KOMERCIJALNA BANKA A.D. BANjA LUKA

Transcription

1 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 WITH INDEPENDENT AUDITORS RERORT KOMERCIJALNA BANKA A.D. BANjA LUKA Banja Luka, March 2012 Financial Statements for the year ended 31 December 2011 with Independent Auditors Report

2 CONTENTS Page Independent Auditors Report Income Statement 3 Balance Sheet 4 Statement of Changes in Equity 5 Cash Flow Statement Financial Statements for the year ended 31 December 2011 with Independent Auditors Report

3 INDEPENDENT AUDITORS RERORT To the Board of Directors and shareholders of Komercijlana banka a.d. Banja Luka We have audited the accompanying financial statements of Komercijalne banke a.d. Banja Luka ( the Bank ), which comprise the balance sheet as at 31 December 2011, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the accounting regulation in the Repulic of Srpska and other relevant regulation issued by Agency for Banking of the Republic of Srpska, which regulates operation and reporting of banking sector. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We have conducted our audit in accordance with the International Standards on Auditing and Law on Accounting and Auditing of the Republic of Srpska. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the financial statements 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 principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. (continued) Financial Statements for the year ended 31 December 2011 with Independent Auditors Report 1

4 Opinion INDEPENDENT AUDITORS RERORT To the Board of Directors and shareholders of Komercijlana banka a.d. Banja Luka (conitinued) In our opinion, the financial statements give a true and fair view of the financial position of the Bank as at 31. December 2011, and of its financial performance, changes in equity and its cash flows for the year then ended, in accordance with the accounting regulations of Republic of Srpska and accounting polices disclosed in the notes to the financial statements. Other Financial statements of the Bank as at and for the period ended 31 December 2010 were audited by another auditor whose report dated 25 February 2011 expressed an unqualified opinion on those statements. EF REVIZOR d. o. o. Banja Luka, Gajeva broj 12 Date: 22 March 2012 CERTIFIED AUDITOR Milan Kondić This is a translation of the original Independent Auditors Report issued in the Serbian language. All due care has been taken to produce a translation that is as faithful as possible to the original. However, if any questions arise related to interpretation of the information contained in the translation, the Serbian version of the document shall prevail. Banja Luka KPMG d.o.o. Beograd (L.S.) Milan Kondić Certified Auditor 2

5 Financial Statements for the year ended 31 December 2011 with Independent Auditors Report 3

6 Financial Statements INCOME STATEMENT for the year ended 31 December 2011 (in thousands of KM) Note Interest income 3.1, 4 13,924 13,808 Interest expense 3.1, 4 (3,598) (5,038) Net interest income 10,326 8,770 Fee and commission income 3.2, 5 3,015 2,859 Fee and commission expanse 3.2, 5 (552) (744) Net fee and commission income 2,463 2,115 Net income/expence from changes in value of assets and liabilities 3.4, Operating income 3.7, 7 4,257 5,590 Expenses on indirect write-off of placements 3.7, 8 (5,032) (6,106) Other provisions 3.16, 8 (21) (4) Other operating expenses 9 (10,685) (9,947) Other income Other expeses 10 (21) (133) Income before tax 1, Income tax 3.12, 11 (119) - Profit for the year 1, Earning per share - Earning per share КМ These financial statements are approved by management on 18 February For and on behalf of Komercijalne banke a.d. Banja Luka: Srđan Šuput Director Dragica Malešević Acting Director of Finance, Accounting and Reporting Department The accompanying notes are an integral part of these financial statements Financial Statements for the year ended 31 December 2011 with Independent Auditors Report 3

7 Financial Statements BALANCE SHEET As at 31 December 2011 (in thousands of KM) Note ASSET Cash and cash equivalents 3.10, 12 9,373 8,284 Deposits held in BIH/RS CB refinanceable in BIH/RS CB 3.7, 13 63,888 84,650 Receivables for interests and fees 3.7, 14 1,471 1,243 Loans and deposits 3.7, 3.8, , ,343 Securities ,781 - Other investments and accrued income 18 5,189 4,437 Inventories 3.6.1, Fixed assets held for sale 3.6.2, 20 2, Fixed assets 3.5.2, 16 2,047 2,265 Intagible assets 3.5.1, Total assets 245, ,068 EQUITY AND LIABILITIES Liabilities for loans and deposits 3.8, , ,985 Liabilities for interest and fees Provisions 3.7, Other liabilities and accrued expenses 23 2,706 2,884 Total liabilities 182, ,177 Equity Share capital 60,000 60,000 Reserves for estimated losses 1,891 1,379 Profit 1, Total equity 3.14, 24 63,181 61,891 Total liabilities and equity 245, ,068 COMMITMENTS AND CONTINGENCES 25 44,545 21,421 The accompanying notes are an integral part of these financial statements Financial Statements for the year ended 31 December 2011 with Independent Auditors Report 4

