INVEST BANKA MONTENEGRO A.D., PODGORICA

Transcription

1 INVEST BANKA MONTENEGRO A.D., PODGORICA Financial Statements For the Year Ended and Independent Auditors Report English Translation of the Auditors Report and Financial Statements issued in the Language Officially Used in Montenegro

2 CONTENTS Page INDEPENDENT AUDITORS REPORT 1-2 FINANCIAL STATEMENTS: Income Statement 3 Balance Sheet 4 Statement of Changes in Equity 5 Cash Flow Statement 6 Notes to the Financial Statements 7-32 English Translation of the Auditors Report and Financial Statements issued in the Language Officially Used in Montenegro

3 Deloitte d.o.o. Bulevar Ivana Crnojevića Podgorica Crna Gora Tel: +382 (0) (0) Fax: +382 (0) English Translation of the Auditors Report Issued in the Language Officially Used in Montenegro INDEPENDENT AUDITORS REPORT To the Management Board and Shareholders of Invest Banka Montenegro A.D., Podgorica We have audited the accompanying financial statements (page 3 to 32) of Invest Banka Montenegro A.D., Podgorica (the Bank ), which comprise the balance sheet as of and the related 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. The financial statements as of and for the year ended 2007 were audited by another auditor whose report dated May 30, 2008 expressed a qualified opinion since it could not satisfy itself with the fairness of the presented amount of assets received in lieu of debt settlement or with the Bank's ability to realize these assets in the amount recorded. 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 regulations of Montenegro and the regulations of the Central Bank of Montenegro governing financial reporting of banks. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. Except as disclosed in Basis for Qualified Opinion, we conducted our audit in accordance with International Standards on Auditing and the Law on Accounting and Auditing of Montenegro. Those standards require that we comply with ethical requirements, and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from 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 the auditor s 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, the auditor considers 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 policies 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 audit opinion. (Continues)

4 English Translation of the Auditors Report Issued in the Language Officially Used in Montenegro INDEPENDENT AUDITORS REPORT To the Management Board and Shareholders of Invest Banka Montenegro A.D., Podgorica (Continued) Basis for Qualified Opinion As disclosed in Note 3.1 to the financial statements, origination fees for loans, guarantees and other forms of sureties, as well as fees charged to the Bank for its borrowings, are all included within income and expenses, respectively, in the moment of providing the service in question, i.e. when fees fall due for settlement. Such accounting treatment departs from the requirements of IAS 18 Revenues and IAS 39 Financial Instruments: Recognition and Measurement, delineating that all these fees are an integral part of generating an involvement with the resulting financial instrument and are deferred and recognized as an adjustment to the effective interest rate. The Bank did not defer fees and accordingly, we were unable to satisfy ourselves as to the effects which the application of the aforementioned standards could have had on the financial statements of the Bank. As disclosed in Notes 5 and 15 to the financial statements, in 2007, the Bank recorded within assets received in lieu of debt settlement an amount of EUR 538 thousand and concurrently stated other income in the amount of EUR 502 thousand and interest income of EUR 36 thousand, which relate to the activated collaterals for not settled principal and interest of loans approved to IM Troica in an earlier period, which the Bank maintained within its off-balance sheet items. These assets were recorded in 2007 in the amount of the principal and interest outstanding, where in 2008, the Bank made an allowance for impairment totaling EUR 141 thousand. Based on the information available, we were unable to satisfy ourselves whether the Bank will be able to realize these assets in the amount recorded. Qualified Opinion In our opinion, except for the effects on the financial statements of the matters referred to the previous paragraphs, the accompanying financial statements present fairly, in all material respects the financial position of Invest Banka Montenegro as of, and its financial performance, changes in equity and its cash flows for the year then ended in accordance with the Law on Accounting and Auditing of Montenegro and regulations of the Central Bank of Montenegro governing financial reporting of banks. Deloitte d.o.o., Podgorica Montenegro Danijela Dimovski, Certified Auditor April 15, 2009 (License no. 030 issued on August 7, 2006) 2

5 INCOME STATEMENT Year Ended Notes Interest income 3.1, 4a Interest expense 3.1, 4b (104) (137) Net interest income Provisions for potential losses 3.6, 5 (281) (587) Net income Fee and commission income 3.1, 6a Fee and commission expense 3.1, 6b (275) (171) Net fee and commission income NET INTEREST, FEE AND COMMISSION EXPENSES Other operating (expenses)/income, net 7 (222) 1,533 General expenses 8 (1,631) (1,434) NET (EXPENSES)/INCOME, BEFORE EXTRAORDINARY ITEMS (875) 198 Extraordinary expenses (3) - (LOSS)/PROFIT BEFORE TAXATION (878) 198 Income taxes and contributions 3.3, 9 (6) (20) (LOSS)/PROFIT FOR THE YEAR (884) 178 The accompanying notes on pages 7 to 32 form an integral part of these financial statements. These financial statements were adopted by the Management Board of Invest Banka Montenegro A.D., Podgorica, on February 13, Signed on behalf of Invest Banka Montenegro A.D., Podgorica: Predrag Dašić General Director English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 3

