COOPERATIVE CENTRAL BANK LIMITED REPORT AND CONSOLIDATED FINANCIAL STATEMENTS. For the year ended 31 December 2013

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1 COOPERATIVE CENTRAL BANK LIMITED REPORT AND CONSOLIDATED FINANCIAL STATEMENTS

2 REPORT AND CONSOLIDATED FINANCIAL STATEMENTS CONTENTS PAGE Officers and professional advisors 1 Report of the Committee 2-3 Independent Auditors' report 4-6 Consolidated statement of profit or loss and other comprehensive income 7 Consolidated statement of financial position 8 Consolidated statement of changes in equity 9-10 Consolidated statement of cash flows Notes to the consolidated financial statements 13-87

3 OFFICERS AND PROFESSIONAL ADVISORS Committee: Georgios Iosif - Non-Executive Chairman (until 25 October 2013) Nicolas Hadjiyiannis - Independent Non-Executive Chairman (member from 25 October 2013, chairman from 8 November 2013) Charalambos Christodoulides - Independent Non-Executive Vice Chairman (from 25 October 2013) Demetrios Stavrou - Non-Executive Member (until 25 October 2013) Yiannakis Yiannaki - Non-Executive Member (until 25 October 2013) Georgios Marinou - Non-Executive Member (until 25 October 2013) Demetris Christou - Non-Executive Member (until 25 October 2013) Pavlos Theodotou - Non-Executive Member (until 25 October 2013) Dr. Nearchos Ioannou - Non-Executive Member (until 25 October 2013) Mikis Neophytou - Non-Executive Member (until 25 October 2013) Michalis Papageorgiou - Non-Executive Member (until 25 October 2013) Demetris Theodotou - Non-Executive Member (until 25 October 2013) George Hadjinicolas - Non-Executive Member (until 25 October 2013) Dr. Andreas Charitou - Independent Non-Executive Member (until 25 October 2013) Dr. Gregoris Maliotis - Independent Non-Executive Member (until 25 October 2013) Athanasios Stavrou - Independent Non-Executive Member (until 25 October 2013) Georgios Kittos - Independent Non-Executive Member (until 25 October 2013) Panicos Pouros - Independent Non-Executive Member (until 25 October 2013) George Strovolides - Independent Non-Executive Member (reappointed on 7 November 2013) Lambros Pieri - Independent Non-Executive Member (reappointed on 7 November 2013) Erotokritos Chlorakiotis - Executive Member (until 18 September 2013) Stavros Iacovou - Executive Member (from 8 November 2013 until 15 January 2014) Marios Klerides - Executive Member (from 22 January 2014) Efthymios Pantazis - Executive Member (reappointed on 22 January 2014) General Manager: Erotokritos Chlorakiotis - (until 18 September 2013) Efthymios Pantazis - (Deputy General Manager from 19 September 2013 until 10 January 2014) Marios Klerides - (from 11 January 2014) Senior Management: Efthymios Pantazis Stavros Iacovou Costas Araouzos Demetris Koulas - Senior Director of Banking services - Manager Administrative Services - Manager Finance - Manager Financial Services Independent Auditors: KPMG Limited Certified Public Accountants and Registered Auditors 14 Esperidon Street 1087 Nicosia Cyprus Legal Advisors: Tassos Papadopoulos & Associates Christos M. Triantafillides in cooperation with Ioannis Klerides & Sons Registered office: 8 Gregori Afxentiou street, 1096 Nicosia, P.O , 1389 Λευκωσία 1

