OHRIDSKA BANKA AD, OHRID Financial Statements and Independent Auditors Report for the ended
OHRIDSKA BANKA AD - OHRID CONTENTS Page Independent Auditors Report 1-2 Income Statement 3 Balance Sheet 4 Statement of Changes in Equity 5 6 Statement of Cash Flows 7-8 Notes to the Financial Statements 9-113
INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF OHRIDSKA BANKA AD, OHRID We have audited the accompanying financial statements (page 3 to 113) of Ohridska banka AD, Ohrid (hereinafter referred to as the Bank ), which comprise the balance sheet as at and the income statement, statement of changes in equity and statement of cash flows for the then ended, and a summary of significant accounting policies and other explanatory information. 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 the Republic of Macedonia and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Audit Law of the Republic of Macedonia and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the 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. (Continued)
INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF OHRIDSKA BANKA AD, OHRID (Continued) Opinion In our opinion, the financial statements of Ohridska banka AD, Ohrid for the ended are prepared, in all material respects, in accordance with accounting regultive of the Republic of Macedonia. Deloitte DOO Lidija Nanus Certified Auditor Director Aleksandar Arizanov Certified Auditor Skopje March 21, 2011 2
OHRIDSKA BANKA AD - OHRID INCOME STATEMENT Year ended () Notes Interest income 1,021,058 892,750 Interest expense (365,927) (355,571) Net interest income 6 655,131 537,179 Fee and commission income 182,267 149,951 Fee and commission expense (53,110) (44,067) Net fee and commission income 7 129,157 105,884 Trading income, net 8 - - Net income from other financial instruments carried at fair value 9 - - Foreign exchange gains/(losses), net 10 55,946 72,706 Other operating income 11 13,760 15,074 Share of profit of associates 24 - - Impairment losses of financial assets, net 12 (168,543) (120,430) Impairment losses of non-financial assets, net 13 (339) (2,701) Personnel expenses 14 (254,246) (244,223) Depreciation and amortization 15 (74,176) (62,471) Other operating expenses 16 (325,933) (272,095) Share of loss of associates 24 - - Profit before tax 30,757 28,923 Income tax expense 17 (3,685) (4,537) Profit for the 27,072 24,386 Earnings per share 41 Basic (in Denars) 75.92 75.60 Diluted (in Denars) 75.92 75.60 The accompanying notes are an integral part of these financial statements. The financial statements were approved by the management of the Bank on February 28, 2011 and by the Bank s Supervisory Board on February 28, 2011. Signed on behalf of Ohridska banka AD, Ohrid: Mrs. Jitka Pantuckova Mr. Mito Gjoreski Mr. Petar Tegovski President of the Board Member of the Board Member of the Board of Directors of Directors of Directors 3
OHRIDSKA BANKA AD - OHRID BALANCE SHEET At () Notes ASSETS Cash and cash equivalents 18 3,652,492 2,708,706 Held-for-trading assets 19 - - Financial assets at fair value through profit or loss upon initial recognition 20 - - Derivative assets held for risk management 21 - - Loans and advances to banks 22.1 1 231,059 Loans and advances to other customers 22.2 10,560,768 8,296,746 Investments in securities 23 4,299,272 2,358,494 Investments in associates 24 - - Income tax receivable (current) 30.1 4,596 8,281 Other receivables 25 93,576 69,452 Assets pledged as collateral 26 - - Foreclosed assets 27 137,189 146,496 Intangible assets 28 55,844 30,004 Property and equipment 29 444,754 455,991 Deferred tax assets 30.2 - - Non-current assets held-for-sale and disposal group 31 - - Total assets 19,248,492 14,305,229 LIABILITIES Trading liabilities 32 - - Financial liabilities at fair value through profit or loss upon initial recognition 33 - - Derivative liabilities held for risk management 21 - - Due to banks 34.1 33,721 158,015 Due to other customers 34.2 12,913,170 9,733,586 Debt instruments issued 35 - - Borrowings 36 4,336,422 2,991,951 Subordinated debt 37 - - Special reserve and provisions 38 25,029 23,202 Income tax payable (current) 30.1 - - Deferred tax liabilities 30.2 - - Other liabilities 39 271,462 70,086 Liabilities related to disposal group 31 - - Total liabilities 17,579,804 12,976,840 EQUITY Subscribed capital 40 1,162,253 854,755 Share premium 127,227 127,227 Treasury shares - - Capital component of hybrid financial instruments - - Other equity instruments - - Revaluation reserves 40 895 (4,834) Other reserves 40 118,576 114,918 Retained earnings 259,737 236,323 Total equity and reserves 1,668,688 1,328,389 Total liabilities, equity and reserves 19,248,492 14,305,229 Contingent assets 42.2 - - Contingent liabilities 42.1 4,022,246 2,460,958 The accompanying notes are an integral part of these financial statements. 4