8 Financial Statements STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2011 (in thousands of KM) Share capital Legal reserves Reserves for estimated losses Undistribute d profit Total Balance as at 1 January , ,674 Reserve for estimated losses (note 2.2 and 9b) Restatement balance as at 1 January , , profit distribution (218) - Increase in share capital 40, ,000 Profit for the year Balance as at 31 December , ,891 Balance as at 1 January , , profit distribution (512) - Profit for the year ,290 1,290 Balance as at 31 December ,000 1, ,290 63,181 The accompanying notes are an integral part of these financial statements Financial Statements for the year ended 31 December 2011 with Independent Auditors Report 5

9 Financial Statements CASH FLOW STATEMENT as at 31 December 2011 (in thousands of KM) Cash flow from operating activities: Interest income 16,301 15,914 Interest expenses (3,878) (5,078) Payments to employees and suppliers (10,243) (9,651) Net cash inflows from operating activities before changes in assets and liabilities 2,180 1,185 Changes in assets and liabilities Net (increase) / decrease in placements (29,290) (17,786) Net increase / (decrease) in deposits from public institutions 20,762 (20,078) Net increase / (decrease) in deposits from customers 6,745 (21,682) Income tax paid (112) (10) Net cash inflows / (outflows) from operating activities 285 (58,371) Cash flows from investment activity Purchase (disposal) nonmaterial assets (272) (410) Purchase (disposal) material assets (447) (554) Net cash flow from investment activity (719) (964) Cash flows from financing activity Inflow from increase in share capital - 40,000 Borrowings 1,417 6,220 Net cash low from financing activity 1,417 46,220 Net increase / (decrease) in cash and cash equivalent 983 (13,115) Cash and cash equivalents at beginning of the year 7,514 20,436 Net foreign exchange differences Cash and cash equivalents at the end of the year 8,576 7,514 Cash and cash equivalents at comprise: 8,576 7,514 Cash and cash equivalents 8,576 7,514 The accompanying notes are an integral part of these financial statements Financial Statements for the year ended 31 December 2011 with Independent Auditors Report 6

10 NOTES TO THE FINANCIAL STATEMENTS for the period from 1 January to 31 December 2011 Banja Luka, February 2012 Financial Statements for the year ended 31 December 2011 with Independent Auditors Report 7

11 1 Bank s foundation and operating policy Komercijalna banka a.d., Banja Luka was established in September 2006 and on 15 September 2006 was duly registered in accordance with the Decision of the Court of Banja Luka number REG In the process of the Bank s registration, all conditions defined by the regulatory authorities with respect to the performance of principal banking activities were fulfilled. The Republic of Srpska Banking Agency, in accordance with its Decision number /2006 of 28 August 2006, issued to the Bank its operating license, and pursuant to Decision numbered /2006 of 25 Septemberer 2006, the Agency issued to the Bank its license to conduct international payment transactions. In the Bosnia and Herzegovina, the Bank is licensed to perform activities that include payment transfers, credit and deposit operations in the country and abroad and, in accordance with the Republic of Srpska banking legislation, the Bank performs its activities in accordance with liquidity, solvency and profitability principles. At the date 31 of December of year 2011 The Bank conducts its business from its headquarters in Banja Luka, no. 6 Veselina Masleše Street, and trough 10 branches and 6 agencies in Bosnia and Herzegovina. As at 31 December 2009 the Bank had 141 employees. The Bank s tax identification number is BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS 2.1 Statements of compliance Starting from 1 January 2010 The Bank keeps records and prepares its financial statements in accordance with the law and regulations in Republika Srpska, International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and regulations of the Central Bank of Bosnia and Herzegovina, tax regulations of the Republic of Srpska and the Agency for Banking of the Republic of Srpska Decisions etc.. Financial statements are expressed in a format prescribed by the Rulebook on the From and Content of Financial Statements Forms Items for Banks and Other Financial Organizations (Official Gazette of the Republic of Srpska no. 67/2009). 2.2 Basis of measurement Financial statements have been prepared on the historical cost basis, except for the following items: financial instruments at fair value through profit and loss which are measured at fair value, and financial instruments available for sale which are measured at fair value and buildings and equipment in the cases of material fluctuations in current value from fair value.