4 COOPERATIVE CENTRAL BANK REPORT OF THE COMMITTEE The Committee of Cooperative Central Bank Limited (the ''Bank'') presents to the members its Annual Report together with the audited consolidated financial statements of Cooperative Central Bank Limited that include the eighteen Cooperative Credit Institutions ( CCIs ) and the twelve Companies of Commercial Sector which are controlled, the Group, for the year ended 31 December Incorporation The Bank was founded in Cyprus in 1937 (registration number 88) as a Cooperative limited liability Company, under Article 11 of the Cooperative Companies Law of 1923 and Principal activities The principal activities of the Group, which have not changed from prior year, is the provision of banking and financial services, within the legal framework of the Cooperative Companies Law and the carrying out of agricultural trading activities. All activities are carried out in Cyprus. Review of development regarding the position and review of the results of the Group The profit from ordinary activities before the provisions for impairment increased by 18,9% and amounted to thousands compared to thousands for The increase of profit is attributable mainly to the increase in net interest income. After the charge for impairment of securities of thousand, the increase in the provision for impairment of loans and other advances of thousands, and the tax charge of thousands, a loss for the year of thousands was generated compared to a loss of thousands for The significant increase in the loss is attributable mainly to the increase in the provision for impairment of loans and other advances as a result of the negative economic climate, the increase of non-performing loans and the continued decline in property values. Deposits and other customer accounts as at 31 December 2013 amounted to thousands showing a decrease of thousands or 11.3%. Loans and other advances to customers after provisions on 31 December 2013 amounted to thousands showing a decrease of thousands or 18.6%. The Group's equity after the successful recapitalization for an amount of 1,5 billions from the financial support programme amounted to 1,2 billions and the Core Tier Capital ratio to 12.1%. Indicative consolidated financial position which includes the amount of recapitalization of 1,5 billions is included in note 7 of the financial statements. Restructuring plan and strengthening of the capital base of CCS The Cooperative Central Bank Limtied prepared a Restructuring Plan for the Cooperative Credit Sector ("CCS") that was approved on 24 February 2014 by the European Commission. The European Commission ( EC ) states that the measures for the recapitalization and restructuring of CCIs, are in accordance with the EU rules for government support. The main objectives of the Restructuring Plan are: Regaining the confidence of depositors Decrease of operating costs and improvement of profitability Decrease of Non-Performing Loans Strengthening of Capital Adequacy Strengthening the operational framework of Corporate Governance Merge of CCIs Downsizing branch network As a result of the approval of the Restructuring Plan for the CCS, on 28 February 2014 the European Stability Mechanism signed an agreement between the Ministry of Finance and the Bank for the disbursement of 1,5 billion for the recapitalization of the CCS and the transfer of 99% of the CCS shares to the Goverment. 2

5 COOPERATIVE CENTRAL BANK REPORT OF THE COMMITTEE Total net income The Group's total net income for the year ended 31 December 2013 was thousands (2012: thousands). Dividends The Committee does not recommend the payment of a dividend. Future developments As presented in notes 1.2, the Group s Committee, despite of the difficult conditions that exist in the financial sector and the ongoing recession of the economy, assures its members that will continue its efforts for the smooth operation of both the Bank and the CCIs. Particular emphasis is given to the strict compliance of the Restructuring Plan with the aim of strengthening the indicators of capital adequacy, ensuring a healthy liquidity position and an effective credit risk management. Main risks, uncertainties and risk management The main risks and uncertainties faced by the Group and CCIs are credit risk, market risk and liquidity risk. The Group has established a risk management framework, where prime position is held by the reliable measurement of financial risks. The steps taken to manage these risks, are described in more detail in note 50 of the consolidated financial statements. Share capital There were no changes in the share capital of the Bank during the year. Committee The members of the committee during the year and at the date of this report are shown on page 1. Messrs Nicolas Hadjiyiannis, Demetris Theodotou, George Hadjinicolas, Charalambos Christodoulides, Athanasios Stavrou, George Kittos and Panicos Pouros were appointed on 25 October Messrs George Strovolides and Lambros Pieri were reappointed on 7 November 2013 and Efthymios Pantazis was reappointed on 22 January On the same day Marios Clerides was appointed as a member of the Committee. In accordance with the Specific Rules of the Bank all present members of the Committee continue in office. Events after the reporting period Events after the reporting period that ended 31 December 2013 until the date of approval of the consolidated financial statements are mentioned in note 54 of the consolidated financial statements. Related party transactions Disclosed in note 48 of the consolidated financial statements. Independent Auditors The independent auditors of the Bank, KPMG Limited, expressed their willingness to continue in office. By order of the Committee, Chairman Nicosia, 30 June

6 Independent Auditors Report To the Members of Cooperative Central Bank Limited Report on the consolidated financial statements of the Cooperative Central Bank Ltd We have audited the accompanying consolidated financial statements of Cooperative Central Bank Limited (the ''Bank'') and its subsidiaries (together with the Bank, ''the Group'') on pages 7 to 87 which comprise the consolidated statement of financial position as at 31 December 2013, and the consolidated statement of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Committee's responsibility for the consolidated financial statements The Committee is responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union, and the requirements of the Cooperative Companies Law of 1985 as amended from time to time, and for such internal control as the Committee determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation of consolidated financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the committee, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for a qualified opinion for our audit. 4

