Nava banka d.d., Zagreb. Annual Report. Nava Banka d.d., Zagreb. Annual Report

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1 Annual Report Nava Banka d.d., Zagreb 2006 Zagreb, April 2007 Annual Report

2 Content Page Key Performance Indicators 2 Report of the management Board 3 Statement of the Management Board s Responsibility 5 Independent Auditors Report 6 Fancial Statements: Income Statements 7 Balance Sheets 8 Statements of Cash Flows 9 Statements of Changes Shareholders Equity 10 Notes to the Fancial Statements Supplementary Statements Supervisory Board 52 Other Information 53 Annual Report

3 Key performance dicators (Expressed of Croatian Kuna -, unless otherwise stated) Index BALANCE SHEET Total assets 490, , Total liabilities 402, , Shareholders capital 87,909 53, Loans to the customers 279, , Deposits 366, , Commitments and contgencies 89,622 59, INCOME STATEMENT Net terest come 13,429 11, Net fee and commission come 2,558 2, Other come 2,203 2, Total come 18,190 16, Operatg expense 10,358 9, Total expense 15,529 13, Profit before taxation 2,661 3, Profit after taxation 2,137 2, PER SHARE INDICATORS Post tax earngs per share () Net assets per share () RATIOS Capital adequacy Tier 1 ratio (%) Cost come ratio (%) RETURN ON CAPITAL AND ASSETS Pre tax return on total assets (%) Post tax return on total equity (%) 0.5% 0.9% % 5.2% 46.2 The fancial formation has been extracted and the ratios derived from the audited Bank s fancial statements for each of the years to Annual Report

4 Report of the Management Board We are pleased to report that the year 2006 the Bank contued to operate successfully. The year 2006 is characterised by the stable recovery of Croatian economy and by the crease of dustrial production, vestment and gross domestic product particularly. The basic characteristics could be shortly described as follows: contuity growth of dustrial production; crease of gross national product; unresolved structural problems the economy and uncerta futher development strategy; high growth of foreign debtedness; budget deficit; deficit balance of payments and still very high rate of unemployment. Bankg operations were performg more favourable circumstances than the year The Croatian bankg sector is very stable and competitive. Increase of competition bankg dustry significantly decreased both active and passive terest rates and fees calculated for deliverg all sorts of bankg services. Fancial markets are developg gradually with larger choice of fancial struments and the impresive broadeng of the volume of tradg. Along the bankg activities, the fund dustry is growg rapidly and takg very important role on fancial market. As at 2006, the balance sheet of the Bank recorded 490,691 (2005: 363,815 ), representg very strong growth of 34.9%. The Bank has primarily focused on the safety and stability of its operations, development of new technologies and implementation of new products and services. Cash and other cash equivalents creased at 150,5 million (2005: 91,7 million), while the placements to the customers obtaed 10.8% growth. Fancial assets available for sale and hold to maturity recorded the amount of 46,3 million (2005: 9,6 million), representg the assets with the fastest growth. Deposit from the customers creased for 28.6% to the amount of 366,0 million (2005: 290,4 million), where household savgs recorded 20.8% growth up to 194,2 million (2005: 160,7 million). Savgs represent 48.2% of all the Bank's liabilities. The growth of savgs confirms that the Bank is completely keepg the confidence of its depositors and the image of safe and stable private bank. The shareholders capital has been successfully creased durg March 2006 for the amount of 35,0 million, through the private placement of the new share issue contag 50,000 of regular shares, completely bought by the group of craotian surance companies belongg to Agram Group, which as a relatied parties represent the biggest shareholder of the Bank. At the end of the year the Bank has 36 shareholders: 17 Croatian private companies and 19 Croatian citizens. Net terest come 2006 recorded 13,429 (2005: 11,723 ), representg the 14.6% growth compared to the last year. The Bank s terest comes and expenses are the result of the busess policies applied and the market position of the Bank, related to the structure of its placements and liabilities. Management has contually adopted the competitive credit and terest policies, with respect to the predomant prices on the fancial markets, the valid conditions for drawg of new deposits, cludg also the premium for currency, operative and credit risk exposure. The total come amount of 18,190 (2005: 16,656 ) is 9.2% higher compared to the last year. The portion of fees and commissions calculated for services delivered to the clients is significantly creased and the net fees come recorded 17.6% growth. The profit before taxation amount of 2,661 (2005: 3,523 ) decreased due to high crease of additional provisions for impairment losses and commitments amount of 5,171 (2005: 3,625 ), representg their 42.6% growth. Operative expenses amount of 10,358 (2005: 9,509 ) recorded 8.9% crease. Annual Report

