer to Fixed asset held for sale (614) - (614) Balance, ,765 4,735 Net Book Value: ,961 1,693 12, , ,789 22

25 12. BUSINESS PREMISES AND OTHER FIXED ASSETS (continued) In Jun 2012 three buildings were reclassified to fixed asset held for sale. Net book value of transferred items was EUR 697 thousand, with cost of EUR 1,311 thousand and EUR 614 thousand accumulated depreciation. Estimated fair value from 2012 was EUR 1,795 thousands. As of 2012, the Bank doesn t have property under pledge to ensure repayment of loans and other liabilities. 13. SECURITIES AVAILABLE FOR SALE In EUR Banks and financial institutions: - AIK banka A.D., Niš, Republic of Serbia JUBMES banka A.D., Belgrade, Republic of Serbia Beogradska berza A.D., Belgrade, Republic of Serbia Lovćen osiguranje A.D., Podgorica CG Broker A.D., Podgorica (the Bank's equity interest 11.57%) Other legal entities: - Plantaže A.D., Podgorica (the Bank's equity interest 9.23%) 3,171 3,158 - Central Depository Agency, Podgorica A.D., Podgorica Tržište novca A.D., Belgrade, Republic of Serbia Montenegro Airlines A.D., Podgorica 3 3 3,183 3,171 3,110-6,352 3,229 In 2012, securities available for sale were increased by investment in bonds which are issued by the Ministry of Finance of Montenegro in September 2012 with maturity of 5 years and interest rate 7% annually. As of 2012 Government bonds amounted to EUR 3,110 thousand. 14. SECURITIES HELD TO MATURITY As of 2012 securities held to maturity amounted to EUR 6,420 thousand and it relates to purchase Treasury bills with maturity of 182 days, which are issued by the Ministry of finance of Montenegro. On 6th auction held on August 27, 2012, the Bank purchased EUR 3,000 thousand T-bills, with annual interest rate 4.80%, and on 11th auction held on December 25, 2012 additional EUR 3,500 thousand, with interest rate of 3.45% annually. Unamortised discount of T-bills at the end of period amounted to EUR 80 thousand. Part of T-bills was funded from obligatory reserve, which Bank holds with the Central Bank of Montenegro. In accordance with Article 8 of Decision on reserve requirements for banks to be held with the Central Bank of Montenegro (Official Gazette of Montenegro no. 35/2011 issued on July 27, 2011 and changes in no. 22/12 and 61/12) the Bank can hold up to 35% of the Bank s obligatory reserve requirements in T-bills. 23

26 15. OTHER ASSETS In EUR Interest, fee and commission receivables Deferred interest income Deferred management fee on loans received Intangible assets Prepaid expenses: - leasehold improvements other expenses Receivables from employees Deferred tax assets (Note 9) - 24 Receivables from dividends Receivables from clients for legal costs Other receivables ,475 2,633 Intangible assets are mostly comprised of licenses and software. The movements on intangible assets in the course of 2012 and 2011 were as follows: In EUR Cost Balance, January Additions Write-off (113) - Balance, December Accumulated amortisation Balance, January Amortisation (Note 8) Write-off (113) - Balance, December Net Book Value Balance, December

27 16. DEPOSITS In EUR Demand deposits: - Government of Montenegro 6,439 4,054 - financial institutions privately-owned companies 36,270 29,115 - state owned companies 1,438 1,861 - municipalities (public organisations) 2,715 2,750 - funds retail customers 31,378 26,395 - non-profit organizations 3,688 4,685 - other ,285 69,976 Short-term deposits: - financial institutions 8,909 4,395 - privately-owned companies 45,392 9,890 - state owned companies 14,155 11,944 - funds retail customers 49,466 24,768 - non-profit organizations ,257 51,018 Long-term deposits: - financial institutions 2,932 2,765 - retail customers privately-owned companies 2,462 2,028 - state owned companies 66-5,466 4, , ,788 Demand deposits of retail customers, corporate customers, public and other organizations are placed at an interest rate from 0.3% to 1% annually. Short-term and long-term deposits of retail customers denominated in EUR are deposited at an interest rate ranging from 0.3 % to 6.8% annually. Short-term and long-term deposits of corporate customers denominated in EUR are placed at interest rates ranging from 0.3% to 7% annually. 25