7 Basis for qualified opinion regarding the consolidated financial performance and the consolidated cash flows Due to limitations placed on the extent of our work, we were unable to complete the procedures required by the International Auditing Standards ( ISA ) 510 "Initial Audit Engagements Opening Balances" and ISA 710 "Comparative Information - Corresponding Figures and Comparative Financial Statements" so as to have sufficient and appropriate audit evidence as to the total assets and total liabilities of the Group as at 1 January 2013, and the corresponding amounts as at 31 December Since the opening balances of assets and liabilities of the Group affect the determination of financial performance and its cash flows for the year, we were unable to determine any adjustments that might be necessary in relation to the profit / loss for the year ended 31 December 2013 that is presented in the consolidated statements of profit or loss and other comprehensive income and changes in equity, and in relation to the net cash flows presented in the consolidated statement of cash flows for respective year and any adjustments to the corresponding amounts for Qualified opinion regarding the consolidated financial performance and its consolidated cash flows In our opinion, except for the effects of the matters mentioned in the paragraph of the basis for qualified opinion, the consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year ended 31 December 2013 give a true and fair view of the financial performance and cash flows of the Group for the year then ended, in accordance with International Financial Reporting Standards as adopted by the European Union, and the requirements of the Cooperative Companies Law of 1985 as amended from time to time. Opinion regarding the consolidated financial position In our opinion, the consolidated statement of financial position gives a true and fair view of the financial position of the Group as at 31 December 2013, in accordance with International Financial Reporting Standards as adopted by the European Union, and the requirements of the Cooperative Companies Law of 1985 as amended from time to time. Report on other legal requirements Pursuant to the additional requirements of the Auditors and Statutory Audits of Annual and Consolidated Accounts Laws of 2009 as amended from time to time, we report the following: We have obtained all the information and explanations we considered necessary for the purposes of our audit, except that the scope of our work was limited by the matters referred to in the paragraph of the basis for qualified opinion. In our opinion, proper books of account have been kept by the Bank so far as it appears from our examination of these books, except as stated in the basis for qualified opinion paragraph. The consolidated financial statements are in agreement with the books of account. In our opinion and to the best of our information and according to the explanations given to us, the consolidated financial statements give the information required by the Cooperative Companies Law 1985 as amended from time to time, in the required manner except as stated in the basis for qualified opinion paragraph. In our opinion, the information given in the report of the Committee on pages 2 to 3 is consistent with the consolidated financial statements. 5

8 Other matter This report, including the opinion, has been prepared for and only for the Bank s members as a body in accordance with Section 34 of the Auditors and Statutory Audits of Annual and Consolidated Accounts Laws of 2009 as amended from time to time and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whose knowledge this report may come to. Comparative figures The comparative figures have not been audited. Michael M. Antoniades, FCA Certified Public Accountant and Registered Auditor for and on behalf of KPMG Limited Certified Public Accountants and Registered Auditors 14 Esperidon Street 1087 Nicosia Cyprus 30 June

9 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Note Interest income Interest expense 10 ( ) ( ) Net interest income Income from fees and commissions Expenses for fees and commissions (1.899) (3.585) Other net losses 11 (28.306) (3.695) Fair value loss on investment properties 27 (32.734) (11.707) Other income Total net income Staff costs 13 ( ) ( ) Depreciation 15 (13.785) (14.275) Other operating expenses 16 (63.853) (70.146) Total expenses ( ) ( ) Operating profit before provisions for impairment Net finance costs 17 (252) (184) Share of results of associates before tax Charge for impairment in value of investments held to maturity 26 (16.900) (2.000) Charge for impairment of financial assets available for sale 25 (4.234) (149) Increase in provisions for impairment of loans and other advances 21 ( ) ( ) Loss before tax ( ) (11.746) Tax 18 (3.200) (5.611) Net loss for the year ( ) (17.357) Other comprehensive income Items that will not be reclassified in subsequent periods to profit or loss: Change in the fair value of land and buildings (22.242) (8.756) Tax on other comprehensive income 18 (356) 79 (22.598) (8.677) Items that may be reclassified in subsequent periods to profit or loss: Available for sale financial assets - Fair value gains Other comprehensive expense for the year (19.238) (6.406) Total loss for the year ( ) (23.763) The notes on pages 13 to 87 form an integral part of these consolidated financial statements. 7

10 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 31 December 2013 ASSETS Note Cash Deposits with central banks Deposits with other banking institutions Loans and other advances to customers Inventories Properties held for sale Financial assets at fair value through profit or loss Available for sale financial assets Investments held to maturity Investment properties Property, plant and equipment Intangible assets Investments in associates Other assets Total assets LIABILITIES Amounts due to other bank institutions Deposits and other customer accounts Repurchase agreements Other loans Loans for the repayment of refugee deposits Loan capital Deferred income Other liabilities Total liabilities EQUITY Share capital Reserves 45 ( ) Total equity ( ) Total equity and liabilities Contingent liabilities and commitments On 30 June 2014, the Committee of Cooperative Central Bank Limited 8uthorized these consolidated financial statements for issue Chairman Vice Chairman General Manager Finance Manager The indicative consolidated statement of financial position that includes the amount of recapitalization of 1,5 billion which results in equity of 1,2 billion is presented in note. 7. The notes on pages 13 to 87 form an integral part of these consolidated financial statements. 8