5 Report of the Management Board Due to crease provisiong for possible losses, net profit for the year 2006 amount of 2,137 (2005: 2,805 ) is slightly lower compared to the previous year. From the pot of stable and safe runng of busess operations, very sound reputation of the Bank, contuity wideng of the client's and deposit base, improvement of the competitive strength and the quality of services, obtaed expenditure control, currency risk control and risk exposure control, as well as regardg the operative efficiency recorded very competitive surroundg, the year 2006 could be assessed as very successful for the Bank. Durg the year 2007 we will contue to run the bankg transactions by tailorg the adequate measures and busess policies for efficient risk management. The risk control and risk management will provide the successful current operatg of the Bank and its clients. The most significant element of the busess policy remas respectg the prciples of safety and liquidity, honourg the very high level of customer s confidence by providg them with high quality services and obtag the market efficiency contuously. Due to specific restrictions for further bankg placement's growth prescribed by Craotian National Bank ("CNB"), the year 2007 we are planng the Bank s assets growth of about 15%, crease of placement of about 12%, return on assets near to 1,8% and return on equity of about 10%, keepg also the similar structure of the Bank's asset and liability s portfolio. Internet bankg, where the Bank has successfully implemented its own IT platform NavaNET, is significantly improved the Bank's accessibility to the clients, providg them the highest quality of payment transaction services, cludg also the standardisation of the documents and the procedures used distribution of all other products and services. Durg the year 2007 we are planng to improve the further technological development and competitive strength of the Bank, novation of its products and services and to mata high level of productivity and sound relations with the customers. ***** We would like to express our gratitude to the entire Bank's clients and shareholders, especially to Supervisory Board members and employees for their contued support, commitment and responsible actg and their great contribution to the success of the Bank's operations. Zagreb, 20 April 2007 Management Board: Stipan Pamuković President & CEO Željko Škalec Member of the MB Annual Report

6 Responsibility for the Fancial Statements Pursuant to the Croatian Accountg Law (The Official Gazette No, 90/92, 146/05), the Management Board is responsible for ensurg that fancial statements are prepared for each fancial year accordance with International Fancial Reportg Standards (IFRS), as published by the International Accountg Standards Board (IASB), which give a true and fair view of the state of affairs and results of the bank for that period. After makg enquiries, the Board has a reasonable expectation that the bank have adequate resources to contue operational existence for the foreseeable future. For this reason, the Board contues to adopt the gog concern basis preparg the fancial statements. In preparg those fancial statements, the responsibilities of the Board clude ensurg that: suitable accountg policies are selected and then applied consistently; judgements and estimates are reasonable and prudent; applicable accountg standards are followed, subject to any material departures disclosed and explaed the fancial statements; and the fancial statements are prepared on the gog concern basis unless it is appropriate to presume that the bank will contue busess. The Board is responsible for keepg proper accountg records, which disclose with reasonable accuracy at any time the fancial position of the bank and must also ensure that the fancial statements comply with the Croatian Accountg Law (Official Gazette No, 90/92, 146/05). The Board is also responsible for safeguardg the assets of the bank and hence for takg reasonable steps for the prevention and detection of fraud and other irregularities. Signed on behalf of the Board: Stipan Pamuković, CEO Nava Banka d,d, Zagreb Tratska Zagreb Hrvatska 20 April 2007 Annual Report

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9 Fancial Statements for 2006 INCOME STATEMENT FOR YEAR 2006 Note Interest come 3 29,421 24,704 Interest expense 4 (15,992) (12,981) Net terest come 13,429 11,723 Fee and commission come 5 4,136 3,784 Fee and commission expense 6 (1,578) (1,608) Net fee and commission come 2,558 2,176 Net come from fancial operatg 7 2,061 2,621 Net exchange rate (loss)/gas 8 (708) 134 Other come Total other come 2,203 2,757 Other operatg expense 10 (10,358) (9,508) Provision for impairment losses and commitments 13 (5,171) (3,625) Total other expense (15,529) (13,133) Profit before taxation 2,661 3,523 Profit tax 14 (524) (718) Profit for the year 2,137 2,805 Earngs per share 28 0,015 0,028 Fancial statements are approved and signed by the Management of Nava Banka d.d., Zagreb on 20 April 2007 Stipan Pamuković President & CEO Željko Škalec Member Notes on pages 13 to 43 are accompanyg part of these Fancial Statements. Annual Report

10 Fancial Statements for 2006 BALANCE SHEET ON 31 DECEMBER 2006 Note ASSETS Cash 15 69,323 56,156 Balances with Croatian National Bank 16 51,972 35,724 Placements to other banks 17 29,231 - Fancial assets available for sale 18 16,208 3,007 Fancial assets held to maturity 19 30,100 6,583 Loans and advances to customers , ,056 Investments subsidiaries 21 7,380 5,842 Property, plant and equipment Other assets 22 6,630 3,811 Total assets 490, ,815 LIABILITIES Demand deposits 23 73,572 61,184 Term deposits , ,447 Borrowgs from banks 25 28,895 18,143 Other liabilities 26 7,842 7,542 Total liabilities 402, ,316 EQUITY Share capital 27 60,644 40,644 Capital gas 18,483 3,483 Retaed profit and reserves 6,645 6,567 Profit for the year 2,137 2,805 Total equity 87,909 53,499 Total liabilities and equity 490, ,815 Notes on pages 13 to 43 are accompanyg part of these Fancial Statements. Annual Report

11 Fancial Statements for 2006 STATEMENT ON THE STATE AND CHANGES ON THE EQUITY FOR THE YEAR 2006 Share capital Capital gas Retaed profit and reserves Profit for the period Total Balance on ,644 3,483 4,346 2,729 51,202 Transfer to retaed profit and reserves - - 2,221 (2,221) - Dividend payment - (508) (508) Profit for the year ,805 2,805 Balance on ,644 3,483 6,567 2,805 53,499 Transfer to retaed profit and reserves (773) - Dividend payment - - (2,032) (2,032) Registered capital crease 20,000 15, ,000 Unrealized loss based on fair value adjustment - - (695) - (695) Profit for the year ,137 2,137 Balance on ,644 18,483 6,645 2,137 87,909 Notes on pages 13 to 43 are accompanyg part of these Fancial Statements. Annual Report