12 2.3 Going concern concept The financial statements are prepared in accordance with the going concern concept, which assumes that the Bank will continue in operation for the foreseeable future. 2.4 Functional and reporting currency The figures in the accompanying financial statements have been expressed in thousands of convertible marks (KM). The convertible mark is the official currency in the Republic of Srpska. 2.5 Use of estimates The presentation of the financial statements requires the Bank s management to make best estimates and reasonable assumptions that affect the: assets and liabilities amounts, the disclosure of contingent liabilities and receivables as of the date of preparation of the financial statements, as well as the income and expenses arising during the accounting period. These estimates and assumptions are based on previous experience and on information available on the day of preparation of financial statements, which seem realistic and reasonable under the given circumstances. Based on such assumptions estimates are made of the value of assets and liabilities which cannot be determined using other information. Actual values of assets and liabilities can differ from amounts determined in this way. Estimates, including assumptions based on which estimates are made, are continuously reviewed. If after a review it is determined that a change occurred in the estimated values of assets and liabilities, determined effects are recognised in the financial statements in the period when the change in estimate occurred, if the change in estimate only affects the given reporting period, or in the period in which the change in estimate occurred and in subsequent reporting periods, if the change in estimate affects current and future reporting periods. 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND KEY ACCOUNTING ESTIMATES AND ASSUMPTIONS 3.1 Interest income and expense Interest income and expenses, including penalty interest and other income and expenses arising on the interest-bearing assets and liabilities are calculated on an accrual basis of income and expenses and in accordance with the terms defined in the agreements with lenders and borrowers. Income from loan approval commission is recorded as deferred income, and is recognized under interest income of the period using the effective interest rate method, and effective yield on placements. Interest income also includes income arising on risk hedging instruments, mostly by linking payments to the KM exchange rate with respect to EUR, other foreign currency or retail price index. Income arising on risk hedging instruments is calculated at the end of each month during the repayment period, as well as at the date of payment. 9

13 3.2 Fee and commission income/expenses Fee and commission income and expenses are recognized in the income statement on accruals basis. Fee and commission income and expenses for banking services are recognized upon maturity, or when they are realized, and they are recognized in the income statement when incurred or due and payable. Fee and commission income for guarantees and others contingent liabilities are accrued over their contractual period and are recognized in the income statement in proportion to elapsed time. 3.3 Income and expenses from securities Gains and expenses arising from changing of amortised value, of held to maturity securities, are charged to income or expenses in the income statement. Gains and losses on foreign currency clause and change in exchange rates applied to securities available for sale as well as income from interest on securities available for sale are recognized in the income statement. Impairment for estimated risks for all securities is recognized in income statement of the Bank. 3.4 Foreign currency translation Business transactions in foreign currencies are translated into KM at the official exchange mid rates set by the inter-banking foreign currency market, prevailing at the date of each transaction. Assets and liabilities presented in foreign currency at the balance sheet date are translated into KM at the official exchange mid rates set by the inter-banking foreign currency market, prevailing at the date of each transaction. Net foreign exchange gains or losses arising on foreign currency transactions and on translation of balance sheet items denominated in foreign currency are recognized in the income statement as foreign exchange gains or losses. Contingent liabilities and commitments denominated in foreign currency as at balance sheet date are translated in KM at the foreign exchange mid rate set by the inter-banking foreign currency market ruling as at that date. 3.5 Property and equipment, investment property and intangible assets Intangible assets Intangible assets are measured at cost or purchase price. After initial recognition, intangible assets are reported at cost reduced for amortisation and impairments. The depreciation of intangible assets commences at the beginning of the month following the month in which the asset is available for use. The depreciation base is cost less residual value. If the residual value is not materially significant, it does not affect the depreciation base. 10

14 Amortization is calculated on a straight-line basis on an annual rate of 20% Fixed assets /I/ Recognition and measurement Fixed assets, except real estate, are stated at cost decreased for accumulated depreciation and accumulated impairment losses. Fixed assets are initially measured at cost or purchase price. Purchase price includes cost directly associated to the purchasing of an asset. Purchased software that is part of the necessary equipment for functional usefulness, are capitalized as the part of the equipment. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. /II/ Subsequent costs The cost of replacing part of an item of property or equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The costs of the day-to-day servicing of property and equipment are recognized in profit or loss as incurred. /III/ Depreciation Depreciation of fixed assets is provided on a straight line basis with respect to the cost or valuation of the fixed assets, using the following depreciation rates which are designed to write off the undepreciated (residual) value of fixed assets in equal instalment over the useful life of the asset. Annual depreciation rates are presented as follows: Computer equipment 25% Vehicles 15.5% Furniture and other equipment 10% % Leasehold improvements 10% % 3.6 Inventories Inventories Inventories are stated at the lower of cost and net realisable value Inventories include assets acquired by way of collecting receivables. 11

15 3.6.2 Non-current assets held for sale Non-current assets held for sale represent non-current assets whose carrying amount will be recovered principally through a sale transaction rather than through continuing use. A non-current asset is classified as an asset available for sale if it meets the following conditions: the asset (or group of assets) is available for sale in its present condition; there is a sales plan for the sale of fixed assets and activities have been initiated for realising the sales plan; there is an active market for these types of assets and the asset is actively present on the market; the sale is very probable and there is an expectation that the sale will be realised within one year as of the date when the asset is classified as available for sale. A non-current asset held for sale is initially measured at the lower of the carrying amount and fair value, reduced for costs to sell. As of the moment that an asset is recognised as available for sale, all associated depreciation for accounting purposes is discontinued. When change of the purpose of a non-current asset held for sale arises or when the fixed assets are not sold in the planned period, the asset is no longer classified as held for sale. In that case, the non-current asset is measured at the lower of the : Carrying amount on the date when classified as held for sale, reduced for accumulated depreciation and any impairments that would have been recognised, had the asset not been classifies as held for sale and Its recoverable amount on the date when the intention to sell was abandoned. 3.7 Financial instruments /I/ Classification The Bank classifies its financial assets into the following categories: financial assets at fair value whose effects of changes in fair value are reported in the income statement, loans and receivables, financial assets available for sale and assets held to maturity. The classification depends on the purpose for which the financial assets have been acquired. Management classifies financial placements at the moment of initial recognition. /II/ Recognition The purchase and sale of financial assets or liabilities is recorded in accordance with appropriate accounting treatment on transaction date. /III/ Measurement Financial instruments are initially measured at market value which includes transaction costs for all financial assets or liabilities, except for those that are valued at fair value through profit and loss. Financial assets at fair value through profit and loss are initially recognised at fair value, with transaction costs charged to operating expenses in the income statement. 12