OHRIDSKA BANKA AD - OHRID STATEMENT OF CHANGES IN EQUITY Year ended () Equity Reserves Revaluation reserve Retained earnings Subscribed capital Share premium (Treasury shares) Capital com. of hyb. Fin. Instrum Other fin. Instrum. Statutory reserve Other reserves Reval. Reserves for assets held for trading Risk reserve Foreign exchange reserve Other reserves Attribut. to sharehol. Limited for distrib. to sharehol Total Equity and Reserves As at January 1, 2009 854,755 127,227 - - - 79,931 31,000 - - - - 215,924-1,308,837 Changes in fair value of assets available-for-sale - - - - - - - (4,834) - - - - - (4,834) Changes in fair value of risk protection of cash flows - - - - - - - - - - - - - - Changes in fair value of risk protection of net investments in foreign operations - - - - - - - - - - - - - - Foreign exchange differences recognized in equity - - - - - - - - - - - - - - Deferred tax (assets)/liabilities recognized in equity - - - - - - - - - - - - - - Other - - - - - - - - - - - - - - Total unrealized profit /(loss) recognized in equity - - - - - - - (4,834) - - - - - (4,834) Shares issued during the period - - - - - - - - - - - - - - Profit/loss for the - - - - - - - - - - - 24,386-24,386 Distribution to statutory reserve - - - - - 3,987 - - - - - (3,987) - - Distribution to other reserves - - - - - - - - - - - - - - Dividends - - - - - - - - - - - - - - Purchase of treasury shares - - - - - - - - - - - - - - Other changes in equity and reserves - - - - - - - - - - - - - - As at December 31, 2009 854,755 127,227 - - - 83,918 31,000 (4,834) - - - 236,323-1,328,389 The accompanying notes are an integral part of these financial statements. 5
OHRIDSKA BANKA AD - OHRID STATEMENT OF CHANGES IN EQUITY (Continued) Year ended () Equity Reserves Revaluation reserve Retained earnings Subscribed capital Share premium (Treasury shares) Capital com. of hyb. Fin. Instrum Other fin. Instrum. Statutory reserve Other reserves Reval. Reserves for assets held for trading Risk reserve Foreign reserves reserve Other reserves Attribut. to sharehold Limited for distrib. to sharehol Total Equity and Reserves As at January 1, 2010 854,755 127,227 - - - 83,918 31,000 (4,834) - - - 236,323-1,328,389 Changes in fair value of assets available-for-sale - - - - - - - 5,729 - - - - - 5,729 Changes in fair value of risk protection of cash flows - - - - - - - - - - - - - - Changes in fair value of risk protection of net investments in foreign operations - - - - - - - - - - - - - - Foreign exchange differences recognized in equity - - - - - - - - - - - - - - Deferred tax (assets)/liabilities recognized in equity - - - - - - - - - - - - - - Other - - - - - - - - - - - - - - Total unrealized profit /(loss) recognized in equity - - - - - - - 5,729 - - - - - 5,729 - - - - - - - - - - - - - - Shares issued during the period 307,498 - - - - - - - - - - - - 307,498 Profit/loss for the - - - - - - - - - - - 27,072-27,072 Distribution to statutory reserve - - - - - 3,658 - - - - - (3,658) - - Distribution to other reserves - - - - - - - - - - - - - - Dividends - - - - - - - - - - - - - - Purchase of treasury shares - - - - - - - - - - - - - - Sale of treasury shares - - - - - - - - - - - - - - Other changes in equity and reserves - - - - - - - - - - - (259,737) 259,737 - As at 1,162,253 127,227 - - - 87,576 31,000 895 - - - - 259,737 1,668,688 The accompanying notes are an integral part of these financial statements. 6
OHRIDSKA BANKA AD - OHRID STATEMENT OF CASH FLOWS Year ended () Operating activities Profit/(Loss) before taxation 30,757 28,923 Adjustment for: Depreciation of: Intangible assets 12,300 7,085 Property and equipment 61,876 55,386 Capital gain from: Sale of intangible assets - - Sale of property and equipment (593) - Sale of foreclosed assets - - Capital loss from: Sale of intangible assets - - Sale of property and equipment 45 194 Sale of foreclosed assets - - Interest income (1,021,058) (1,042,701) Interest expense 365,927 399,638 Net trading income - - Impairment losses of financial assets, net Additional impairment losses 178,189 289,695 Release of impairment losses (9,646) (169,265) Impairment losses of non-financial assets, net Additional impairment losses 339 2,701 Release of impairment losses - - Special reserve: Additional provisions 5,698 8,863 Release of provisions (3,693) (8,603) Dividend income (2,286) (6,997) Share of profit /(loss) of associates - - Other adjustments - (1,221) Interest received 1,010,023 1,043,332 Interest paid (353,567) (390,581) Profit/(loss) from operations before changes in operating assets: 274,311 216,449 (Increase)/decrease of operating assets: Trading assets - - Derivative assets held for risk management - - Loans and advances to banks 228,464 (218,768) Loans and advances to other customers (2,415,115) (1,535,505) Assets pledged as collateral - - Foreclosed assets 9,307 (6,301) Obligatory deposit in foreign currency (62,804) (588,026) Obligatory deposit held with NBRM according to special regulations - - Other receivables (21,020) (12,441) Deferred tax assets - - Non-current assets held-for-sale and disposal group - - Increase/(decrease) in operating liabilities: Trading liabilities - - Derivative liabilities held for risk management - - Due to banks (124,111) 153,518 Due to other customers 3,179,028 (1,317,014) Other liabilities 200,655 (2,697) Liabilities directly related to group or assets for disposal - - Net cash flow from operating activities before taxation 1,268,715 (3,310,785) (Paid)/received income tax - (2,642) Net cash flow from operating activities 1,268,715 (3,313,427) 7