12 Fancial Statements for 2006 CASH FLOW STATEMENT FOR YEAR 2006 Note NET CASH FLOW FROM OPERATING ACTIVITIES Profit prior to taxation 2,661 3,523 Adjustments to net cash assets generated from operatg activities: Impairment losses and commitments (net) 5,171 3,625 Depreciation 1,097 1,091 Unrealized loss based on fair value adjustment (695) - Movements assets and liabilities form operatg activities (Increase of) Balances with Croatian National Bank (16,248) (4,388) (Increase of) Loans and advances to customers (31,752) (32,279) (Increase)/decrease of other assets (3,043) 124 Increase/(decrease) of demand deposits 12,388 (2,117) Increase of term deposits 69,026 13,182 (Decrease)/crease of other liabilities (4) 457 Profit tax (524) (718) Net cash flow from operatg activities 38,077 (17,500) CASH FLOW FROM INVESTING ACTIVITIES (Increase)/decrease of fancial assets available for sale (13,201) 6,772 Increase/(decrease) of fancial assets held to maturity (23,517) 22,561 (Increase) of property, plant, equipment and tangible assets (2,681) (750) Net cash flow from vestg activities (39,399) 28,583 CASH FLOW FROM FINANCIAL ACTIVITIES Increase/(decrease) of borrowgs from banks 10,752 (11,254) Dividend payment (2,032) (508) Share capital crease 20,000 - Capital gas crease 15,000 - Net cash flow from fancial activities 43,720 (11,762) Net (decrease)/crease of cash and cash equivalents 42,398 (679) Cash and cash equivalents at the begng of the year 30 56,156 56,835 Cash and cash equivalents at the end of the year 30 98,554 56,156 Notes on pages 13 to 43 are accompanyg part of these Fancial Statements. Annual Report

13 Notes to the Fancial Statements 1. General data Nava Banka d.d. Zagreb, Tratska 27 ( the Bank ), was founded the Republic of Croatia as a jot stock company on 12 October The Bank is registered at the Commercial Court Zagreb under the entity's registration number Nava banka d.d. conducts the followg services: providg current accounts to the corporate customers and dividuals, ternet bankg, term deposit and savgs and foreign currencies, grantg loans to the corporate customers and private dividuals, performg local and ternational payments, factorg, issug all types of the letter of guarantees, corporate fancg, security tradg and vestment bankg services, custody and other bankg services. The Supervisory Board of the Bank consists of: 1. Jakov Gelo President 2. Višnjica Mališa Vice president 3. Ivan Gudelj 4. Daniel Hrnjak 5. Anđelko Ivančić Member Member Member The Management Board consists of: 1. Stipan Pamuković President 2. Željko Škalec Member President of the Shareholder's Assembly is Mr. Branimir Weiss. Annual Report

14 Notes to the Fancial Statements (contued) 2. Summary of accountg policies 2.1. Basis for preparation of fancial statements These fancial statements are prepared accordance with the International Fancial Reportg Standards ("IFRS"), under the historical cost convention, as modified by the revaluation of appropriate fancial assets and liabilities. The fancial statements are prepared on an accrual basis of accountg whereby the effects of transactions and other events are recognised when they occur and they are reported the fancial statements of the period to which they relate. The fancial statements are stated the Croatian s official monetary unit Croatian ("") and rounded to the nearest. The preparation of fancial statements conformity with IFRS requires from the Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contgent assets and liabilities on the date of the fancial statements and their reported amounts of revenues and expenses durg the reportg period. These estimates are based on the formation available as of the date of the fancial statements and actual results could differ from those estimates. The Bank keeps its accounts and prepares its statutory fancial statements under regulations and decrees of the CNB (Croatian National Bank). The enclosed fancial statements are made based on Bank s accountg records and they clude pertent adjustments and reclassifications needed the purpose of a true and objective display as prescribed by the IFRS Foreign currencies conversion Assets and liabilities denomated foreign currencies are converted to counter value at the official The Croatian National Bank's mean exchange rate force on the date of the balance sheet. Income and expenses denomated foreign currencies are converted at the mean exchange rate valid on the day of a transaction. Any ga or loss resultg from the conversion of currency items of the balance sheet at the exchange rate of the CNB are recorded the Income statement. On 2006 the valid exchange rate set by the CNB was 7, per 1 EUR (2005: 7, ), and 5, for 1 USD (2005: 6, ). Any ga or loss resultg from currency conversions to and from buyg and sellg currencies is stated the come statement for the relatg year Fancial assets available for sale Available-for-sale fancial assets are those fancial assets that are not classified as held to maturity assets. Investment securities tended to be held for an defite period of time, which may be sold response to needs for liquidity or changes terest rates, exchange rates or equity prices, are classified as available-for-sale. Subsequent to itial recognition, available-for-sale fancial assets are re-measured at fair value based on quoted prices or amounts derived from cash flow models. In circumstances where the quoted market prices are not available, the fair value of debt securities is estimated usg the present value of future cash flows and the fair value of unquoted equity struments is estimated usg applicable price/earngs or price/cash flow ratios refed to reflect specific circumstances of the issuer. Gas and losses arisg from changes the fair value of assets classified as available-for-sale are recognised the equity with other reserves until the moment when fancial assets are sold or decreased, after which realized ga or loss previously recognized the equity are classified as net gas or loss for the period. Annual Report