16 Financial assets available for sale and financial assets at fair value through profit and loss after initial recognition are reported at fair value. Loans and receivables, as well as financial assets held to maturity, are measured at amortised cost using the effective interest rate method. After initial recognition, financial liabilities are reported at amortised cost using the effective interest rate method, except for financial liabilities at fair value though profit and loss. /IV/ Derecognition The Bank derecognises a financial asset when the right to cash receipts associated with such asset expire or when they are transferred to a third party. Any rights associated with transferred financial assets, created or retained by the Bank, are recognised as a separate asset or liability. The Bank derecognises liabilities when a liability is settled, cancelled or transferred to a third party. /V/ Measurement at amortised cost The amortised cost of a financial asset or liability is the amount at which the asset or liability can be initially measured, reduced for principal repayment, and increased or decreased for accumulated amortisation using the effective interest rate method applied to the difference between the initial value and nominal value as at the date of maturity, reduced for any impairments. /VI/ Measurement at fair value The fair value of financial instruments is the amount at which an asset can be exchanged or a liability settled, between informed and willing parties in an independent transaction. The fair value is determined using available market information on reporting date, as well as other valuation models used by the Bank. The fair value of individual financial instruments reported at nominal value approximates their carrying amount Such instruments include cash, as well as receivables and liabilities with no date of maturity, or contractual fixed interest rate. Other receivables and liabilities are carried at present value of discounted future cash flows using current interest rates. Management believes that as the result of the nature of the Bank s operations and its business policies, there are no significant differences between the carrying amount and fair value of financial assets and liabilities. The fair value of irrevocable loans and off-balance sheet items is equal to their carrying amount. /VII/ Impairment The Bank's financial assets are reviewed at balance date to determine whether there is objective evidence of impairment. If there is evidence of impairment, the Bank will determine the amount collectible from the placement. For proper and efficient management of credit risk, the Bank prescribed in its internal regulations specific policies and procedures for the identification of bad assets and management of such assets. 13

17 The Bank's management evaluates the recoverability of receivables, and allowances for impairment based on individual risk assessment of receivables. Doubtful receivables are considered to be all receivables that are overdue. The bank estimates the recoverable amount of receivables and loans, considering regularity of repayment, the financial situation of the debtor and the quality of collateral, as well as contractual cash flows and historical losses. For the estimated amount of impairment the Bank forms a provision that is charged to period expenses. If later on Bank management concludes that there was a change in circumstances and that the impairment no longer exists, the previous amount of impairment provision is reversed and debited to income. A reversal of a provision cannot result in higher book value than the one that would have been without the provision for impairment. 3.8 Loans Loans are stated at the amount of principal outstanding, less allowance for impairment, which are based on evaluation of specifically-identified exposures and also cover losses that are inherent in the Bank s loan portfolio The Bank s management applies internally adopted methodology, based on fully application of IAS 39 Financial instruments: Recognition and Measurement. Loans, which are disbursed in KM and index-linked to the foreign exchange rates of EUR or other foreign currencies or to the changes in the retail price index, are revalorized in accordance with the provisions stated under the individual loan agreements. A difference between the nominal value and the revalorized value of the outstanding principle is recognized under receivables for loans The effects of such revaluation are recorded as gains and losses on the valuation of financial assets. 3.9 Financial assets Financial assets at fair value through profit and loss Financial assets at fair value through profit or loss are financial assets that are classified as held for trading. Financial assets at fair value through profit or loss are assets that the Bank acquired or incurred principally for the purpose of selling or trading in the near term Financial assets held to maturity Financial assets held to maturity are non-derivative financial instruments with fixed and determinable payment schedules and a fixed date of maturity that the Bank has the intention and ability to hold to maturity. These financial assets comprise bonds of legal entities. In the event that the Bank decides to sell a significant portion of its financial assets held to maturity, the entire category will be reclassified as available for sale. Financial assets held to maturity are classified as long-term assets, except when maturities are shorter than 12 months as of balance sheet date, when they are classified as short-term assets. Financial assets held to maturity are initially recorded at cost, and as at balance sheet date they are reported at amortised cost or present value of future cash flows calculated using the effective interest rate built into the instrument. 14