6 BALANCE SHEET As of Notes ASSETS Cash and deposit accounts held with depository institutions 10 2,484 6,777 Loans and leases 3.5, 3.6, 11 9,626 6,774 Securities held-to-maturity Available for sale assets, excluding shares 3.8, 12 1,891 - Business premises and other fixed assets 3.9, Equity investments in other legal entities 3.8, 14 5,256 4,109 Assets received in lieu of debt settlement Other assets Less: Reserves for potential losses on other assets 15, 16 (162) (15) Total assets 20,923 19,538 LIABILITIES AND EQUITY Liabilities Deposits 17 4,157 2,977 Borrowings Amounts owed to the Government ,056 Other liabilities Reserves for losses contingent on off balance sheet items Total liabilities 5,297 4,352 Equity Share capital 22 12,494 11,115 Share premium 2 2 General reserves Revaluation reserves 2,641 2,696 Retained earnings 335 1,300 Total equity 15,626 15,186 Total liabilities and equity 20,923 19,538 OFF-BALANCE-SHEET ITEMS 23 13,162 3,340 The accompanying notes on pages 7 to 32 form an integral part of these financial statements. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 4

7 STATEMENT OF CHANGES IN EQUITY Year Ended Share Capital and Share Premium General Reserves Revaluation Reserves Retained Earnings Total Balance, January 1, , ,122 6,412 New share issue 5, ,898 Positive effects of remeasuring shares available for sale to their fair value - - 3,568-3,568 Released revaluation reserves - - (872) - (872) Share premium Profit for the year Balance at , ,696 1,300 15,186 Priority share issuance 1, ,379 Allocations to general reserves (81) - Negative effects of remeasuring shares available for sale to their fair value, net - - (55) - (55) Loss for the year (884) (884) Balance at 12, , ,626 The accompanying notes on pages 7 to 32 form an integral part of these financial statements. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 5

8 CASH FLOW STATEMENT Year Ended CASH FLOWS FROM OPERATING ACTIVITIES Interest, fee and commission received 1, Interest, fee and commission paid (379) (308) Cash paid to employees and suppliers (2,040) (1,453) Net cash used in operating activities before changes in operating assets and liabilities (781) (767) Changes in operating assets and liabilities Loans and advances to customers (3,040) 1,505 Other assets (152) (35) Increase in customer deposits 1,180 (2,035) Other liabilities (638) 336 Net cash used in operating activities (2,650) (229) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of equipment and intangible assets (84) (577) Equity investments in other legal entities, net (1,969) (495) Net cash used in investing activities (2,053) (1,072) CASH FLOWS FROM FINANCING ACTIVITIES Loans and borrowings (outflows) (324) (884) Payment of share capital 1,379 5,900 Net cash provided by financing activities 1,055 5,016 Foreign exchange gains Net (decrease)/increase in cash and cash equivalents (4,293) 3,086 Cash and cash equivalents, beginning of year 6,777 3,691 Cash and cash equivalents, end of year 2,484 6,777 The accompanying notes on pages 7 to 32 form an integral part of these financial statements. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 6

9 1. ESTABLISHMENT AND ACTIVITY On November 20, 2006, the Shareholders' Assembly of Pljevaljska banka A.D., Pljevlja enacted a Decision on the Change of Registered Name of the Bank, number /3, into Invest banka Montenegro, a Shareholding Company, Podgorica (originally: Invest banka Montenegro, Akcionarsko društvo Podgorica ). Invest banka Montenegro A.D., Podgorica (hereinafter the Bank ) is a legal successor of Pljevaljska banka A.D., Pljevlja. In accordance with the Decision on the Change of Registered Office and Address, number /4, the Bank s headquarters are located in Podgorica, 4 Stanka Dragojevića Street. In accordance with the Law on Banks and the Bank s Articles of Incorporation and Association, the Bank in engaged in the business of keeping deposits and other assets of private individuals and legal entities and it approves loans and makes other advances of these funds entirely or in part for its own account. In addition to these operations, the Bank is also registered to perform the following activities: - guarantee issuance and other commitments; - to purchase and collect receivables; - to issue, process and record payment instruments; - to perform payment transactions performed abroad; - to perform finance lease operations; - to trade in its own name for its own account or for the account of a customer with foreign payment instruments; - to collect data, prepare analysis and provide information and advice on company and entrepreneur creditworthiness; - depositary operations; - safekeeping of assets and securities and - to perform other activities accompanying the Bank s business operations. The Bank s bodies are: the Shareholders Assembly and the Management Board. The Shareholders Assembly is the supreme body in the Bank. The shareholders have voting rights commensurate with the number of shares in their possession. The Management Board is the managing body of the Bank. It appoints and releases of duties the members of the Shareholders Assembly. It consists of 5 members, the majority of which are not the Bank s employees. The General Director is the member of the Management Board, but not its President and/or Chairman. The standing bodies within the Management Board are the Credit Risk Committee and Supervisory Committee. The Credit Risk Committee counts three members chosen among the members of the Management Board. The Supervisory Committee consists of three members, rarely Bank s employees. The General Director of the Bank is at the same time the Executive Manager of the Bank. For its results, the General Director is directly answerable to the Bank s Assembly and the Management Board. At, the Bank had 37 employees ( 2007: 35 employees). The Bank s Central Office is located at number 115 Svetog Petra Cetinjskog Street in Podgorica and one counter in Pljevlja, number 10 Skerlićeva Street. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 7