OHRIDSKA BANKA AD - OHRID STATEMENT OF CASH FLOWS (Continued) Year ended () Cash flow from investing activities (Investments in securities) (42,070) (3,581) Inflows from sale of investment in securities - (Outflows from investment in subsidiaries and associates) - - Inflows from disposal of investment in subsidiaries and associates - - (Purchase of intangible assets) (38,140) (23,809) Inflows from sale of intangible assets - - (Purchase of property and equipment) (50,091) (52,016) Inflows from sale of property and equipment - 23,786 (Outflows from non-current assets held-for-sale) - - Inflows from non-current assets held-for-sale - - (Other outflows from investing activity) - - Other inflows from investing activity 2,286 6,997 Net cash flow from investing activities (128,015) (48,623) Cash flow from financing activities (Repayment of debt securities issued) - - Issued debt securities - - (Repayment of borrowings) (4,151,573) (554,314) Increase of borrowings 5,484,142 2,841,365 (Repayment of issued subordinated debts) - - Issued subordinated debts - - Inflows from issued shares/equity instruments during the period - - (Purchase of treasury shares) - - Disposal of treasury shares - - (Dividends paid) (57) - (Other financing outflows) - - Other financing inflows from financing 307,498 - Net cash flow from financing activities 1,640,010 2,287,051 Effect from allowance for impairment of cash and cash equivalents 202 2,522 Effect from foreign exchange differences of cash and cash equivalents - - Net increase/(decrease) of cash and cash equivalents 2,780,912 (1,072,477) Cash and cash equivalents as of 1 January 3,111,634 4,184,111 Cash and cash equivalents as of December 31, 5,892,546 3,111,634 The accompanying notes are an integral part of these financial statements. 8
OHRIDSKA BANKA AD - OHRID 1. INTRODUCTION a) General Information Ohridska banka AD, Ohrid was transformed into a shareholding company on December 29, 1989. The Bank s registered head office is located at Street Makedonski Prosvetiteli 19, 6000 Ohrid. The Bank operates in the Republic of Macedonia with a network of 1 branch and 11 sub-branches. The Bank is registered as a universal type of commercial bank in accordance with the Macedonian laws. The principal activities of the Bank are as follows: - Collecting deposits and other recurrent sources of funds; - Financing in the country and abroad, including factoring and financing commercial transactions; - Issuance and administration of payment instruments (cards, cheque, bills of exchange); - Financial leasing; - Foreign exchange operations; - Domestic and international payment operations, including purchase/sale of foreign currency funds; - Fast money transfer; - Issuing payment guarantees, backing guarantees and other forms of security; - Providing services of renting safe deposit boxes, depositories and depot; - Trading in instruments at the money market (bills of exchange, deposit certificates); - Foreign exchange operations (including commodities trading) - Trading in foreign currency funds, securities and financial derivatives; - Managing assets and securities portfolio at order and for account of clients; - Rendering services to custody bank; - Purchase/sale, guaranteeing and placement of securities issue; - Intermediating in selling insurance policies; - Intermediating in concluding agreements for loans and borrowings; - Data collection and analysis of companies credit rating; - Economic and financial consulting; - Other financial services defined by law, which can be performed only by a bank. The Bank is controlled by Societe Generale SA, incorporated in France, which owns 70.02% of the equity of the Bank and represents its ultimate parent company. The shares of the Bank are listed on Macedonian Stock Exchange on the market of publicly held companies with the special reporting requirements, and it is one of ten companies comprising the Macedonian Stock Exchange Index MBI-10. The ID quotation code is the following: Symbol OHB (common shares) ISIN code MKOHBA101012 9
OHRIDSKA BANKA AD - OHRID 1. INTRODUCTION (Continued) a) General Information (Continued) The Bank s financial statements for the ended, have been approved by the Bank s Supervisory Board on February 28, 2011. b) Basis of Preparation of the Financial Statements Accounting Standards The Bank maintains its accounting records and prepares its financial statements in accordance with the Company Law, Law on Banks and other regulations as prescribed by the National Bank of the Republic of Macedonia ( NBRM ), and the Decision on the Methodology for recording and valuation of accounting items and for the preparation of financial statements, and the Manual on the types and content of financial statements of banks, ( Official Gazette of the Republic of Macedonia no. 118/07, 80/09 and 157/09), issued by the NBRM, applicable since January 1, 2009. New standards, Amendments and Interpretations to Existing Standards Effective After 2010 On December 23, 2010, a new Decision on the Methodology for recording and valuating of accounting items and for the preparation of financial statements was published ( Official Gazette of the Republic of Macedonia no. 169/2010), which will be in force from January 1, 2011. The same day a new Manual on the types and content of financial statements of banks was published ( Official Gazette of the Republic of Macedonia