15 Notes to the Fancial Statements (contued) 2. Summary of accountg policies (contued) 2.4. Fancial assets held to maturity Investments held to maturity are fancial assets with fixed or determable payments and fixed maturities that the Bank plans and is able to hold to maturity. Held-to-maturity fancial assets are cluded the fancial statements at depreciated cost, determed under the effective yield method, decreased for any impairment losses. Fancial asset is impaired if its book amount is bigger than its estimated recoverable amount. The amount of the impairment loss for assets stated at depreciated cost is calculated as the difference between the asset s book amount and the present value of expected future cash flows discounted at the fancial strument s origal effective terest rate. To compare, the recoverable amount of an strument measured at fair value is the present value of expected future cash flows discounted at the current market rate of terest for a similar fancial asset. Interest earned whilst holdg vestment securities is reported as terest come Origated loans and provisions for loan impairment Loans origated by the Bank by providg money directly to a borrower are categorised as loans origated by the Bank and are carried at amortised cost. Third party expenses, such as legal fees, curred securg a loan are treated as part of the cost of the transaction. All loans and advances are recognised when cash is advanced to borrowers. Loans and advances to customers and fancial stitutions are stated at the amount decreased for provisions for loan impairment. A provision for loan impairment is established if there is objective evidence that the Bank will not be able to collect all amounts due. The amount of the provision is the difference between the book amount and the recoverable amount, beg the present value of expected cash flows, cludg amounts recoverable from guarantees and collateral, discounted at the origal effective terest rate of loans. Provisions for identified losses are assessed with reference to the credit standg and performance of the borrower takg to account the value of any collateral or third party guarantees. When a loan is uncollectible, it is written off agast the related provision for impairment; subsequent recoveries are credited to the Impairment losses and provisions expenses` category the come statement Derivative fancial assets and liabilities A derivative is a fancial strument whose value is changed based on the changes of calculated terest rates, value of tradg securities, market price of commodities, exchange rates, dices of prices or rates, credit ratgs or creditworthess dices, or similar variable. Derivative fancial assets and liabilities are representg the embedded derivatives or the component of hybrid (underlyg) fancial strument, which cludes both derivative and primary contracts - with the effect that the cash flow of underlyg strument is changed a similar way as the derivative itself. The embedded derivative determes some or all cash flows which could be correlated to the contract to modify the base case of a calculated terest rate, market price of security, market price of commodity, exchange rate, price dices or rates or other variable. The economic effects of embedded derivative values are cluded to the net tradg come. Annual Report

16 Notes to the Fancial Statements (contued) 2. Summary of accountg policies (contued) 2.7. Property, plant, equipment and tangible assets Property, plant and equipment and tangible assets are stated at historical cost decreased for accumulated depreciation. Depreciation is calculated on a straight-le basis to write down the cost of such assets to their residual values over their estimated useful lives. Land and assets the course of construction are not depreciated. Annual rates of depreciation applied are as follows: Buildgs 2.50% 2.50% Computers 50% 50% Furniture 20% 20% Heatg and security equipment 10% 10% Telecommunications equipment 25% 25% Intangible assets 50% 50% Motor vehicles 25% 25% The Bank periodically tests its fixed assets for impairment. Where the book amount of an asset is bigger than its estimated recoverable amount, it is written down to its recoverable amount. Gas and losses on disposal of assets are determed by reference to their book amount and are recognised the come statement le Other come/ (expense) the year of disposal. Repairs and renewals are charged to the come statement when the expenditure is curred. Costs associated with acquirg software are treated as tangible fixed assets and are depreciated on a straight-le basis over the estimated useful life not exceedg two years Share capital and treasury stock Share capital represents the Bank's non-distributive capital at nomal value. Net profit for the year, after distribution of dividend to the shareholders, is transferred to reserves and retaed earngs of the Bank based on the decision of the General Assembly. Losses are covered from retaed earngs and reserves. Any outstandg difference is covered from the share capital paid. Dividends on ordary shares are recognised equity the period which they are declared Interest come and expense Interest come and expense is recognised the come statement for all terest bearg struments on an accrual basis usg the effective yield method, based on the actual purchase price. Interest come cludes coupons earned on fixed come vestment and tradg securities and accrued discount and premium on treasury bills and other discounted struments. Penalty terest is accounted for on a cash basis. When collection of loans becomes doubtful, the amount of the prcipal is decreased to the estimated payment amount and terest come thereafter recognised based at the rate used to discount the future cash flows. Annual Report

17 Notes to the Fancial Statements (contued) 2. Summary of accountg policies (contued) Fee and commission come and expense Fees and commissions are generally recognised on the accrual basis. Loan approval fees for loans which are likely to be withdrawn down, are deferred (together with related direct costs) and recognised as an adjustment to the effective yield of the loan. Service fees are recognised based on applicable service contracts. Fees and commissions consist maly of fees received from loans, guarantees, letters of credit and other services provided by the Bank. Fees are credited to come on receipt. Fee and commission expense consists of fees paid to banks licensed for foreign currency payment operations, as well as those for services of the Fancial Agency (FINA) for domestic currency payment operations Profit tax Profit tax is calculated based on taxable profit which is calculated by adjustg the fancial result for certa come and expense items (such as costs of representation, part of costs for official cars etc) accordance with Croatian regulations. Deferred tax is accounted under the liability method and reflects the tax effect of all significant temporary differences between the tax basis, of assets and liabilities and their amounts reported fancial statements. As significant temporary differences do not exist, there was no need to make deferred tax provisions fancial statements of the Bank Off-balance-sheet fancial commitments The Bank s Management matas the provision for commitments, guarantees and other off balance sheet liabilities losses at a level it believes adequate to absorb probable future losses. The Management Board determes the adequacy of the provision based upon reviews of dividual items, recent loss experience, current economic conditions, the risk characteristics of the various categories of transactions and other pertent factors. The Bank recognises a provision for commitments, guarantees and other off balance sheet liabilities losses when it has a present obligation as a result of a past event; when it is probable that an outflow of resources embodyg economic benefits will be required to settle the obligation, and a reliable estimate of the obligation can be made Cash flow statement For the purpose of reportg cash flows, cash and cash equivalents are defed as cash and placement to banks which mature less than 90 days, excludg the obligatory mimum reserve with the Croatian National Bank Comparative figures Where it was necessary, certa data from the previous year fancial statements were reclassified, order to conform to the current year presentation Regulatory requirements The Bank is subject to the regulatory requirements of the Croatian National Bank. These regulations clude limits and other restrictions pertag to mimum capital adequacy requirements, classification of loans and off balance sheet commitments and provisiong to cover credit risk, liquidity, terest rate and foreign currency position. Annual Report