28 17. LIABILITIES BASED ON LOANS AND BORROWINGS In EUR Liabilities towards related parties: Societe Generale, Paris, France 36, ,500 Liabilities towards foreign creditors: European bank for reconstruction and development ( EBRD ) 26,429 15,000 62, ,500 As of 2012, liabilities based on loans and other borrowings in the amount of EUR 62,429 thousand include loans from parent bank loans in the amount of EUR 36,000 thousand received from the parent bank with maturities up to one year accruing interest at annual rates ranging from 3.15% + 1M EURIBOR to 5.10%. Unused amount of the approved limit on loans from parent bank at the end of 2012 was EUR 79,000 thousands. As of 2012, the Bank has liabilities toward the European bank for reconstruction and development under two long-term loans in the amount of EUR 26,429 thousand intended for financing development of small and medium enterprises in Montenegro. The first loan granted in a amount of EUR 25,000 thousands for a period of 5 years, was approved on August 30, 2010, with an annual interest rate of 2.65% + 6M EURIBOR. The second loan in the amount of EUR 10,000 thousand was approved on December 24, 2012, with a grace period of 2 years at an annual interest rate of 2.65% + 6M EURIBOR. The loan is repayable after the expiry of the grace period, in semiannual annuities. Unused amount of the loan from the European Bank for Reconstruction and Development as of 31 December, 2012 was EUR 5 million. Maturity of obligations on this basis is as follows: In EUR Up to 1 year 14, ,642 from 1 to 2 years 24,857 4,286 from 2 to 3 years 17,572 4,286 from 3 to 4 years 1, from 4 to 5 years 4,428-62, ,500 26

29 18. OTHER LIABILITIES In EUR Deferred interest on deposits Deferred loan fees 1,182 1,114 Interest accrued on loans and deposits Provisions for employee benefits Insurance premiums for loans issued to retail customers Liabilities for oversees payment transactions Taxes payable Deferred tax liabilities (Note 9) Advances received Liabilities arising from foreign currency savings deposits Dividends payable Accounts payable to suppliers Commission jobs Payables to employees Payables to merchants - instalment purchases Accrued liabilities Other liabilities ,996 6,934 The provisions for employee benefits as of 2012 in the amount of EUR 440 thousand present value of the expected future payments to employees with regard to retirement benefits and jubilee awards after fulfilling the conditions, which is calculated by an authorized actuary using Projected Unit Credit method. The assumptions used for the purpose of assessment of the present value of expected future outflows for leaving payments, retirement and jubilee awards are summarized in the table below: The assessment on % % Discount rate Retirement benefits Discount rate Jubilee awards Fluctuation of labour force 1 1 Inflation rate The expected growth rate of salaries - - The movements in the provisions for employee benefits are summarized in the table below: Balance, beginning of the year Provisions during the year (Note 8) Actuarial gains transferred to equity (110) - Balance, December

30 19. PROVISIONS FOR LOSSES ON OFF-BALANCE SHEET CREDIT EXPOSURES In EUR Provisions for losses contingent on: - off-balance sheet items (Note 5) operational risk (Note 5) EQUITY As of 2012 the Bank's equity was comprised of 96,736 common shares (December 31, 2011: 96,736 common shares), having the par value of EUR The Law on Banks (Official Gazette of Montenegro, no. 17/2008, 44/2010 and 40/2011) defines the minimum amount of initial capital of Bank in the amount of EUR 5,000 thousand. As of December 31, 2012 the Bank s equity complied with the prescribed minimum capital requirements. The ownership structure of the Bank s equity as of 2012 and 2011 was as follows: In EUR 000 Number Of shares Number In EUR Of 000 % share shares In EUR 000 % share Shareholder name Societe Generale, Paris, France 87,602 22, % 87, % Plantaže A.D, Podgorica 2, % 2, % NFD Aureus global developed O.I.F, Croatia 1, % 1, % East Capital Holding, Stockholm, Sweden 1, % 1, % Other 3, % 3, % 96,736 24, % 96,736 24, % 21. COMPLIANCE WITH REGULATIONS OF THE CENTRAL BANK OF MONTENEGRO In accordance with the regulations of the Central Bank of Montenegro, the Bank is obliged to maintain the minimum capital adequacy ratio of 10%. The Bank is also required to maintain certain ratios pertaining to the volume of its activities and composition of risk assets in compliance with the Law on Banks (Official Gazette of Montenegro, no. 17/2008, 44/2010 and no. 40/2011) and regulations of the Central Bank of Montenegro. The Bank s solvency ratio as of 2012 amounted to 12.25% ( 2011: 14.85%). In 2012 there was a change of Decision on capital adequacy which prescribed unrealized gains from available for sale securities to be excluded from tier 2 capital calculation and this was the biggest effect on solvency ratio decrease compared to