no. 169/2010) which will be in force from December 31, 2011. Presentation of Financial Statements The accompanying financial statements of the Bank have been presented in accordance with the Guidelines on the prescribed form and content of the annual financial statements of the banks ( Official Gazette of the Republic of Macedonia no. 118/07, 80/09 and 157/09), (hereinafter referred to as the Guidelines ), which in certain aspects differ from the presentation of certain positions in the financial statements in accordance with the requirements of the International Accounting Standard (IAS) 1 - Presentation of Financial Statements. The Bank s Management estimates the influence of the changes in IAS, the new IFRS and their interpretation on the financial statements, as well as the requirements on the form and contents in accordance with the Guidelines and valuation of assets, liabilities, revenues and expenses in accordance with the Methodology. As a result, the Bank s management does not express an explicit and definite statement of compliance of the financial statements with IAS and IFRS, which are applicable in the accounting period of the accompanying financial statements. The accompanying financial statements have been prepared in accordance with the historical cost principle, except for the valuation of investments in financial assets held-for-sale which have been stated at fair value, and other financial assets and liabilities which stated at fair value through profit and loss under the going concern assumption. 10
OHRIDSKA BANKA AD - OHRID 1. INTRODUCTION (Continued) b) Basis of preparation of the financial statements (Continued) Presentation of Financial Statements (Continued) The presentation of the financial statements in accordance with the accounting standards applicable in the Republic of Macedonia requires the use of best estimates and reasonable assumptions by the Bank s management, which affects the presented values of assets and liabilities, and the revenues and expenses in the reporting period. These estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for estimation of the carrying amounts of assets and liabilities for which no other data is available. Actual results may differ from these estimates. The presented financial statements are expressed in thousands of Denars (MKD). The Denar represents the functional and reporting currency of the Bank for the purpose of reporting to NBRM.. The estimates and assumptions are reviewed on a continues basis. The revised accounting estimates are recognized in the period for which the estimate has been revised if it affects only that period, or in the period of the estimate and future periods if the revised estimate affects both periods the current and future period. Information regarding the significant areas for which there is uncertainty based on estimates and critical judgments in the implementation of the accounting policies with the most significant impact on the amounts disclosed in the financial statements are presented in Note 1.g). The Bank s financial statements have been prepared in accordance with the accounting policies disclosed in Note 1 c) to the financial statements. c) Summary of Significant Accounting Policies Interest Income and Expense Interest income and expense are recognized in the income statement for all interest bearing instruments on accrual basis, measured at amortized cost using the effective interest rate method. The effective interest rate method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and commissions paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Fee and Commission Income Fees and commissions, except the fees on approval of loans, are generally recognized on an accrual basis over the period of service rendering. Other fees relating to the acquisition and origination of loans are deferred over the life of the loan and amortized using the effective interest rate method. 11
OHRIDSKA BANKA AD - OHRID 1. INTRODUCTION (Continued) c) Summary of Significant Accounting Policies (Continued) Dividend Income Dividend income is recognized when the right to receive payment is established for all shareholders who participate in income distribution. Foreign Exchange Translation Transactions denominated in foreign currencies have been translated into Denars at rates set by the National Bank of the Republic of Macedonia ( NBRM ) at the dates of the transactions. Assets and liabilities denominated in foreign currencies are translated into Denars at the balance sheet date using official rates of exchange ruling on that date. 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 Denars by applying the official exchange rates at the balance sheet date. Financial Assets Financial assets are classified into the following specified categories: held-for-trading financial assets, available-for-sale financial assets, held-to-maturity financial assets and loans to banks and customers. The classification depends on the nature and the purposes of the financial assets and is determined at initial recognition. Financial assets are recognized and derecognized on trade date where the purchase or sale of an investment is under a contract which terms require delivery of the investment within the agreed timeframe. Held-for-trading Financial Assets Held-for-trading financial assets, which comprise securities issued in local currency by the Ministry of Finance are securities included in a portfolio in which a pattern of short-term profit making exists. Initially, these securities are recognized at cost and subsequently measured at fair value as determined based on their market price. All the respective realized and unrealized gains and losses are included under net trading income. Interest, if realized, during managing securities, is recorded as interest income. The sale of securities held-for-trading is recognized on trading date, which is the date when the Bank is obliged to buy/sell the asset. 12