18 Notes to the Fancial Statements (contued) 3. Interest come Interest come is summarized as it follows: Retail 5,936 5,117 Corporate 20,532 17,056 Banks and other fancial stitutions 1, Public sector 1, Non-profit organisations Other Total 29,421 24, Interest expense Interest expense is summarised as follows: Retail 9,974 7,655 Corporate 3,800 3,975 Banks and other fancial stitutions 1, Public sector - - Non-profit organisations Total 15,992 12, Fee and commission come Fee and commission come is summarised as follows: Corporate Retail 3,815 3,442 Banks 8 14 Others Total 4,136 3,784 Annual Report

19 Notes to the Fancial Statements (contued) 6. Fees and commission expense Fees and commission expense is summarised as follows: Fancial Agency (FINA) 1,175 1,299 Bank Other Total 1,578 1, Fancial operatg come Fancial operatg come is summarised as follows: Net foreign exchange transaction gas 2,033 2,649 Net come/(expense) from derivative fancial struments (73) (36) Income from available-for-sale fancial assets Total 2,061 2, Net exchange rate gas/(losses) Net exchange rate (losses)/gas are summarised as follows: Gas from unrealized exchange rate differentials 4,820 4,490 Losses from unrealized exchange rate differentials (5,528) (4,356) Total (708) 134 Annual Report

20 Notes to the Fancial Statements (contued) 9. Other come Other come is the followg: Income from the collection of written-off receivables Income from the cars sale 92 - Other come 10 2 Total Other operatg expenses Other operatg expenses are summarised as follows: Personnel expenses (Note 11) 5,609 5,329 Depreciation (Note 21) 1,097 1,091 Other operatg expenses (Note 15) 3,652 3,088 Total operatg expenses 10,358 9, Personnel expenses Personnel expenses are summarised as follows: Net salaries 2,633 2,529 Taxes and contribution 2,879 2,718 Other Total 5,609 5,329 On 2006 the Bank had 19 employees (on 2005: 17 employees). Annual Report

21 Notes to the Fancial Statements (contued) 12. Other operatg expenses Other operatg expenses are the followg: Cost of material and services 2,319 1,848 Fees to Supervisory Board members Savgs surance premium Other expenses Total 3,653 3, Provision for impairment losses and commitments Provision for impairment losses and commitments are set out as follows: Impairment losses and commitments on loans and advances to customers (Note 20) 4,643 2,179 Impairment losses on other assets (Note 22) 224 1,547 Provision for commitments and contgencies (Note 26) 304 (101) Total 5,171 3, Profit tax The reconciliation of accountg result with the tax base is stated below: Accountg profit 2,661 3,523 Items that crease the tax base Items that decrease the tax base (236) (89) Tax base 2,621 3,590 Tax rate 20% 20% Profit tax liability The Bank s profit tax liability is calculated based on the accountg profit takg to account tax nondeductible expenses and tax exempt come. On and 2006 and 2005 the Bank had no temporary differences and accordgly no deferred taxation. Annual Report

22 Notes to the Fancial Statements (contued) 15. Cash Cash is set out as follows: Giro account balance 37,421 21,280 Cash on hand 5,869 6,181 Foreign-exchange current account with foreign banks 20,419 25,974 Foreign-exchange current account with domestic banks 5,614 2,721 Total 69,323 56, Dues from Croatian National Bank Dues from the Croatian National Bank are set out as follows: Obligatory reserve 38,806 32,036 Obligatory reserve foreign currency 3,166 3,688 Other deposits with the CNB 10,000 - Total 51,972 35,724 Dues from the Croatian National Bank are obligatory reserves both and foreign currencies, calculated at the rate of 17% respectively on deposits, foreign currencies deposits and other liabilities. The Bank is bound to hold at least 70% of obligatory reserves and at least 60 % of obligatory reserves foreign currencies on an account with the Croatian National Bank. Dues from the CNB also clude border obligatory reserve which represents part of assets from non-residents and legal entities with which the Bank has special relations and which the Bank is obliged to hold with the CNB. In relation to the same period 2005, December 2006 the claim for border obligatory reserve was 15 % of the crease of assets sources of nonresidents and legal entities special relations with the Bank. The Bank is not allowed to use the amount of obligatory reserves for its daily transaction's runng. Other deposits with the CNB imply overnight deposit of surplus of liquidity form of cash deposit to which the CNB pays terests based on the 0.5% terest rate. Cash deposits mature overnight and are not cluded the obligatory reserve holdg liability. Annual Report