18 3.10 Cash and cash equivalents For purposes of the Statement of Cash Flows, Cash and cash equivalents include cash and balances on the current accounts held with the other banks, as well as cheques in the course of collection Funds managed on behalf of third parties Assets for business operations conducted on behalf of third parties, that are managed by the Bank with no commission, are not included in the Bank s balance sheet, but in the off-balance sheet positions Taxes and contributions Corporate income tax Current income tax represents the amount calculated in accordance with the effective tax rate. The tax base includes the profit stated in the statutory statement of income in accordance with IAS/IFRS, adjusted for permanent differences between defined and effective tax rate. The final amount of income tax liability is calculated by applying a tax rate of 10% to the tax base declared in the tax balance and tax return. Tax effects which refer to temporary differences between tax basis for certain assets and liabilities and amounts of those assets and liabilities stated in balance sheet which is in accordance with IAS/IFRS, are shown as deferred income tax or deferred tax liability Taxes and contributions not dependant on results Taxes and contributions that are not dependant on results comprise property tax, value added tax, taxes and contributions for salaries charged to the employer, as well as other taxes and contributions in accordance with tax legislation and general regulations. These taxes and contributions are recorded under other operating expenses Deposits Deposits are reported in the amount of deposited funds which can be increased for accrued interest, which depends on the terms of contract between the depositor and the Bank. Depending on deposit amount, the Bank specifies contractual interest rates. Foreign currency deposits are reported in KM at the spot exchange rate ruling on balance sheet date In the balance sheet deposits are presented as transaction and other deposits Equity The Bank s equity consists of the founder s share, other forms of equity, share issue premium, subscribed unpaid capita, profit reserves, other reserves, reserves for potential losses, risk reserves, weighted reserves (FX gains/losses), revaluation reserves, profit for the period, retained earnings, current year s and previous years losses. The Bank s equity is formed from the funds invested by the Bank s founders in monetary form. The founder cannot withdraw funds invested in the Bank s equity. 15

19 3.15 Significant Accounting Estimates and assumptions The Bank s management to make best estimates and reasonable assumptions that influence the assets and liabilities amounts in the following financial year. It is rare for estimated values to be the same as actual results. Estimates and assumptions that carry the risk of a material adjustment to the carrying values of assets and liabilities in the next financial year, are shown below. /I/ Allowances for Impairment Bank reviews the credit portfolio in order to determine allowance for impairment and provisions on a monthly basis In determining whether the impairment losses on placements should be recognized in the income statement, the Bank assesses whether there is information / evidence indicating the existence of a measurable decrease in the estimated future cash flows of a portfolio basis, before such losses can be identified at the level of individual placements. Information indicating that a placements has suffered impartment include: irregularity and default in liability settlement, market and economic conditions present locally which cause delays in payments etc Management s estimates of impairment in financial placements within the Bank s portfolio using the estimated future cash flows, are based on actual losses incurred in the past, realized on financial assets with similar risk-exposure and similar causes of impairment. The methodology and assumptions underlying the process of defining the amounts and periods of cash inflows, based on placements, are reviewed on an ongoing basis in order to reduce the difference between estimated and actual losses to the minimum. Impairment assessment process is conducted on a case basis, for each materially significant loan and on the portfolio level for less significant loans. The amount of impairment is individually assessed as the difference between the carrying amount and the present value of expected future cash flows, determined through discounting the loans at the effective interest rate. The impairment of less significant loans is assessed on a portfolio basis for each credit rating group separately, given their similar characteristics with respect to credit risk in the amount of percentage of migration of adequate credit rating group into the V credit rating group, as adjusted for the percentage of collected loans previously classified into the V credit rating group. If the individual assessment of a materially significant loan shows that there is no objective evidence of loan impairment, the impairment of the loan in calculated as a percentage applied to the respective credit rating group. The methodology and assumptions underlying the process of defining the amounts and periods of cash inflows, based on placements, are reviewed on an ongoing basis in order to reduce the difference between estimated and actual losses to the minimum. The amounts of inflows expected from a loan are assessed based on evidence of the borrower s planned income, and in case these are assessed as insufficient, the Bank assessed the cash flow that could be realized by activating the related collateral. The number of days in default against certain receivables from debtors is assessed by taking into consideration of all relevant evidence about the timeline of earning the planned income by the debtor, as well as historical data about the delays in payment of that particular debtor. 16