OHRIDSKA BANKA AD - OHRID 1. INTRODUCTION (Continued) c) Summary of Significant Accounting Policies (Continued) Available-for-sale Financial Assets Available-for-sale financial assets are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. This portfolio comprises quoted and unquoted equity investments in shares of banks and other financial institutions and enterprises, where the Bank does not exercise control. Available-for-sale financial assets are initially recognized at cost, and subsequently re-measured at fair value based on quoted prices in active markets or amounts derived from cash flow models for unquoted equity investments. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognized in equity, until the financial asset is derecognized or impaired at which time the cumulative gain or loss previously accumulated in the revaluation reserves should be recognized in profit or loss. Interest calculated using the effective interest method, impairment losses and foreign exchange gains and losses are recognized in the income statement. Held-to-maturity Financial Assets Held-to-maturity financial assets are financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity. If the Bank is to sell other than an insignificant amount of held-to-maturity assets, the entire category would be reclassified as available-for-sale. These securities are measured at amortized cost using the effective interest rate method. Loans Originated by the Bank Loans originated by the Bank include loans where cash is provided directly to the customer. Loans are initially recognized at fair value, including any transaction costs, and are subsequently measured at amortized cost using the effective interest rate method. Interest on loans originated by the Bank is included in interest income and is recognized on an accrual basis. Loans to customers and financial institutions are stated at their net amount reduced by allowance for impairment and uncollectibility. 13
OHRIDSKA BANKA AD - OHRID 1. INTRODUCTION (Continued) c) Summary of Significant Accounting Policies (Continued) Impairment of Financial Assets The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the income statement. The amount of the impairment loss for financial assets carried at amortized cost is calculated as the difference between the asset s carrying amount and the present value of expected future cash flows discounted at the financial instrument s original effective interest rate. Impairment Losses on Loans and Advances Allowances for impairment and uncollectibility are determined if there is objective evidence that the Bank cannot collect all amounts due on a claim according to the original contractual terms. A claim means a loan, a commitment such as a letter of credit, guarantee or commitment to extend the credit. A provision for loan impairment is reported as a reduction of the carrying amount of the loan, whereas for offbalance sheet items are presented within the provisions. Additions to provisions are made through impairment losses on financial assets in the income statement. The allowances for impairment and uncollectibility are determined according to the regulative of the NBRM ruling on each balance sheet date, according to which the Bank is liable to classify the assets and off-balance sheet items in groups, according to their specific level of risk and to estimate the outcome of potential losses which are calculated by applying objective and subjective metrics, as of and 2009, by applying the following percentages: Risk category Percent A 0%-10% B 10%-25% V 25%-50% G 50%-75% D 75%-100% 14
OHRIDSKA BANKA AD - OHRID 1. INTRODUCTION (Continued) c) Summary of Significant Accounting Policies (Continued) Impairment Losses on Loans and Advances (Continued) The allowances for impairment and uncollectibility are determined on the basis of the degree (size) of the risk of uncollectibility or specific country risk on the basis of the following principles: - Separate loan exposures (risks) are assessed on the basis of the type of loan applicant, his/her/its overall financial position, resources and payment records and recoverable value of collaterals. Allowances for losses on impairment and uncollectibility are measured and determined for the difference between the carrying amount of the loan and its estimated recoverable amount, which is, in fact, the present value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted by effective loan interest rate. - Losses on impairment and uncollectibility is termination of the calculation of interest income as per agreed terms and conditions, while