10 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS 2.1. Basis of Preparation and Presentation of the Financial Statements The Bank maintains its accounting records and prepares its statutory financial statements in conformity with the Accounting and Auditing Law of Montenegro (Official Gazette of Montenegro no. 69/2005 and no. 80/2008) and specifically, in accordance with the relevant decision pertaining to the application of International Accounting Standards ( IAS ) in Montenegro (Official Gazette of Montenegro numbered 69/2002). Pursuant to these provisions, International Financial Reporting Standards ( IFRS ) were applied for the first time as the Bank s primary basis of accounting for the reporting period commencing on January 1, The financial statements are presented in the format required under Articles 17 and 18 of the Accounting and Auditing Law of Montenegro and European Union Directive numbered 86/635/EEC of December 8, 1986 which relates to the annual reports of banks and other financial institutions. Such statements represent the complete set of financial statements as defined under the law, which differ from those defined under the provisions of IAS 1, Presentation of Financial Statements. The accounting policies adopted in the preparation and presentation of the financial statements for the year ended differ from the IFRS requirements in number of areas, including but not limited to the allowances for impairment of financial instruments and in respect of disclosures of financial instruments made in accordance with IFRS 7 Financial Instruments: Disclosures. The Bank calculates the amount of allowance for impairment of financial instruments in accordance with the applicable Regulations of the Central Bank of Montenegro (Note 3.6). Such a policy might result in significant departures from the amounts which would be determined, if the allowances for impairment of financial instruments was estimated based on discounted expected future cash flows by applying the original effective interest rate, as required by IAS 39, Financial Instruments: Recognition and Measurement. In addition, the Bank suspends interest accrual on the loans classified into C, D and E categories (non-performing assets in accordance with the Decision of the Central Bank of Montenegro on the classification of banks and reserves for credit losses), and the Decision also stipulates that risk-weighted assets classified into E category be written off from the balance sheet assets and recorded within off-balance sheet items as loans written off. Due to the potentially significant effects of the above-described matters, these financial statements cannot be described as having been prepared in accordance with International Financial Reporting Standards. In the preparation of the accompanying financial statements, the Bank has adhered to the accounting policies described in Note 3, which are in conformity with the accounting, banking and tax regulations prevailing in Montenegro. The official currency in Montenegro and the Bank s functional currency is Euro (EUR). As in accordance with the Law on Accounting and Auditing of Montenegro ( Official Gazette of Montenegro numbers 69/2005 and 80/2008), legal entities with controlling influence (parent companies) over one or more legal entities (subsidiaries) are under obligation to prepare, submit and issue its consolidated financial statements in accordance with IAS. The consolidated financial statements are economic wholes consisting of the parent company and all subsidiaries. The consolidated financial statements accompanied by the auditors' report are submitted no later than June 30 for the balance as of and for the year ended December 31 of the previous year. These financial statements represent separate stand-alone financial statements of the Bank. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 8