11 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Share Capital Fair value reserveland and buildings Fair value reserve available-forsale financial assets Merger reserve Statutory reserve required by law Profit available for distribution Total Note Balance 1 January (9.444) Comprehensive income Net loss for the year (17.357) (17.357) Other comprehensive income Fair value reserve land and buildings Fair value gains net of tax 28&42 - (8.112) (8.112) Fair value reserve available-for-sale financial assets Fair value adjustment Provison for charity purposes Other comprehensive income for the year - (8.112) (5.095) Transactions with owners Issue of share capital Increase in merger reserve Transfer of loss for the year (17.357) (17.357) At 31 December (7.173) The notes on pages 13 to 87 form an integral part of these consolidated financial statements. 9

12 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Share Capital Fair value reserveland and buildings Fair value reserve available-forsale financial assets Merger reserve Statutory reserve required by law Profit available for distribution Note Balance 1 January (7.173) Comprehensive income Net loss for the year ( ) ( ) Other comprehensive income Fair value reserve - land and buildings Fair value gains - net of tax 28&42 - (21.886) (21.886) Fair value reserve - available-for-sale financial assets Fair value adjustment Provison for charity purposes (1.758) - (1.758) Other comprehensive income for the year - (21.886) (1.758) - (20.284) Transactions with owners Increase in merger reserve Transfer of loss for the year ( ) Total ( ) At 31 December (3.813) ( ) - ( ) The notes on pages 13 to 87 form an integral part of these consolidated financial statements. 10

13 CONSOLIDATED STATEMENT OF CASH FLOWS Note Cash flows from operating activities Loss before tax ( ) (11.746) Adjustments for: Provision for impairment of loans and other advances to customers Depreciation of property, plant and equipment Amortization of computer software Amortization of rights for use Share of loss/(profit) and write offs from associates 31 4 (19) Loss from disposal of property, plant and equipment Fair value losses on investment properties Fair value gains on financial assets at fair value through profit or loss 24 (49) (32) Impairment charge on financial assets available for sale Impairment charge on investments held to maturity Impairment charge on investment properties Impairment charge on available for sale properties Impairment charge on property, plant and equipment (Credit) in results for employee retirement plans 43 (4.077) - Debit/(credit) in results for provisions for other liabilities and charges (292) Income from investments in treasury bills 9 (450) (2.212) Income from investments in debt securities 9 (57.800) (70.392) Dividend expense (23) (336) Interest income 11 (56) (35) Interest expense Cash flows from operating activities before working capital changes Decrease in deposits with central banks Decrease / (increase)in deposits with other banking institutions ( ) Decrease in loans and other advances to customers Increase / (decrease) in repurchase agreements ( Decrease in inventories (Increase) / decrease in properties held for sale (22.791) Decrease in other assets Increase in financial assets at fair value through profit or loss (5) (20) Decrease in customer deposits and other customer accounts ( ) ( ) Decrease in other liabilities (4.852) - Decrease in deferred income (8) - Cash flows used in operating activities ( ) ( ) Tax (paid)/ refunded (4.955) Payment for employee retirement schemes (1.210) (16.483) Net cash flows used in operating activities ( ) ( ) The notes on pages 13 to 87 form an integral part of these consolidated financial statements. 11

14 CONSOLIDATED STATEMENT OF CASH FLOWS Cash flows from investing activities Income from investments in treasury bills Income from investments in debt securities Payment for acquisition of intangible assets 29 (268) (1.073) Payment for acquisition of property, plant and equipment 28 (30.477) (29.547) Payment for acquisition of investment properties 27 (4.650) (2.945) Payment for acquisition of available for sale financial instruments 25 (12.665) (7.904) Payment for acquisition of investments in subsidiaries Payment for acquisition of investments in associates 31 - (196) Proceeds from disposal of property, plant and equipment Proceeds from disposal of investment properties Proceeds from disposal of investments held-to-maturity Interest received Dividends received Net cash flows from investing activities Cash flows from financing activities Proceeds from issue of share capital Repayments of loan capital 38 (20.110) - Interest paid (33) (34) Net cash flows (used in) / from financing activities (20.143) Net decrease in cash and cash equivalents ( ) ( ) Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year The notes on pages 13 to 87 form an integral part of these consolidated financial statements. 12