the loan is classified as non-performing since the contractual liabilities for payment of the principal and/or interest are in default, i.e. uncollected for a period longer than 90 days. All allowances for losses on impairment and uncollectibility are reviewed and tested at least quarterly, and any further changes in the amount and timing of expected future cash flows in comparison to previous assessments result in changes in allowances for losses on impairment and uncollectibility recorded in the income statement. - The loan which is believed that is impossible to be collected is written off against the relevant allowance for losses on impairment and uncollectibility. Further collections are recorded as reduction of losses on impairment and uncollectibility in the income statement. - In case of loans granted to borrowers in countries with increased risk of difficulties for servicing external debt, the political and economic circumstances are assessed and additional allowances for sovereign risk are allocated. Derecognition of Financial Assets The Bank derecognizes financial assets when the right to receive cash from the financial asset has expired or has transferred its rights to receive cash flows from the asset and substantially all the risks and rewards of ownership of the assets to another entity. Financial Liabilities Financial liabilities are classified in accordance with the substance of the contractual arrangement. Financial liabilities are classified as deposits from banks, financial institutions and customers, loans payable, other payables and derivative financial instruments. Deposits from Banks and Other Financial Institutions and Customers These financial liabilities are initially recognized at fair value net of transaction costs incurred. Subsequently they are measured at amortized cost. Loans Payable Loans payable are initially recognized at fair value net of transaction costs incurred. Subsequent measurement is at amortized cost and any difference between net proceeds and the redemption value is recognized in the income statement over the period of the loan using the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability. 15
OHRIDSKA BANKA AD - OHRID 1. INTRODUCTION (Continued) c) Summary of Significant Accounting Policies (Continued) Other Payables Other payables are stated at their nominal amounts. Derecognition of Financial Liabilities The Bank derecognizes financial liabilities when, and only when, the Bank s obligations are discharged, cancelled or have expired. Property and equipment Property and equipment is recorded at cost, less accumulated depreciation and accumulated impairment losses. Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately is capitalized. Other subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of property and equipment. All other expenditures are recognized in the income statement as an expense as incurred. Depreciation is charged at estimated rates so as to write off the cost of assets over their estimated useful lives, using the straight-line method. No depreciation is provided on construction in progress until the constructed assets are put into use. The annual depreciation rates are as follows: Buildings 2.5% -5% Furniture and equipment 10% - 25% The gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the profit and loss. The Bank annually reviews its property and equipment for impairment. Where the carrying amount on an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Intangible Assets Intangible assets are assets acquired separately and are reported at cost less accumulated amortization and accumulated impairment losses, if any. Intangible assets include computer software and software that was acquired apart from hardware. Expenditure on software is amortized on a straight-line basis over the estimated useful life, which is five s. The Bank annually reviews its intangible assets and assess whether there is any indication for impairment. If such indications exist, an estimate is performed to assess whether the carrying amount is recoverable. If the carrying amount exceeds the recoverable amount, it is written down to the recoverable amount. Impairment of Tangible and Intangible Assets The Bank s management regularly reviews the carrying amounts of the Bank s tangible and intangible assets. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized as an expense of the current period. A reversal of an impairment loss is recognized as income immediately. 16