11 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (Continued) 2.2. Comparative Information In order to conform the presentation of figures to the current reporting period, certain reclassifications have been made to the amounts reported in the financial statements for the year ended Use of Estimates The presentation of financial statements requires from the Bank s management to make best estimates and reasonable assumptions that affect the assets and liabilities amounts, as well as the disclosure of contingent liabilities and receivables as of the date of the preparation of the financial statements, and the income and expenses arising during the accounting period. These estimations and assumptions are based on information available as of the financial statements preparation date, and mostly relate to: assessments of provisions against loans and interest, provisions against deposits placed with other banks, provisions against permanent investments and off-balance sheet items. However the Bank s future operating results may vary from the estimated values. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1. Interest Income and Expense Recognition Interest income and interest expense, including penalty interest and operating income and expenses related to interest bearing assets and liabilities are accounted for on an accrual basis. Fees and commission income earned for banking services and expenses for fees and commissions paid are determined when due for collection i.e. payment. Guarantee and loan origination fees are recorded when realized, i.e. when due for collection. The Bank suspends interest accrual on the loans classified into the categories C, D and E ( nonperforming assets, ) in accordance with the Decision of the Central Bank of Montenegro regarding the classification of bank assets, provisions and reserves for credit losses) Foreign Exchange Translation Transactions denominated in foreign currencies are translated into Euros at the official exchange rates prevailing on the Interbank Market, at the date of each transaction. Assets and liabilities denominated in foreign currencies are translated into Euros by applying the official exchange rates, as determined on the Interbank Market that are prevailing at the balance sheet date. Net foreign exchange gains or losses arising upon the translation of transactions, and the assets and liabilities denominated in foreign currencies are credited or charged to the Income statement. Commitments and contingent liabilities denominated in foreign currencies are translated into Euros by applying the official exchange rates prevailing on the Interbank Market, at the balance sheet date. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 9

12 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.3. Taxes and Contributions Income Taxes Current Income Taxes Income taxes are calculated and paid in conformity with the income tax regulations defined under Montenegro Tax Law (Official Gazette of Montenegro 80/2004 and no. 40/2008) as per the effective proportional tax rate of 9% on taxable income. A taxpaying entity s taxable income is determined based upon the income stated in its statutory statements of income following certain adjustments to its income and expenses performed in accordance with Montenegro Tax Law (Articles 8 and 9, regarding the adjustment of income and Articles 10 to 20 pertaining to the adjustment of expenses). Montenegro tax regulations do not envisage that any tax losses of the current period be used to recover taxes paid within a specific carryback period. However, any current year losses reported in the annual corporate income tax returns may be carried forward and used to reduce or eliminate taxes to be paid in future accounting periods, but only for an ensuing period of a maximum of five years. Deferred Income Taxes Deferred income tax is determined using the balance sheet liability method, for the temporary differences arising between the tax bases of assets and liabilities, and their carrying values in the consolidated financial statements. The currently-enacted tax rates at the balance sheet date are used to determine the deferred income tax amount. Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for the deductible temporary differences, and the tax effects of income tax losses and credits available for carry forward, to the extent that it is probable that future taxable profit will be available against which deferred tax assets may be utilized. Taxes, Contributions and Other Duties Not Related to Operating Results Taxes, contributions and other duties that are not related to the Bank s operating results, include property taxes, employer contributions on salaries, and various other taxes and contributions paid pursuant to republic and municipal regulations Cash and Cash Equivalents 3.5. Loans For purposes of the Cash Flow Statement, Cash and cash equivalents include cash and balances on the current accounts held with the Central Bank of Montenegro, other banks, including the obligatory reserve, and balances held on the accounts of other banks in the country and abroad. Loans originated by the Bank are recorded in the books of account at the moment of the transfer of funds to the loan beneficiary. Loans originated by the Bank are stated at the amount of principal outstanding, less an allowance for impairment, which is based on an evaluation of the specifically-identified exposures which serves to cover any losses inherent in the Bank s loan portfolio. The Bank s management applies the methodology prescribed by the Central Bank of Montenegro in its evaluation of the forgoing risks, as disclosed in Note 3.6. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 10

13 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.6. Allowances for Impairment and Provisions for Potential Losses The Decision issued by the Central Bank of Montenegro regarding the classification of bank assets, provisions and reserves for credit losses per separate items of assets (Official Gazette of the Montenegro, number 59/2007 and number 60/2008) sets forth the following: minimum criteria and manner of classifying assets and off-balance sheet items which render the Bank susceptible to interest rate risk, the manner of calculation and suspension of unpaid interest, the manner of determining the minimum provisions for potential losses contingent on the Bank's exposure to credit risk and the criterion and way of determining the provisions for general credit losses. The Bank's risk-weighted assets, within the meaning of this Decision, are comprised of loans, interest, fees and commissions, lease receivables, deposits with banks, advances and all other items included in the balance sheet exposing the Bank to default risk, as well as guarantees issued, other sureties, effectuated letters of credit and approved, but undrawn loan facilities, as well as all other off-balance sheet items being the Bank's contingent liabilities. Pursuant to the aforementioned Decision, loans and other risk-weighted assets are classified into the following categories: A category ( Pass ) including assets assessed as collectible in full pursuant to the agreement; B category ( Special Mention ) with B1 and B2 subcategories including items for which there is low probability of loss, but which, just as well, require special attention, since the potential risk, if not adequately monitored, could diminish their collectability; C category ( Substandard assets ) with C1, C2, C3 and C4 subcategories for which there is high probability of loss, due to the clearly identified collectability issues; D category ( Doubtful assets ) including items the collection of which is highly unlikely, given the creditworthiness of loan beneficiaries and quality of collaterals; E category ( Loss ) including the items which are uncollectible in full, or will be collectible in an insignificant amount. The estimated amount of provision for potential losses is computed by applying the following percentages to the corresponding categories: 1% to the placements classified into category A, from 3% to 8% to the placements classified into category B, from 20% to 50% to the placements classified into category C, from 50% to 75% to the placements of category D, and 100% to the placements under category E. Moreover, as in accordance with the provisions of the aforecited regulation, the Bank is to suspend any accrued, uncollected interest and should terminate any further accrual of interest on its non-performing assets, with the exception of the non-performing assets that are secured by quality collateral and that are in the process of collection, to the extent that the recovery of such asset is anticipated within a reasonable period of time (generally defined as not exceeding three months). Following the suspension of interest accruals on non-performing assets, the Bank remains under an obligation to record the subsequent, matured interest on the same basis, on its off-balance sheet items and, upon classification, designate the accrued income into E category The Decision further prescribes that the risk-weighted assets classified into E category be written off from the off-balance sheet records under the heading of Loans written off. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 11