15 1. General 1.1 Incorporation The Bank was founded in Cyprus in 1937 (registration number 88) as Cooperative limited liability company in accordance with Article 11 of the Cooperative Companies Law of 1923 and Its registered office is located at 8 Grigori Afxentiou street, 1096 Nicosia, P.O , 1389 Nicosia. According to the Memorandum of Understanding which was agreed between the Republic of Cyprus and the European Central Bank, European Committee and International Monetary Fund ( Troika ) the number of Cooperative Credit Institutions (CCIs) is reduced to 18, with the General Meetings of the Members approving the mergers on September On 4 October 2013 the nationalization decree of the Cooperative was issued along with the increase of the share capital to 1.5 billions. The agreement for the granting of the debenture issued by the European Stability Mechanism for recapitalization of the Cooperative Movement was signed on 28 February In accordance with the Restructuring Plan, the Memorandum and the two government decrees issued on 4 October 2013 and 29 January 2014, the participation percentage of the voting rights of the Republic of Cyprus in the ownership structure of Cooperative Central Bank ( CCB ) is 99% and of the existing shareholders is 1%. At the same time, CCB becomes a 99% shareholder in the remaining 18 Cooperative Credit Institutions. 1.2 Public finance adjustment program and operating environment On 25 March 2013 the negotiations between the Cyprus government and Eurogroup have been concluded, and an agreement was reached for the provision of financial support towards the Cyprus Government of up to 10 Billions and the development of a macroeconomic adjustment program. From the 10 Billions, 2.5 billions will be available for the re-capitalisation of the bank institutions of Cyprus, including the Cooperative Sector, but excluding Bank Of Cyprus Plc ( Bank of Cyprus ) and Laiki Bank Plc ( Laiki ). Furthermore, it was decided that Bank of Cyprus and Laiki will be set under resolution assets, insured deposits and the 9 billions provided by Emergency Liquidity Assistance ( ELA ) will be transferred from Laiki Bank to Bank of Cyprus. The recapitalization procedure of Bank of Cyprus was completed in accordance with the relevant decrees of the Resolution Authority for Bailing - in meaning a partial conversion of the unsecured deposits into shares. Moreover, the holders of shares and credit securities of Bank of Cyprus have contributed towards its recapitalization through the absorption of losses. In accordance with the text of the economic adjustment program the target is to overcome both the short-term and the medium-term economic, financial and structural challenges that Cyprus is facing. The main aims of the program are: 1. to restore the strength of the Cyprus banking sector and to gain the trust of the depositors and the market with the thorough restructuring and downsizing of the financial institutions, the strengthening of supervision and to address the expected capital deficiencies, in accordance with the political agreement of the Eurogroup on the 25 March 2013, 2. to continue the current process of restructuring the public finances in order to correct the excessive government budgetary deficit, as soon as possible, especially through measures to decrease the current primary expenditure, and by maintaining, medium term, the restructuring of the public finances, especially through measures to increase the productivity of the public expenditure within a short-term public finances framework, to increase the collection of income and to improve the operation of the public sector, and 3. to implement corrective reforms in order to support the competitiveness and a sustainable and balanced development, allowing the correction of the macroeconomic imbalances, and more specific through the reform of the system of cost of living allowance and the removal of obstacles for the ordinary functioning of the services markets. 13

16 1. General (continued) 1.2 Public finances adjustment program and operating environment (continued) The final text of the Memorandum of Understanding with Troika was agreed from the Board of Directors of the European Stability Mechanism and the Cyprus Parliament and approved by the member states of the eurozone. On 27 March 2013 the first decree was issued concerning the restrictions on the banking transactions. The scope and duration of the restrictions are decided and revised by the Ministry of Finance and the Governor of the Central Bank of Cyprus. The temporary restrictions on the bank transactions and cash transactions include restrictions on the withdrawals of cash, the clearing of cheques and restrictions of money transferred on other credit institutions in Cyprus and abroad. On 29 March 2013, the Central Bank of Cyprus issued two decrees in relation to the Laiki and Bank of Cyprus, implementing measures for these two banks as per The Resolution of Credit and Other Institutions Law of On 18 April 2013, legislation was approved by the Parliament that allowed for increase of the Corporation tax from 10% to 12,5%, increasing the special contribution for defence from 15% to 30% as well as increasing the special tax relating to credit institutions from 0,11% to 0,15%. The Central Bank of Cyprus announced on the 24 April 2013 that an agreement was reached with the banking institutions in Cyprus, that provides that if the deposit rate offered by the financial institutions exceeds euribor plus 300 basis points, then the financial institution must maintain additional special capital. On 2 May 2013, the Cyprus bonds have regained the ability to be used as a collateral for the purpose of funding from the European Central Bank, while on 13 May 2013 the European Stability Mechanism announced the decision of its Board of Directors to release the first installment of 3 billions from the support package given to Cyprus and the deposit of the initial 2 billions. The Central Bank of Cyprus (CBC) having evaluated the current regulatory framework in relation to the provision of advances, the procedure of impairment of assets and provisions and the handling of collateral for the provisions, has started to implement regulatory amendments. On 17 February 2014 the Central Bank of Cyprus issued a decree that covers the provisioning policy of loans and the procedures for provisions. The Decree starts with an immediate effect and the disclosure requirements must be applied for the year The reform of the legal framework regarding repossession and insolvency is of high importance, so that balanced motives will be given to borrowers and lenders to negotiate and reach to an agreement regarding the restructuring of the non-performing loans, avoiding at the same time difficult situations. The completion of the evaluation is subject to an approval from the European Union and the International Monetary Fund (IMF) and is expected to be reviewed from the Eurogroup, the board of directors of the European Stability Mechanism and the executive committee of the IMF until the beginning of July. 1.3 Principal activities The main activities of the Group, which have remained the same as the previous year, is the provision of banking and financial services, in accordance with the legislation of Cooperative Companies and the performance of trading activities. All activities are carried out in Cyprus. 1.4 Turnover The turnover of the Group consists of revenue from interest, rights and commissions and other income. 14