31 22. OFF-BALANCE-SHEET ITEMS In EUR Guarantees, other contingent liabilities and commitments: Guarantees to corporate entities: - payment guarantees 20,534 17,099 - performance bonds 8,375 7,375 Irrevocable commitments for undrawn credit facilities 21,749 16,427 Unsecured letters of credit 1,131 2,829 Guaranties received 75,666 38,515 Received collaterals: - administrative ban 35,471 25,483 - guarantees and pledge 249, ,269 - bonds 392, ,522 - mortgage and fiduciary 321, ,503 - insurance policies 131, ,860 - movables 23,483 18,299 - deposits 5,535 5,645 - liens on movable property 210, ,509 - other Other off-balance sheet items: - commission business 6,017 7,060 - loans written-off 9,730 6,492 - other written-off assets 1,390 1,393 - written-off and suspended interest 2,177 1,619 1,516,700 1,302,938 29

32 23. RELATED PARTY TRANSACTIONS Related party transactions relate to Parent Bank, other members of Societe Generale Group, Bank s shareholders, Bank s management and employees of the Bank. In EUR Receivables Correspondent accounts with foreign banks: - Societe Generale Paris 5,871 1,036 - Societe Generale New York SKB Banka, Ljubljana 1 3 5,948 1,116 Time deposits with related parties: - Societe Generale New York 2,544 1,089 2,544 1,089 Loans: - Plantaža A.D, Podgorica 6,298 6,142 - Milšped MNE d.o.o, Podgorica Gorcin d.o.o Cavic d.o.o M Makarije d.o.o. 9-6,413 6,142 Equity investments in other legal entities: - Plantaža A.D, Podgorica 3,171 3, ,181 3,168 Total receivables 18,086 11,515 Payables Deposits: - Građevinar d.o.o. 1, Lovćen osiguraje 2, Klinički centar Crne Gore Plantaža A.D, Podgorica - 4 3, Borrowings: - Societe Generale Paris (Note 17) 36, ,500 36, ,500 Interest payables: - Societe Generale Paris Other payables: - Societe Generale Paris Total liabilities 40, ,749 Liabilities, net (22,131) (93,234) As of 31 December 2012, the total amount of guarantees received from the parent bank and other members of Societe Generale Group, used as collaterals for loans, amount to EUR 25,486 thousand. Also, Societe Generale Group issued guarantees in amount of EUR 31,429 thousand for EBRD credit line and guarantees to the Bank's client for the deposit placed to the Bank in amount of EUR 15,000 thousand.. 30

33 23. RELATED PARTY TRANSACTIONS (continued) At 2012, loans to employees amounted to EUR 3,868 thousand ( 2011: EUR 3,183 thousand) and mostly referred to the approved long-term loans bearing annual interest rates ranging from 4% + 6M Euribor to 8.02% + 6M Euribor. In EUR Off-balance-sheet items Guarantees issued: - Plantaža A.D, Podgorica Milšped MNE d.o.o, Podgorica Građevinar d.o.o, Guarantees received: - Societe Generale Paris 71,915 34,455 - Banka Societe Generale, Albania SG Vienne - Austria ,697 34,455 Expenses and revenues as a result of related party transactions during 2012 and 2011 are listed below: In EUR Income Interest income: - Plantaža A.D, Podgorica Societe Generale Paris Societe Generale New York Fee and commission income: - Plantaža A.D, Podgorica Total income Expenses Interest and fees expenses: - Građevinar d.o.o Lovćen Osiguranje Societe Generale Paris 3,266 3,573 - Societe Generale New York 5-3,278 3,575 Other expenses: - Societe Generale Paris Societe Generale Banka Srbija A.D., Beograd Total expenses 3,461 3,955 Expenses, net (3,097) (3,588) 31