14 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.6. Allowances for Impairment and Provisions for Potential Losses (Continued) Pursuant to the Decision, provision for potential losses contingent on assets is calculated based on the carrying value net of any deductible items of collaterals based on: Monetary deposits and Irrevocable guarantees of the countries or central banks of the OESD member countries, the banks with credit rating better than A+ pursuant to the ratings of the agency Standard & Poor s, i.e., any equivalent rating of other internationally acclaimed rating agencies and legal entities whose business operations are under the control of the Central Bank of Montenegro Trading Securities Trading securities comprise securities which are held for the purpose of selling it in the near term. Trading securities are comprised of structural bills and trading shares, and are initially recorded at cost. As of the balance sheet date these securities are recorded at market value. All realized gains and losses arising on sale, and any changes in their fair values are included in the income statement Equity Investments in Subsidiaries and Related Parties and Securities Available- for-sale Securities available-for-sale are comprised of equity investments in third parties, which cannot be classified as trading securities or securities held-to-maturity and are comprised of equity investment in other legal entities. Following the initial recognition, securities available-for-sale are stated at fair value. The fair value of securities quoted on the market is based on the currently offered prices. Unrealized gains and losses on securities available-for-sale are recorded within revaluation reserves, until such security is sold, collected or otherwise realized or until it is permanently impaired. When securities available-for-sale are disposed of or their value is impaired, the accumulated adjustments of fair value are recognized within equity on the face of the income statement Business Premises, Other Fixed Assets and Intangible Assets Business premises, other fixed assets and intangible assets at are stated at cost less accumulated depreciation and impairment loss, if any. Cost represents the prices billed by suppliers together with all costs incurred in bringing the respective asset to the location and condition necessary for its intended use. Depreciation and/or amortization are provided for on a straight-line basis to the cost of business premises, other fixed assets and intangible assets in order to write them off over their expected useful lives. Depreciation and/or amortization are calculated on a straight line basis using the following prescribed annual rates: Computers 20.0 % Furniture and equipment 12.5 % Motor vehicles 15.5 % The calculation of depreciation and/or amortization of business premises, other fixed assets and intangible assets commences when an asset is placed into use. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 12

15 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Employee Benefits Pursuant to the regulations effective in Montenegro, the Bank has an obligation to pay contributions to various state social security funds. These obligations involve the payment of contributions on behalf of an employee, by the employer in an amount calculated by applying the specific, legally-prescribed rates. The Bank is also legally obligated to withhold contributions from gross salaries to employees, and on their behalf to transfer the withheld portions directly to the appropriate government funds. These contributions payable on behalf of the employee and employer are charged to expenses in the period in which they arise. Pursuant to the Labor Law, the Bank is bound to pay employee benefits upon retirement. Longterm liabilities related to provisions for retirement benefits payable once the legally prescribed conditions for retirement have been met represent the present value of expected future payments to employees as determined pursuant to the actuarial valuation, based on the following assumptions: discount rate of 10%, salary growth of 3%, fluctuation rate of 5% Fair Value In accordance with IAS 32, Financial Instruments: Disclosures and Presentation, the fair value of financial assets and liabilities should be disclosed in the Notes to the Financial Statements. For these purposes, the fair value is defined as an amount at which an asset can be exchanged, or a liability settled, between knowledgeable willing parties in an arm s-length transaction. The Bank should disclose the fair value information of those components of assets and liabilities for which published market information is readily available, and for which their fair value is materially different from their recorded amounts. In Montenegro, sufficient market experience, stability and liquidity do not exist for the purchase and sale of receivables, investments and other financial assets or liabilities, for which published market information is presently not readily available. Fair value cannot readily be determined in the absence of active capital and financial markets, as generally required under the provisions of IFRS/IAS. In the opinion of management, the reported carrying amounts are the most valid and useful reporting values under the present market conditions. In the amount of the identified estimated risk that the carrying value will not be realized, a provision is recognized based on a relevant decision of the Bank s management. 4. INTEREST INCOME AND EXPENSE a) Interest Income Year Ended Banks: - deposits loans Corporate customers Retail customers MNE Government Other financial institutions 9 - Municipalities - 5 Other English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 13