17 2. Basis of preparation 2.1 Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and the provisions of the Cooperative Companies Laws of Functional and presentation currency The consolidated financial statements are presented in Euro ( ), which is the functional currency of the Bank. The amounts presented in the financial statements are rounded to the nearest thousand unless when stated otherwise. The functional currency is the currency of the primary economic environment in which the Group operates and in which the elements of financial statements are measured. 2.3 Basis of measurement The consolidated financial statements have been prepared under the historical cost convention, as amended with the fair value estimate of land and buildings, investment properties, financial assets available for sale and the financial assets at fair value through profit or loss. 2.4 Going concern basis The consolidated financial statements have been prepared on a going concern basis. Despite the recent developments in the economic environment of Cyprus, as stated in notes 1.2 and 3.8 until 3.14 of the consolidated financial statements, the Management and the Committee of the Group have been satisfied on the basis of the analysis in note 3.15,that the Group, has the means to continue its operations in the foreseeable future. 3. Use of estimates and judgments The preparation of consolidated financial statements in accordance with IFRs requires from Management the exercise of judgement, to make estimates and assumptions that influence the application of accounting principles of the Group and the related amounts of assets and liabilities, disclosure of contingent liabilities and commitments as at the date of preparation of the financial statements as well as the amounts of income and expenses. Despite the fact that these calculations are based on the best knowledge of Management of the Bank in relation to current conditions and actions, actual results may deviate from such estimate. The estimates and underlying assumptions are revised on a continuous basis. Revisions in accounting estimates are recognized in the period during which the estimate is revised, if the estimate affects only that period, or in the period of the revision and future periods, if the revision affects the present as well as future periods. The estimates and assumptions that have a significant risk for material adjustments within the next financial year are presented below. 3.1 Impairment of financial assets Assets which are presented at amortised cost are evaluated for impairment based on the explanation in note The loss for assets which are evaluated individually is based on the best possible estimates of the management for the present value of the estimated future cash flows that are expected to be received. For determining these cash flows, the management exersises its judgements about a debtor s financial situation and the net realizable value of any underlying collateral. 15

18 3. Use of estimates and judgments (continued) 3.1 Impairment of financial assets (continued) Impairment provision is also estimated collectively for assets that have been evaluated individually and have not demonstrated any impairment, (incurred but not recorded) and for advances with homogenous characteristics that have not been assessed as significant on an individual basis. The provision for losses that have been incurred but not recorded covers the credit losses that are inherent in loans, and investments held to maturity when there is an objective evidence that demonstrates that there are impaired assets but these assets have not been identified. In the evaluation for the need for collective provision, the management takes into account factors, such as the solvency, the size of the portfolio and other economic factors. The management also uses assumptions on the estimation of the provision based on prior experience and the current financial position. The accuracy of the provision is contingent on the assumptions and parameters of the model that is used to determine the provision. The Group grants loans and other facilities to customers, that are secured by guarantees of the Republic of Cyprus. The Group does not recognize any other impairment provision due to the government guarantees. This decision of the Group requires the exercise of significant judgment. Based on the existing information, the Group believes that it has fulfilled all of its obligations from the current agreements with the Government and as a result it has not recognized any provision for this category of loans. Investments in shares are tested for impairment as explained in note Significant or prolonged reduction in the fair value below the costs of investments on shares is considered as objective evidence for impairment. Investments in government bonds are tested for impairment, taking into account the solvency that is reflected on the returns of the bonds, in the evaluations of rating agencies, the ability of the government to obtain funding from the markets, as well as whether the state has used support mechanisms for financial support. Investments in bonds held to maturity are subject to impairment when their book value exceeds their recoverable amount. The recoverable amount is measured based on the present value of the expected cash flows. For the measurement of the expected cash flows significant judgments are required, that are related to the financial position of the issuer,the breach of contract conditions and the possibility of bankruptcy of the issuer. 3.2 Fair value estimation The fluctuations that exist in the real estate market and the reduction in the volume of transactions have significantly increased the uncertainty for the right estimation of the fair value of properties. Properties that the Group has for its own use is measured at fair value less accumulated depreciation and accumulated impairment losses. The fair value is determined from the estimation of professional surveyors, based on market indications about their current use are take place on a regular basis, so that the book value is not substantially different from the fair value. The investment properties owned by the Group is measured at fair value. The fair value is determined from the estimations of professional surveyors, based on indications of the market about their current use at the end of each year. The fair value of the financial instruments that are not traded in the active market is determined from valuation models. These models are reassessed periodically by specialised personnel that reconfirms their credibility. To the greater extent possible, the valuation models are based on observable market inputs, but also on factors such as the identification of credit risk and the volatility requiring estimations and judgments by the management. Changes in these estimations and assumptions are likely to affect the fair value of the relevant financial instruments. 16