20 /II/ Fair value The process of determining the fair value of financial assets and liabilities for which market price does not exist, requires the use of different models and techniques. For financial instruments that have less trading volume and whose market prices are therefore less transparent, the determination of fair value is more subjective and requires a higher degree of use of assessment depending on the liquidity of the instrument, concentration risk, market uncertainties, assumptions about the price and other factors affecting the specific instrument Employee benefits In accordance with regulatory requirements in the Bosnia and Herzegovina /Republic of Serbia, the Bank is obligated to pay contributions state social security funds that guarantee social security insurance benefits to employees. These obligations involve the payment of taxes and contributions on behalf of the employee, by the employer, in an amount computed by applying the specific, legally prescribed rates. The Bank is also legally obligated to withhold contributions from gross salaries to employees, and on behalf of its employees, to transfer the withheld portions directly to the applicable government funds. These taxes and contributions payable on behalf of the employee and employer are charged to expenses in the period in which they arise. The Bank does not have its own defined benefit plans or share-based remuneration options as at 31 December The Bank reversed provisions in 2011 in accordance with IAS 19: Employee benefits for a proportional part of the reduction of long-term liabilities of severance pay for retirement and increasing of liabilities for unused vaccation days of employees. For the calculation in provisions on this basis the Bank has engaged an authorized licensed actuary Segment information The Bank monitors and discloses information for its operating segments lines of business. Due to the fact that the Bank performs most of its operations in the Bosnia and Herzegovina /Republic of Serbia, geographical segment information is not disclosed. 17

21 INCOME STATEMENT 4 INTEREST INCOME AND EXPENSE a) INTEREST INCOME In 000 KM As at 31 December Interest income based on loans, deposits and securities in local currency 6,484 5,537 Interest income based on loans, deposits and securities with contractual hedges 6,291 8,027 Interest income based on loans, deposits and securities in foreign currency 1, TOTAL: 13,924 13,808 b) INTEREST EXPENCE In 000 KM As at 31 December Interest expense based on loans, deposits and securities in local currency 3,105 3,985 Interest expense based on loans, deposits and securities with contractual hedges Interest expense based on loans, deposits and securities in foreign currency TOTAL: 3,598 5,038 c) NET INTEREST INCOME In 000 KM As at 31 December Net interest income 10,326 8,770 5 FEE AND COMMISSION INCOME AND EXPENSE a) Fee and Commission Income In 000 KM As at 31 December Payment transfer fees income 1,668 1,588 Commission income 1,068 1,038 Other fees income TOTAL: 3,015 2,859 18

22 b) Fee and Commission Expenses In 000 KM As at 31 December Fees and commissions expenses in local currency Fees and commissions expenses in foreign currency Other fees and commissions expenses TOTAL: c) Net fees and commissions income In 000 KM As at 31 December Net fees and commissions income 2,463 2,115 6 NET INCOME/EXPENCE FROM CHANGES IN VALUE OF ASSETS AND LIABILITIES In 000 KM As at 31 December Foreign exchange gains 2,014 2,225 Foreign exchange losses (1,935) (2,032) TOTAL: Transactions denominated in foreign currency are calculated at the official exchange rate prevailing at the transaction date. Assets and liabilities denominated in foreign currencies at the balance sheet are calculated at the official average exchange rate prevailing on that day. Exchange rate differences arising from translation are credited to income or expenses. 7 OPERATING INCOME In 000 KM As at 31 December Income from termination of indirect write-off of placements 4,164 5,474 Income from termination of provisions for off-balance sheet items Income from termination of provisions for liabilities - - Other operating income TOTAL: 4,257 5,590 19

23 8 EXPENSES ON INDIRECT WRITE-OFF OF PLACEMENTS In 000KM As at 31 December Provisions for risky balance sheet assets 4,942 5,941 Provisions for risky off-balance sheet assets ,032 6,106 Provisions for retirement pay 21 4 Provisions for lawsuits - - TOTAL: 5,053 6,110 Total regulatory balance sheet and off-balance sheet reserves as at 31/12/2011 Total provisions in accordance with IAS 39 and 37 (balance sheet and off-balance sheet) Special reserve for estimated losses account 812 Amount of missing reserves for loan losses according to ABRS 15,037 KM 7,019 KM 1,891 KM 6,127 KM The Bank's management has made a provision for potential credit losses based on all known and foreseeable risks to the date of the financial statements. 9 OTHER OPERATING EXPENSES In 000 KM As at 31 December Gross expenses for salaries and contributions 4,539 3,998 Expenses for remunerations for temporary and provisional contracts Other personal expenses Costs of material Costs of production services 2,706 2,595 Costs of amortization/depreciation 1,007 1,065 Non-production costs 1,638 1,442 Costs of taxes and contributions Other expenses ,685 9, PROFIT FROM OTHER INCOME AND EXPENCES In 000 KM As at 31 December Other income Other expenses (21) (133) TOTAL: 22 (98) 20

24 11 INCOME TAX In 000 KM 31 December Profit/(loss) before tax 1, Taxation at 10.00% Adjustments for permanent differences: - Capital gains/losses - - Costs that are recognized in tax balance (22) Effective income tax Effective tax rate 8,47% - Capital loss is incurred on the sale of office space in Bileca which was acquired in the course of collection of loan receivables BALANCE SHEET 12 CASH AND CASH EQUIVALENTS In 000 KM 31 December Gross Impairment provision Net Cash and cash equivalents in local currency 2,514-2,514 2,049 Cash and cash equivalents in foreign currency 6,062-6,062 5,465 Other receivables in local currency Other receivables in foreign currency , ,373 8,284 Cash and cash equivalents include deposits of surplus cash funds with the Central Bank of B&H, in accordance with IAS/IFRS regulations and modified regulations of the Central Bank of B&H DEPOSITS HELD IN BIH/RS CB REFINANCEABLE IN BIH/RS CB In 000 KM 31 December Required reserve in BIH/RS CB in local currency 14,828 19,633 Other cash assets in local currency - the excess liquid funds 49,060 65,017 TOTAL: 63,888 84,650 21