16 4. INTEREST INCOME AND EXPENSE (Continued) b) Interest Expense Year Ended Banks - 1 Other financial institutions 25 - MNE Government Corporate customers Retail customers PROVISIONS FOR POTENTIAL LOSSES a) Structure of income and expenses arising from allowance for impairment and provisions Year Ended Net provisions against: - loans (corporate and retail customers) loans (banks) securities available-for-sale - (9) - interest 4 (2) - acquired assets 141 (26) - deposits with banks 6 - off-balance sheet items operational risk retirement benefits other assets English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 14

17 5. PROVISIONS FOR POTENTIAL LOSSES (Continued) b) Movements on the accounts of allowance for impairment and provisions Loans and Lease Operations (Note 11) Interest (Note 16) Other Assets (Note 16) Off-Balance Sheet Items (Note 21) Operational Risk (Note 21) Retirement Benefit (Note 20) Other Assets (Note 16) Deposits with Banks (Note 16) Assets received in lieu of debt settlement ( Note 15) Total Balance, beginning of year Charge for the year, net Transfer to off-balance sheet items (72) (3) (75) Other - - (3) (3) Balance, end of year English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 15

18 HYPO ALPE-ADRIA-BANK A.D., PODGORICA 6. FEE AND COMMISSION INCOME AND EXPENSE a) Fee and Commission Income Year Ended Loan origination fees Fee and commission income from off-balance-sheet operations Fee and commission income from payment transfers Fee and commission income from trading in currency Other fee and commission income b) Fee and Commission Expense Year Ended Fees and commission payable to the Central Bank Fees and commission payable to other financial institutions Fees and commission expense arising from trading in currency Fees and commission expense arising from deposit insurance premium Other fee and commission expense OTHER (EXPENSES)/ INCOME, net Year Ended Collected receivables previously written off Income from trading in currency 4 2 Foreign exchange (losses)/gains, net (6) 1 Dividend income 95 1 Income from recording assets received in lieu of debt settlement Net losses on the fair value adjustment of trading securities (724) (230) Net (losses)/gains on impairment of securities available-for-sale (98) 1,003 Other (222) 1,533 English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 16

19 8. OTHER EXPENSES Year Ended Net salaries Taxes and contributions on salaries Other staff costs (redundancies, annual leave allowance) Remunerations to the Management Board members Business trip expenses Rentals Maintenance of property and equipment Depreciation and amortization charges: - equipment intangible assets Costs of telephone and communication network Production services Non-production expenses Marketing and advertizing Professional services Professional education of employees Entertainment Subscriptions and donations Office material Other costs ,631 1, INCOME TAXES AND CONTRIBUTIONS a) Components of Income Taxes Year Ended Current income taxes - 16 Deferred tax expenses b) Numerical Reconciliation between Tax Expense and the Product of Accounting Results Multiplied by the Applicable Tax Rate Year Ended 2008 Loss before tax (878) Income tax at the statutory tax rate of 9% (79) Effects of expenses not recognized for tax purposes 3 Not recognized tax losses 83 Other (1) Tax effect on the income statements 6 English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 17

20 9. INCOME TAXES AND CONTRIBUTIONS (Continued) b) Deferred Tax Liabilities Deferred tax liabilities at in the amount of EUR 10 thousand ( 2007: EUR 4 thousand) are associated with the temporary differences between the depreciation and amortization of fixed and intangible assets calculated for tax purposes and the depreciation and amortization calculated based on the carrying value of such assets. 10. CASH AND DEPOSIT ACCOUNTS HELD WITH DEPOSITORY INSTITUTIONS Cash in hand: - in EUR in foreign currency Gyro account 316 1,061 Correspondent account with: - foreign banks domestic banks Obligatory reserves with the Central Bank of Montenegro Time deposits with: - foreign banks domestic banks 411 3,533 2,484 6,777 The Bank s obligatory reserves at represent the minimum deposits set aside in accordance with the Central Bank of Montenegro Regulation with respect to the Reserve Requirements for Banks to Be Held with the Central Bank of Montenegro, ( Official Gazette of Montenegro, no. 5/08 as of January 23, 2008). Pursuant to the aforecited, the obligatory reserve is to be calculated by applying the following reserve percentages: 19% for demand and term deposits having less-than-180-day maturities as of the reserve calculation date; and 2% for term deposits with more-than-180-day, but less-than-two-year maturities as of the reserve calculation date. The obligatory reserve is to be calculated by applying the aforementioned ratios on a weekly basis, two days prior to the expiration of the maintenance period. The funds of the obligatory reserves are deposited to the account of the Central Bank of Montenegro held in the country or abroad. For the amount of 50% of the obligatory reserve requirement deposited by banks, the Central Bank pays interest at the annual rate of 1% up to the eighth day of the month for the preceding month. The obligatory reserve is held in Euros. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 18