23 Notes to the Fancial Statements (contued) 17. Placements with banks Placements with banks are the followg: Term deposits with other banks 29,231 - Total 29, Fancial assets available for sale Fancial assets available for sale are summarised as follows: Bills of exchange Companies ownership securities Fancial stitutions ownership securities Total %). Bills of exchange were discounted applyg the rates rangg from 7% to 9% annually (2005: 8.5% Fancial assets held to maturity Held to maturity fancial assets are summarised as follows: Factorg 28,887 5,644 Bills of exchange 1, Other 2 2 Total 30,100 6,583 Factorg is calculated applyg terest the rates rangg from 8% to 9% annually (2005: from 8% to 9% annually). Annual Report

24 Notes to the Fancial Statements (contued) 20. Loans and advances to customers Loans and advances referrg to the type of client are the followg: Corporate 220, ,633 Retail and sole traders 77,653 67,367 Other Provisions on loans impairment losses (14,956) (11,342) Provisions for group based identified losses (3,780) (2,751) Total loans and advances to customers, net 279, ,056 Concentration of risk exposure per specific busess sectors the portfolio of loans to customers is the followg: Retail and sole traders 77,653 67,365 Trade and commerce 93,065 64,091 Textiles Food processg 1,163 4,995 Chemicals and mg 4,118 1,569 Other dustries 28,489 27,327 Agriculture 2,113 2,929 Construction 26,346 23,515 Tourism 7,131 8,499 Publishg and prtg 7,348 7,849 Transport 11,488 9,164 Real estate 31,599 42,054 Other 7,018 6,623 Total per sector 297, ,149 Provision for impairment losses (14,956) (11,342) Provisions for group based identified losses (3,780) (2,751) Total loans and advances to customers, net 279, ,056 Annual Report

25 Notes to the Fancial Statements (contued) 20. Loans and advances to customers (contued) The changes the impairment losses and provision on loans and advances to customers are summarised as follows: Provisions for group based identified losses Total Impairment losses Impairment losses Provisions for group based identified losses Total Balance on 1 January 11,342 2,751 14,093 9,068 2,846 11,914 New impairment losses and provisions(note 13) 6,088 1,053 7,141 6, ,458 Collected and freed amounts (Note 13) (2,474) (24) (2,498) (3,874) (405) (4,279) Balance on 14,956 3,780 18,736 11,342 2,751 14,093 Accordg to legal provisions, the Bank is required to establish the general reserves for potential credit risks, which are not particularly identified, but could be recognised on a group base every loan portfolio based on previous experience. The amount of these reserves can not be less than 1% of total non-risk bearg assets as on 2006 (2005: 1% of non-risk bearg assets). Annual Report

26 Notes to the Fancial Statements (contued) 21. Property, plant and equipment and tangible assets The movements on property, plant and equipment and tangible assets are shown the table below: Buildg objects Equipment and office furniture Computer equipment Other tangible assets Assets progress Advances for assets Total property, plant and equipment Intangible assets Total Purchase value Balance on 1 January ,725 2,058 1, ,117 3,866 15,983 Increases , ,888 Transfer from assets progress (246) (893) (1,139) - (1,139) Write-off and sale - - (47) (47) - (47) Balance on ,725 2,172 1, ,145 4,540 16,685 Increases 2, , ,927 Transfer from assets progress (80) (83) (163) - (163) Write-off and sale - (6) (203) (198) - - (407) - (407) Balance on ,843 2,180 1, ,926 5,116 19,042 Accumulated depreciation Balance on 1 January ,047 1,937 1, ,713 3,450 9,163 Depreciation ,091 Write-off and sale - - (47) (47) - (47) Balance on ,433 1,963 1, ,303 3,904 10,207 Depreciation ,097 Write-off and sale - (6) (203) (115) - - (324) 0 (324) Balance on ,819 1,987 1, ,546 4,434 10,980 Net book value on , , ,478 Net book value on , , ,062 On 2006 the Bank had no assets pledged with other legal entities. Annual Report

27 Notes to the Fancial Statements (contued) 22. Other assets Other assets are summarised as follows: Interest receivables 3,201 3,497 Fee receivables Derivative assets Items course of collection Assets received exchange for bad debts 40 - Other 2, Impairment losses (28) (22) Total 6,630 3,811 Changes on impairment losses for other assets are summarised as follows: Balance on 1 January New impairment losses (Note 13) 474 1,996 Collected and freed amounts (Note 13) (250) (449) Transfer off-balance sheet records (203) (1,527) Write-off and corrections (15) (60) Balance on Annual Report

28 Notes to the Fancial Statements (contued) 23. Demand deposits Demand deposits are the followg: Corporate deposits - 56,440 38,221 - foreign currency 4,327 5,202 Total corporate deposits 60,767 43,423 Retail deposits - 7,267 4,828 - foreign currency 4,114 2,931 Total retail deposits 11,381 7,759 Demand deposits of non-profit organisations ,120 - foreign currency Total deposits of non-profit organisations 1,314 8,374 Demand deposits of other stitutions foreign currency 90 1,608 Total other stitutions 110 1,628 Total 73,572 61,184 Annual Report

29 Notes to the Fancial Statements (contued) 24. Term deposits Term deposits are the followg: Corporate deposits - 58,975 47,004 - foreign currency 6,173 3,441 Total corporate deposits 65,148 50,445 Retail deposits - 149, ,329 - foreign currency 33,033 35,579 Total retail deposits 182, ,908 Deposits from non-profit organisations - 3,995 5,094 Total deposits from non-profit organisation 3,995 5,094 Deposits of other fancial stitutions - 40,500 15,000 Total deposits of other stitutions 40,500 15,000 Total 292, , Borrowgs from banks Borrowg from banks are the followg: Borrowgs from the HBOR 11,595 12,643 Other fancial stitutions 17,300 5,500 Total 28,895 18,143 Liabilities to the Croatian Bank for Reconstruction and Development (HBOR) refer to sources of assets tended for loan approval to legal and physical entities under the HBOR programs for encouragg small and medium entrepreneurship, tourism and agriculture. Dependg on the loan purpose, terest rates ranged from 1% to 2%. Liabilities to other fancial stitutions refer to liabilities to fancial stitutions which mature with a month with the terest rate rangg from 4.00% to 5.50%. Annual Report