19 3. Use of estimates and judgments (continued) 3.3 Income taxes Significant judgment is required in determining the provision for income taxes. There are transactions and calculations for which the final tax computation is uncertain during the ordinary course of business. The Bank recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. In cases where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. 3.4 Provision for obsolete and slow-moving inventories The Bank reviews its inventories for evidence regarding the ability to the sell inventories and their net realizable value on disposal. The provision for obsolete and slow-moving inventory is based on management s past experience, taking into consideration the value of inventories as well as the movement and the level of stock of each category of inventory. The amount of provision is recognized in profit or loss. The review of the net realisable value of the inventories is continuous and the methodology and assumptions used for estimating the provision for obsolete and slow moving inventories are reviewed regularly and adjusted accordingly. 3.5 Fair value of non listed treasury bills, equity securities, debt securities and derivative financial instruments The fair value of treasury bills, equity securities, debt securities and derivative financial instruments that are not quoted in an active market, is determined using valuation models. These models are periodically reviewed by qualified personnel and validated. To the greatest extent possible, models use observable data, as well as factors such as the determination of credit risk and volatility that require management to make estimates and assumptions. Changes in these estimates and assumptions could affect the fair value of the relevant financial instruments. 3.6 Retirement benefits The cost of defined benefit pension plans is determined using actuarial valuations that use assumptions about discount rates, long term rate of return on plan s assets, future salary increases, mortality rates and future retirement benefit increases where necessary. The Group sets these assumptions based on market expectations at the reporting date using best estimates for each parameter, covering the period over which obligations will be settled. Due to the long-term nature of these plans, such assumptions are subject to significant uncertainty. 3.7 Impairment of intangible assets The intangible assets are recognised initially at cost and are depreciated using the straight line method during their useful economic life. For the intangible assets arising from merger of companies, the cost of acquisition is the fair value at the date of the transaction. The intangible assets with unlimited use are reviewed for impairment at least once a year. This review is performed by discounting all future cash flows expected to arise from the use of the intangible assets, using a discount rate reflecting the current estimations of the market and the risks related to the asset. When it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable value of the cash generating unit in which the asset belongs to. 3.8 Cooperative Sector Restructuring Plan On 14 June 2013 the Central Bank of Cyprus announced after a discussion with Troika that the final requirements of the Cooperative Credit Institutions amounted to 1.5 billions. On 5 September 2013 the Parliament approved the legislation regarding the supervision and nationalization of the Cooperative Sector. During September 2013, General Meetings of the Members of the 93 Cooperative Credit Institutions were held and approved the mergers as provided in the Restructuring Plan therefore reducing the CCIs number to