21 11. LOANS AND LEASES Matured loans: - privately-owned corporate entities entrepreneurs retail customers Short-term loans: - privately-owned corporate entities 2,962 2,348 - banks retail customers 1,306 1,935 Long-term loans, including current portions: - privately-owned corporate entities 1,825 1,115 - entrepreneurs funds retail customers 2,808 1,059 9,911 7,019 Less: Reserves for credit losses (285) (245) 9,626 6,774 The Bank extends to retail customers different types of special purpose and general purpose loans: General purpose cash loans for non-depositors at nominal interest rates from 14% to 20% annually; General purpose cash loans approved to depositors at nominal interest rate of 11% annually; General purpose cash loans to the Bank's employees and special customers of the Bank at nominal interest rate of 10% annually; Cash loans for starting business at nominal interest rates from 14% to 20% annually; Lombard loans at nominal interest rates from 9% to 11% annually. Short-term loans are approved to legal entities at nominal interest rates from 8% to 16% annually. Long-term loans approved to legal entities for the purpose of financing working assets mature within 5 years accruing interest at nominal interest rates ranging from 8 to 16% annually. Short-term loans collateralized by a cash deposit are approved to customers at interest rates charged to cash deposits placed as collateral as increased by 4% to 4.5% annually. From the assets of the Development Fund of Montenegro received in prior years, long-term loans were approved as a support to small and medium enterprises for the term of 2 to 3 years, with up to 24-month grace period and an interest rate of 9% annually, out of which the Bank retains up to 2% to cover expenses. The geographic risk concentration within the customer loan portfolio mainly includes customers domiciled in Montenegro. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 19

22 11. LOANS AND LEASES (Continued) The concentration of total gross loans to customers per separate fields of industry as of December 31, 2008 was as follows: Agriculture, hunting and fishing 4 81 Civil engineering 2,500 2,039 Energy supply and mining Trade Services, tourism, accommodation industry Transport, storage, postal services and telecommunication Administration and other public services Banks and other financial institutions Retail customers 4,181 3,032 Other ,911 7, TRADING ASSETS AND ASSETS AVAILABLE FOR SALE, EXCLUDING SHARES Assets available-for -sale : - MNE Government restitution bonds 1, Foreign savings bonds 106-1,452 - Trading assets: - Structural bank bills 439-1,891 - At, the Bank had 3,962,401 MNE Government restitution bonds. These bonds were measured pursuant to the prices quoted on the Nex Stock Market and, as of the aforementioned date, a single bond amounted to EUR English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 20

23 13. BUSINESS PREMISES AND OTHER FIXED ASSETS Leasehold Improvement s Other Assets Used in Operations Constructio n in Progress Buildings Total Cost Balance, beginning of year Additions Activation of fixed and intangible assets (782) (220) Sale and disposal (38) - (11) - (49) Balance, end of year Accumulated Depreciation Balance, beginning of year Charge for the year Sale and disposal (36) - (10) - (46) Balance, end of year Net Book Value: At, there were no encumbrances on the Bank's assets serving as collateral for the timely and regular repayment of loans and other liabilities. 14. EQUITY INVESTMENTS IN OTHER LEGAL ENTITIES Equity investments in other legal entities: - Global Carbon d.o.o., Podgorica 1, Atlasmont banka a.d., Podgorica common shares 3,324 3,217 - Atlasmont banka a.d., Podgorica priority shares ,875 3,342 Trading securities: - Atlas capital financial Other Securities available for sale: - Fond Atlas Mont Crnogorski Telekom ED Žabljak "Montenegroberza" AD Other ,256 4,109 The Bank established a company Global Carbon d.o.o., Podgorica with the aggregate amount of founding capital of EUR 2 million. At, the Bank is the sole owner of Global Carbon d.o.o., Podgorica. Until the balance sheet date, an amount of EUR 1,500 thousand of founding capital was paid in, and until January 9, 2009, the balance of EUR 500 thousand was also paid in. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 21