25 Obligatory reserves at National Bank of Bosnia and Herzegovina and Republic of Serbia represent minimal reserves in domestic currency in accordance with Decision of Obligatory Reserves of the National Bank. From 1 February 2011 The reserve requirement ratio on deposits and borrowed funds with agreed maturity up to one year fell from 14% to 10%, while the rate of reserve requirements on deposits and borrowed funds with agreed maturity over one year remained unchanged, with the percentage of 7%. As of 1 August 2011 the calculation method is changed for remuneration to banks for funds held with the Central Bank of B&H, on 70% of the obligatory reserve and on 90% of the amount of funds in excess of the obligatory reserve, at a rate that is calculated as the weighted average interest rate which was realized by the National Bank of Bosnia and Herzegovina and Republic of Serbia on term deposits for periods of up to one month. 14 RECEIVABLES FOR INTERESTS AND FEES AND OTHER RECEIVABLES In 000 KM 31 December Gross Impairment provision Net Receivables for interests and fees in local currency and other receivables 2, ,470 1,243 Receivables for interests and fees in foreign currency and other receivables TOTAL: 2, ,470 1, LOANS AND DEPOSITS In 000 KM 31 December Gross Impairment provision Net Loans and deposits in local currency 15, ,175 11,454 Loans and deposits with the contract protection from risks in local currency 132,445 2, , ,372 Loans and deposits in foreign currency ,517 TOTAL: 148,282 2, , ,343 Loans are reported in the balance sheet in the amount of uncollected and unmatured amounts of approved placements. Loans up to one year are approved at interest rates from 2.0% to 12.0% per annum. Loans for periods over one year are approved for a period up to a maximum of 25 years, at annual interest ranging from 3.0% to 13.0% per annum. 22

26 Through the Decision on Changes and Additions to the Decision on Minimal Standards for Credit Risk Management and Classification of Assets of Banks (Official Gazette of the Republic of Srpska 136/10 and 127/11) and Instructions on Modified Method of Creating, Recording and Reporting Reserves for Credit Losses number 01-D-1/11, the Banking Agency of the Republic of Srpska regulated the method to be applied by Banks in measuring impairment of loans and other financial assets in accordance with IAS and IFRS (whose application is mandatory as of 1 January 2010 and accordingly the obligation of reclassification of balance sheet items and special reserves from equity and liabilities and related assets items occurred). Total calculated provisions for balance sheet assets exposures amount to KM 6,971 thousand. 16 FIXED ASSETS In 000 KM Cost Movements in fixed assets in 2011 are presented as follows: Land Buildings and investments in buildings Computers Other equipment Investments in progress Advances for fixed assets Balance as at 1 January ,000 2, ,862 Purchases ,442 Transfer from assets in progress (998) Write-offs Balance as at 31 December ,294 3, ,277 Accumulated depreciation 0 Balance as at 1 January ,597 Depreciation Write-offs Balance as at 31 December , ,230 Net book value as at 31 December , ,047 Net book value as at 31 December , ,265 Total 23

27 Movements in intangible assets in 2011 are presented as follows In 000 KM Software Total Cost Balance as at 1 January ,620 1,620 Purchases Balance as at 31 December ,891 1,891 Accumulated depreciation Balance as at 1 January Amortization Balance as at 31 December ,266 1,266 Net book value as at 31 December Net book value as at 31 December OTHER INVESTMENTS, PREPAYMENTS AND DEFERRED EXPENSES In 000 KM 31 December Other placements in local currency Matured placements and current maturities of long-term investments in local currency 4,780 4,107 Prepayments and deferred expenses in local value Matured placements and current maturities of long-term investments in foreign currency Prepayments and deferred expenses in foreign value 1 13 TOTAL: 5,189 4, INVENTORIES In 000 KM 31 December Inventories present value NON CURRENT ASSETS HELD FOR SALE In 000KM 31 December Fixed assets held for sale 2,