20 3. Use of estimates and judgments (continued) 3.8 Cooperative Sector Restructuring Plan (continued) On 27 September 2013 the European Stability Mechanism announced the deposit of 1.5 billions to Cyprus, an amount intended for the recapitalization of the Cooperative Credit Sector. On 4 October 2013 the decree of nationalization of Cooperative Sector was issued. According to the decree, the share capital of the Cooperative Central Bank (CCB) increases by 1.5 billions with the issue of new shares, which are subscribed in full by the Republic of Cyprus with the provision of a bond of equivalent nominal value from the European Stability Mechanism to CCB. The bond has a duration of 18 months, and it could either be renewed or exchanged at its maturity date with cash. The enforcement of the decree is under the final approval of the Cooperative Restructuring Plan from the Directorate General of Competition of the European Union. According to the amended decree which was published in the official qazette of the Republic of Cyprus on 29 January 2014 and according to the valuation report of CCB s shares which was performed by an independent firm, the participation percentage and voting rights of the Republic of Cyprus in the ownership structure of CCB is ninety nine percent (99%) and of the existing shareholders of CCB is one percent (1%). In this respect the Cooperative Holding Company of CCB is incorporated to which all existing shareholders of CCB are transferred with participation to its capital proportionally to the participation each shareholder had in the share capital of CCB. The nominal value of the shares equals to one euro and twenty eight cents ( 1,28) per share, according to the decree specific deductions were made to the payroll of the Bank. On 24 February 2014 the European Committee proceeded with the approval of the Cooperative Restructuring Plan. The recapitalization and restructuring measures of the CCIs conform to the EU rules for state aid, as stated by the European Committee which approved the Restructuring Plan of CCIs. On 24 March 2014 all merger procedures are completed. Main objectives of the Restructuring plan other than the mergers are: Regaining the confidence of depositors Decrease of operating costs and improvement of profitability Decrease of Non-Performing Loans Strengthening of Capital Adequacy Strengthening the operational framework of Corporate Governance Downsizing of branch network On 28 February 2014, the agreement between the Ministry of Finance, Cooperative Central Bank and European Stability Mechanism was signed for the deposit of 1,5 billions for the recapitalization of the Cooperative Sector and the transfer of its shares to the State. 3.9 Macro-economic environment in Cyprus The progress of the adjustment program of the Cypriot economy has been assessed four times by Troika, and all assessments were positive. After the update of the Memorandum of Understanding in May of 2014 the minimum capital adequacy ratio of banks returns to 8%. According to Troika, following the fourth assessment, the program of Cyprus remains on track while the financial targets for the first quarter of 2014 have been achieved. The three most important challenges are the decrease of non-performing loans, maintaining the public finances in a sustainable path and the completion of reforms. As part of the restructuring plan of Cyprus, the government has committed to promote legislation that would ease the foreclosure of mortgages on loans of major debtors. Progress has been recorded regarding the recapitalization and restructuring of the Cooperative Credit Sector and banks proceed with their restructuring plans. This has allowed a significant loosening of the restrictions in domestic transactions, in line with the roadmap of the cypriot government. 18

21 3. Use of estimates and judgments (continued) 3.9 Macro-economic environment in Cyprus (continued) The authorities have also adopted measures for the implementation of their ambitious program of structural reforms. According to Troika, the prospects continue to be challenging despite the fact that the recession is expected to be lower during the current year. The reduction of the GDP for the year 2014 has been revised to 4,2% from 4,8% due to the better than expected results of 2014 and other recent indicators which suggest an improvement in trust. The unemployment remains high and substantial non-performing loans restrict the banks ability to provide credit services to the economy. As a result, it is expected that the recovery will be weaker than what was previously projected with an increase that is expected to reach 0,4% in 2015 with a gradual improvement in the future, since the domestic demand is restricted from the need for reduction of the high levels of debt. Troika believes that the primary fundamental challenge is the effective decrease of non-performing loans, as it is necessary in order to restart the granting of loans to the private sector for the support of growth and the creation of new employment opportunities Regulatory Capital Indicators During the year ended 31 of December 2013, the Group incurred significant losses, due to the substantial increase of the provision for impairment of loans and other advances. As part of the agreement between Troika and the Cypriot government on March 2013, the Cooperative Sector was recapitalized with the issue of a bond from the European Stability Mechanism amounting to 1,5 billion and the transfer of 99% of the share capital to the Government. The core tier ratio of the Group on 31 of December 2013 would be 12,6% if the amount of the recapitalization was accounted for in The Group aims to maintain its capital adequacy through the non distribution of profits, while, at the same time, the restructuring and sale of noncore assets will be determined based on the risk reduction and the capital adequacy. From 1 January 2014, the new Capital Requirements Regulations ( CRR ) and the amended Capital Requirements Directive IV ( CRD IV ) are in force. The Central Bank of Cyprus ( CBC ) evaluates the choices for the implementation of transitional provisions relating to the decrease of the new indicator of the Common Equity Tier 1 Capital. On the basis of this evaluation, the CBC will set the minimum capital indicators, taking into consideration the parameters of the evaluation of the consolidated statement of financial position and the Pan-European stress test, in cooperation with Troika and by informing the European Stability Mechanism. After its recapitalization, the Group complies with the minimum level for core equity capital ratio. During the year and until the 31 of December 2013, the Group did not comply with the minimum level for core equity capital ratio Liquidity The Management and Committee of the Cooperative Sector review on a daily basis the liquidity position of the Group, which will continue to have access to liquidity facilities of the Central Banks, as per the existing rules, when it is necessary. The cypriot authorities have implemented in March 2013, temporary restrictive measures and capital movement controls on bank and cash transactions. These measures provide the Group with time, in order for it to manage the significant liquidity pressure in the local market and the risk of deposit outflows. These measures include limits in cash withdrawals and capital movements. It is noted that the restrictive measures on capital movements within Cyprus have been lifted in May The Cooperative Central Bank is allowed to use liquidity facilities from the Eurosystem up to 1,95 billion (according to the 31 May 2014 data) using as guarantee governmental bonds and the Eurobond of the European Stability Mechanism. Additionally, there is the possibility of borrowing from the interbank market using as guarantee the above bonds from the European Central Bank. 19