24 14. EQUITY INVESTMENTS IN OTHER LEGAL ENTITIES (Continued) The Bank holds an equity stake in Atlasmont banka a.d., Podgorica of EUR 3,324 thousand (3.75%) in the form of 1,368 common shares, their market value amounting on EUR 2.4 thousand. The Bank holds equity stake in Atlasmont banka a.d., Podgorica totaling EUR 51 thousand (1%) in the form of 100 priority shares the market value of which amounts to EUR At, the Bank owned 3,219,378 common shares of Atlas Mont Fund, the market value of which amounted to EUR per share. Based on common shares (1,402,388 shares), the Bank's an equity stake in the Fund totaled %. Based on priority shares (1,826,000 shares), the Bank held equity interest in the Fund's capital of %. 15. ASSETS RECEIVED IN LIEU OF DEBT SETTLEMENT Acquired assets of EUR 494 thousand at (2007: EUR 697 thousand), net of allowance for impairment of EUR 152 thousand (2007: EUR 11 thousand) relate to the assets acquired based on the foreclosure of assets standing collateral against loans. The assets which the Bank acquired in this manner may be maintained in the Bank's ownership for two years or longer if adequate approval is obtained from the Central Bank of Montenegro. These assets were measured in the amount of granted loans. 16. OTHER ASSETS Interest, fee and commission receivables Prepayments Income taxes advance payment 16 - Other receivables Intangible assets Provisions for potential losses contingent on other assets - interest (1) - - other assets (3) (1) - reserves for interbank deposits (6) - - country risk and market risks - (3) (10) (4) English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 22

25 16. OTHER ASSETS (Continued) The movements on intangible assets in the course of 2008 were as follows: 2008 Cost Balance, beginning of year 330 Transfers from construction in progress 220 Balance, end of year 550 Accumulated Amortization Balance, beginning of year 74 Charge for the year 90 Balance, end of year 164 Net Book Value: DEPOSITS Demand deposits: - government agencies municipalities (public organizations) privately-owned companies with majority state-ownership privately-owned corporate entities banks retail customers other ,026 Short-term deposits: - privately-owned corporate entities 1,528 1,893 - financial institutions retail customers other 25-2,183 1,901 Long-term deposits - Montenegro Government privately-owned corporate entities , ,157 2,977 English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 23

26 17. DEPOSITS (Continued) Demand deposits placed by retail customers in EUR were deposited at an interest rate of 1.5% annually. Short-term deposits of retail customers in EUR fall due within: 3 months were deposited at an interest rate of 4% annually 6 months were deposited at an interest rate of 5.5% annually 12 months were deposited at an interest rate of 7% annually 24 months were deposited at an interest rate of 8% annually 36 months were deposited at an interest rate of 4% annually. Demand deposits of corporate customers in EUR were deposited at an interest rate ranging from 1% to 1.5% annually. Short-term deposits placed by corporate customers in EUR maturing within: 3 months were deposited at an interest rate of 5% annually 6 months were deposited at an interest rate of 6% annually 12 months were deposited at an interest rate of 6.5% annually. Long-term deposits of corporate customers in EUR fall due within: 24 months were deposited at an interest rate of 7% annually 36 months were deposited at an interest rate of 4.5% to 7.5% annually. At, the Bank had EUR 2,540 thousand as special purpose deposits placed as collaterals against lending and placements. 18. BORROWINGS Liabilities in the amount of EUR 74 thousand (2007: EUR 92 thousand) relate to securities converted into long-term borrowings in accordance with the Law on Converting Loans and Other Receivables of the National Bank of Yugoslavia into long-term borrowings maturing within 15 years, inclusive of a 5-year grace period and an interest rate of 1% annually. 19. AMOUNTS OWED TO THE GOVERNMENT Amounts owed to the Government of EUR 760 thousand (2007: EUR 1,056 thousand) are associated with the liabilities arising from long-term borrowings from the Montenegro Development Fund which the Bank makes available to end beneficiaries for the period from 2 to 3 years with a grace period of 24 months and an interest rate of 9% accrued annually, out of which the Bank retains 2% for purpose of settling expenses. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 24

27 20. OTHER LIABILITIES Interest payables 2 1 Prepaid interest 3 1 Accounts payable 46 7 Deferred tax expenses 10 4 Other taxes payable - 1 Winter food allowance 43 - Payables to employees housing fund Suspense accounts Retirement benefits payable to employees (Note 5) 1 - Other liabilities RESERVE FOR LOSSES CONTINGENT ON OFF-BALANCE SHEET ITEMS Reserves for losses contingent on: - off-balance sheet exposures operational risk SHARE CAPITAL At, the Bank s share capital was comprised of 121,602 ordinary shares and 112,014 preference shares having an individual par value of EUR thousand and EUR thousand, respectively. The Law on the Amendments and Supplements to the Law on Banks ( Official Gazette of the Republic of Montenegro, no. 32/2002), effective as of July 11, 2002, defines that the minimum cash amount of initial capital may not be less that EUR 5,000 thousand. At, the Bank s capital complied with the prescribed minimum capital requirements. English Translation of the Financial Statements Issued in the Language Officially Used in Montenegro 25