30 Notes to the Fancial Statements (contued) 26. Other liabilities Other liabilities are summarised as follows: Interest receivables 5,867 5,799 Derivative assets Trade payables Liabilities course of collection Profit tax liabilities Other liabilities Provisions for off balance sheet f. commitments Total 7,842 7,542 The movement the provisions for off balance sheet fancial commitments are the followg: Balance on 1 January Changes the provision for o.b.s.f. commitments (Note 13) 304 (101) Balance on Under the valid regulations, the Bank has to allocate reserves for off balance sheet fancial commitments not particularly identified but which re determed on the group base for commitments based on previous experience. The amount of such determed reserves must not be smaller than 1% of off balance sheet fancial commitments as on 2006 (2005: 1% of off balance sheet fancial commitments) Annual Report

31 Notes to the Fancial Statements (contued) 27. Share capital Share capital of the Bank was creased from the amount of 40,644 by to the amount of 60,644, paid cash. Under the decision of the Supervisory Board from 8 December 2005 and decree of the Croatian Agency for Supervisg Fancial Services from 9 February2006 a folder was approved on issug 50,000 ordary registered shares, though a private offer, at a unique sellg price of 700,00 for each ordary share. The private offer registered and paid all 50,000 ordary shares, thus amountg the Bank share capital to 60,644, dividend to ordary registered shares, each havg nomal value of 400. The payment was made on 8 March 2006 by the followg companies: Sunce osiguranje d.d., Zagreb, Jadransko osiguranje d.d., Split, Euroherc osiguranje d.d., Zagreb te Agram životno osiguranje d.d., Zagreb. Through the placement of ordary shares the Bank earned capital gas of 15,000. The Banks ma shareholders are the followg: % % Agram životno osiguranje d.d. 8.24% - Alg - Deković, Ivančić and Šesnić j.t.d. 3.30% 4.92% Euroherc osiguranje d.d. 8.24% - GIP Pionir d.o.o. 5.94% 8.86% Jadransko osiguranje d.d. 8.24% - Kemika d.d % 21.65% Pamuković Stipan 3.92% 5.85% Predović Dragica 4.56% 6.80% Sunce osiguranje d.o.o. 7.12% - Škalec Željko 3.92% 5.85% Total 67.99% 53.93% 28. Earng per share Earng per share is shown the Table below: Net profit 2,137 2,805 Weighted average number of ordary shares ( ) 142, ,610 Earng per share Annual Report

32 29. Off balance sheet fancial commitments Off balance sheet fancial commitments are the followg: 31 December Performance bonds 34,631 24,130 Payment guarantees 41,959 24,013 Bid bonds 5,281 5,995 Customs guarantees Approved loans unused 7, Guarantees for given advances 192 1,808 Provision for commitments (Note 26) (905) (601) Total off balance sheet fancial commitments, net Cash and cash equivalents Cash and cash equivalents analysis for cash flow statement are summarised as follows: Cash on hand and balances on Bank s current account 69,323 56,156 Placements to banks up to 90 days 29,231 - Total cash and cash equivalents 98,554 56,156 Annual Report

33 Notes to the Fancial Statements (contued) 31. Funds managed for and on behalf of third parties Funds managed on behalf of third parties are summarised as follows: Assets Retail loans Total assets Liabilities Enterprises Total liabilities Net - - The Bank manages funds on behalf of and for the account of third parties, which maly comprise of the loan placements. The assets of the trustee are separated and they are not cluded balance sheet of the Bank. The gas and losses of such operations are ascribed to the orderg party and the Bank does not bear any liabilities. The bank calculates fees for its services provided managg funds. Net assets and liabilities arise due to temporarily discontuity between the flow and outflow of the funds under management. Annual Report

34 Notes to the Fancial Statements (contued) 32. Related-party transactions Parties are considered to be related if one party has the ability to control the other party or exercise significant fluence over the other party makg fancial or operational decisions. A number of bankg transactions that clude grantg loans and deposits are entered to with related parties the normal course of busess. These transactions were carried out on commercial terms and at market rates and prices. The complete volume of transactions with related parties, closg balances at the year end and related come and expense for the year are summarised as follows: Loans Shareholders 8,176 4,408 Employees 1,455 1,329 Employees companies 2,319 3,314 Total loans 11,950 9,051 Commitments and contgencies Shareholders 19,128 15,975 Total Commitments and contgencies 19,128 15,975 Income Shareholders 1,503 1,020 Employees Employees companies - 67 Total Income 1,591 1,123 Expense Shareholders 2,941 1,417 Employees Employees companies Total Expense 3,844 1,428 Deposits Shareholders 46,971 15,940 Total deposits 46,971 15,940 Compensations of the Management Board are the followg: Net salaries Taxes and contributions Total 1, Annual Report