28 Fixed assets held for sale relate to: - real-estate property acquired through executive court procedure for collection of receivables from borrower Prohema doo Brcko, with a carrying amount of km 2,199 thousands and - a machine provided by borrower Sipad 20 avgust ad Vlasenica under bankruptcy proceedings for settlement of receivables, with a carrying amount of KM 63 thousands. 21 LIABILITIES FOR LOANS AND DEPOSITS In 000KM 31 December Liabilities for loans and deposits in local currency 75,386 65,523 Liabilities for loans and deposits with hedging contract 67,558 53,272 Liabilities for loans and deposits in foreign currency 36,121 52,190 TOTAL: 179, ,985 Short term deposits in domestic currency were deposited at annual interet rate form 0.20 % to 6.0 % and deposit in foreign currency at annual interest rate from 0.10 % to 6.0 %. Long term deposits in domestic currency were deposited at annual interest rates from 2.80 % to 6.20 %, and deposits in foreign currency at annual interest rates from 3.80 % to 6.20 %. Annual interests rates on loans ranged from 2.0% %. 22 LIABILITIES FOR INTEREST AND FEES In 000 KM 31 December Liabilities for interest and fees in local currency 27 9 Liabilities for interest and fees in foreign currency OTHER LIABILITIES AND ACCRUED EXPENSES 31 December In 000KM Other liabilities in local currency, except tax liabilities Liabilities for taxes and contributions Provisions Accrued expenses in local currency 1,221 1,450 Other liabilities in foreign currency Accrued expenses in foreign currency TOTAL: 3,012 3,183 25

29 24 SHARE CAPITAL, RESERVES AND RETAINED PROFIT/LOSS Total shares capital as at 31 of December 2011 was KM 60,000,000.00, and consists of of ordinary shares with nominal value of 1,000 KM pre share. The majority shareholder of the Bank is Komercijalna banka a.d. Beograd with %. In 000 KM 31 December Share capital 60,000 60,000 Reserves from profit Reserves for estimated losses 1, Current year profit 1, TOTAL: 63,181 61, COMMITMENTS AND CONTINGENCES a) Warranties, commitments and potential liabilities In 000 KM 31 December Issued guarantees and other warranties 21,883 13,921 Irrevocable obligations for undisbursed loans and investments in local currency 15,505 7,147 Irrevocable obligations for undisbursed loans and investments in foreign currency Issued guarantees and other warranties in foreign currency 6, Other off-balance sheet assets/liabilities 330, ,052 Other off-balance sheet exposure TOTAL: 374, ,473 b) Other contingent liabilities Lawsuits As at 31 December 2011 contingent liabilities related to lawsuits initiated against the Bank amount to KM 241 (8 lawsuits). The opinion of the Bank and its legal advisors is that not negative outcomes are expected with respect to the said lawsuits that could have a materially significant effect on the Bank s financial statements. The Bank has made provisions for lawsuits in the amount of KM 6. As at 31 December 2011 Komercijalna banka AD Banja Luka is involved in 143 court cases against third parties in respect of collection of outstanding loan amount of KM 4,

30 26 RELATED PARTIES TRANSACTIONS - KBBL Account (KBBL-Banja Luka) Currency Currency code KB BANjA LUKA Balance in currency (in 000) Balance in 000KM EUR RSD /977 RSD/KM AUD CAD DKK SEK CHF GBP USD EUR EUR EUR 8,000 15, /977 RSD/KM /977 RSD/KM /977 RSD/KM /977 RSD/KM /977 RSD/KM /977 RSD/KM /977 RSD/KM PAYMENTS TO KEY MANAGEMENT Gross and net earnings of Bank management *, Supervisory Board and Audit Committee in 2011 were as follows: In 000 KM absolute values 31 December 31 December Gross earnings Bank management* Net earnings Bank management* Gross earnings Supervisory Board and Audit Committee Net earnings Supervisory Board and Audit Committee

31 * We note that for earnings of Bank management only gross and net earnings of the directors and executive directors of the Bank are presented (earning of the directors of departments are not considered). 27 EXCHANGE RATES Fixed exchange rates in the interbank foreign exchange market meeting, applied for the calculation of the balance sheet in Konvertabilna Marks (KM) at 31 December for the major currencies were In KM 31 December USD ( 840) EUR ( 978) CHF (756) RISK MANAGEMENT The Bank has recognized that the process of risk management is a key element of business management, because exposure to risks is associated with all business activities, as an integral part of banking operations, which are managed through the identification, measurement, mitigation, monitoring, control and reporting, setting of risk limits, and reporting in accordance with strategies and policies. The Bank has established a comprehensive and reliable system of risk management that includes: risk management strategies, policies and procedures, appropriate organizational structure, effective and efficient process of managing the risks it is exposed to, an adequate system of internal controls, an adequate information system and appropriate process of internal assessment of capital adequacy. Risk profile for risk-taking is defined on the basis of capacity to cover the risk that the Bank is or may be exposed to. Risk-taking is core to the banking business and has great importance for the continuing profitability of the Bank. The Bank set the following objectives associated with risk management via its internal enactments: minimizing adverse effects on the financial result and equity with respect to the defined framework of acceptable risk levels, maintaining the required level of capital adequacy, as well as development of the Bank's activities in line with business opportunities and market development in order to achieve a competitive advantage. Risk management system The risk management system is governed by internal enactments. In order to achieve better risk management, the Bank is in the process of adopting new regulations at Group level, where the Risk Management Strategy and Risk Management Policies have been adopted, while the adoption of related enactments (Risk Management Procedures and Methodologies for Managing Individual Risks) which will replace the current Instructions for Risk Management is pending. 28