35 Notes to the Fancial Statements (contued) 33. Interest risk Interest rate risk is the risk that the value of a fancial strument will fluctuate due to changes market terest rates. Therefore the length of time for which the rate of terest is fixed on a fancial strument dicates to what extent it is exposed to terest rate risk. The table below provides formation on the extent of the Bank s terest rate exposure, based either on the contractual maturity date of its fancial struments or, the case of struments that re-price to a market rate of terest before maturity, the next re-pricg date. It is the policy of the Bank to manage the exposure to fluctuations net terest come arisg from changes terest rates by the degree of re-pricg mismatch the balance sheet. Those assets and liabilities that do not have contractual maturity date or are not terest bearg are grouped Non terest bearg category Up to 1 month 1 to 3 months 3 to 12 months 1 to 3 years Over 3 years Non terest bearg Total ASSETS Cash 26, ,290 69,323 Balances with Croatian National Bank 51, ,972 Placements with banks 12,338 16, ,231 Fancial assets available for sale 995 1,088 5, ,071 16,208 Fancial assets held to maturity 13,447 8,761 7, ,100 Loans and advances to customers 43,452 40, ,987 23,993 56, ,165 Property, plant and equipment ,380 7,380 Intangible assets Other assets 6, ,630 Total assets 154,096 66, ,933 23,993 56,698 61, ,691 LIABILITIES Demand deposits 73, ,572 Term deposits 9,577 95, ,644 8, ,473 Borrowgs from banks 14,300 3,262 8,187 2,097 1,049-28,895 Other liabilities ,842 7,842 Total liabilities 97,449 99, ,831 11,094 1,416 7, ,782 EQUITY Share capital ,644 60,644 Capital gas ,483 18,483 Retaed profit and reserves ,645 6,645 Profit for the year ,137 2,137 Total equity ,909 87,909 Total liabilities and equity 97,449 99, ,831 11,094 1,416 95, ,691 Net assets/liabilities and equity 56,647 (32,322 ) (57,898 ) 12,899 55,282 (34,608) - Annual Report

36 Notes to the Fancial Statements (contued) 33. Interest risk (contued) The followg table represents the book value of assets and liabilities, categorized by the earlier contractual re-pricg or maturity, dependg of the deadle earlier than Up to 1 month 1 to 3 months 3 to 12 months 1 to 3 years Over 3 years Non terest bearg Total ASSETS Cash 28, ,461 56,156 Balances with Croatian National Bank 34, ,724 Placements with banks Fancial assets available for sale 964 1, ,007 Fancial assets held to maturity 4,173 2, ,583 Loans and advances to customers 42,756 39,499 95,501 25,817 48, ,056 Property, plant and equipment ,842 5,842 Intangible assets Other assets ,761 3,811 Total assets 111,484 43,170 96,208 25,817 48,483 38, ,815 LIABILITIES Demand deposits 61, ,184 Term deposits 6,195 87, ,238 14, ,447 Borrowgs from banks - 3,262 3,286 9,498 2,097-18,143 Other liabilities 1, ,799 7,542 Total liabilities 69,122 90, ,524 23,999 2,097 5, ,316 EQUITY Share capital ,644 40,644 Capital gas ,483 3,483 Retaed profit and reserves ,567 6,567 Profit for the year ,805 2,805 Total equity ,499 53,499 Total liabilities and equity 69,122 90, ,524 23,999 2,097 59, ,815 Net assets/liabilities and equity 42,362 (47,605) (22,316) 1,818 46,386 (20,645) - Annual Report

37 Notes to the Fancial Statements (contued) 33. Interest risk (contued) below: Effective terest rate related to terest bearg assets and liabilities are presented the table % % Assets Cash and amounts due from other banks % % Balances with Croatian National Bank % % Placements with banks % % Fancial asset available for sale % % Fancial assets held to maturity % % Loans and advances to customers % % Liabilities Demand deposits 1.00% 1.00% Term deposits % % Borrowgs from banks % % 34. Concentration of assets, liabilities and commitments The Bank does not have assets, liabilities or commitments any other country than Croatia, excludg current accounts foreign currencies held with foreign banks several European countries. Annual Report

38 Notes to the Fancial Statements (contued) 35. Currency risk The Bank is exposed to currency risk through transactions foreign currencies that effect its fancial position and cash flows. The followg table represents the analysis of ma foreign currencies related to the Bank currency risk exposure. Other foreign currencies are comprised 'Other foreign currencies'. The Bank daily monitors its foreign currency risk exposure accordance to legislation prescribed from the Croatian National Bank and ternally set limits for each currency and for the total balance sheet denomated or lked to foreign currency. The Bank directs its busess activities tryg to mimise the currency gap between its assets and liabilities EUR USD Other currencies FC clause Total ASSETS Cash 40,605 23,769 2,620 2,329-69,323 Balances with Croatian National Bank 48,806 3, ,972 Placements with banks - 26,442 2, ,231 Fancial assets available for sale 16, ,208 Fancial assets held to maturity 30, ,100 Loans and advances to customers 104, , ,165 Property, plant and equipment 7, ,380 Intangible assets Other assets 6, ,630 Total assets 254,647 54,004 5,432 2, , ,691 LIABILITIES Demand deposits 64,666 8, ,572 Term deposits 107,469 37,138 1, , ,473 Borrowgs from banks 24, ,195 28,895 Other liabilities 6,617 1, ,842 Total liabilities 203,452 46,608 1, , ,782 EQUITY Share capital 60, ,644 Capital gas 18, ,483 Retaed profit and reserves 6, ,645 Profit for the year 2, ,137 Total equity 87, ,909 Total liabilities and equity 291,361 46,608 1, , ,691 Net assets/liabilities and equity (36,714) 7,396 3,500 1,541 24,277 - Annual Report