OHRIDSKA BANKA AD - OHRID 1. INTRODUCTION (Continued) c) Summary of Significant Accounting Policies (Continued) Assets Acquired Through Foreclosure Proceedings Foreclosed assets include property and equipment acquired through foreclosure proceedings in full or partial recovery of a related loan and is disclosed in other receivables. These asset are initially measured at the lower of the cost of the loan, including transaction costs (usually the cost value of the loan stated in an enactment passed by a competent body from where the legal grounds for acquiring of ownership arises) and the fair value less estimated cost to sell, as determined by local certified appraiser on the date of asset foreclosure. After initial recognition, foreclosed assets are reviewed for impairment at least annually and are measured at the lower of their carrying amount less estimated costs to sell and accumulated impairments. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and nostro accounts, that represent demand deposits and placements with other banks and financial institutions, unrestricted account balances with the NBRM and other financial assets such as treasury and other eligible bills, as highly liquid assets with maturity up to three months and insignificant changes to fair value. Managed funds The Bank provides fiduciary and trust services to legal entities and citizens, whereby it holds and manages assets or invests funds received in various financial instruments at the direction of the customer. The Bank receives fee income for providing these services. Managed funds are not assets of the Bank and are not recognized in the financial statements. The Bank is not exposed to any credit risk relating to such placements, as it does not guarantee these investments. Provisions Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, it is probable that the Bank will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. Employment benefits Health, pension and social insurance contributions from gross wages and salaries are being paid by the Bank during the to the national organizations at the statutory rates. Such contributions represent defined contribution benefit plans and are recognized as an expense when employees have rendered services entitling them to the contributions. There is no additional liability to these plans. 17
OHRIDSKA BANKA AD - OHRID 1. INTRODUCTION (Continued) c) Summary of Significant Accounting Policies (Continued) Employment Benefits (Continued) The Bank does not have defined plans for severance payment or options for other compensations as of. The Bank s management estimates that present value of future liabilities towards employees relating to severance payment and jubilee expenses is not material as of December 31, 2010 and 2009. Income Tax The current income tax payable is calculated based on the local tax regulation by using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax base used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that future taxable profits will be available against which those deductible temporary differences can be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is to be settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. Leases The Bank leases assets as operating leases. Rental income and expenses are recognized in the income statement on a straight-line basis over the term of the lease. d) Critical Accounting Judgments and Estimates The most significant areas, for which judgments, estimates and assumptions are required, are: Fair Value of Financial Instruments The fair values of the financial instruments that are not quoted in active markets are determined using internal valuation techniques. These include present value methods, models based on observable input parameters. All valuation models are validated before they are used as a basis for financial reporting, and periodically reviewed by qualified personnel independent of the area that created the model. Wherever possible, the Bank compares valuations derived from models with quoted prices of similar instruments, and with actual values when realized, in order to further validate and standardized models. A variety of factors are incorporated into the models, including actual or estimated market prices and rates, such as time value and volatility, and market conditions and liquidity. The Bank applies its models consistently from one period to the next, ensuring comparability and continuity of valuations over time, but estimating fair value inherently involves a significant degree of judgment. 18
OHRIDSKA BANKA AD - OHRID 1. INTRODUCTION (Continued) d) Critical Accounting Judgments and Estimates (Continued) Fair Value of Financial Instruments (Continued) In the Republic of Macedonia sufficient market experience, stability and liquidity do not exist for the purchase and sale of receivables and other financial assets or liabilities, for which published market prices are presently not readily available. The Management assesses its overall risk exposure and in instances in which it estimates that the value in the books may not be realized, it recognizes a provision. In the opinion of management, the reported carrying amounts for the assets that are not quoted in an active market represent the most valid and useful reporting values under the present market conditions. Allowance for Loan Losses The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the income statement, the Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in the Bank, or national or local economic conditions that correlate with defaults on assets in the Bank. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Useful Lives of Tangible and Intangible Assets The Bank s management determines estimated useful lives and related depreciation and amortization charges for its tangible and intangible assets. The appropriateness of the estimated useful lives is reviewed annually or whenever there is an indication of significant changes in the underlying assumptions, such as anticipated technological developments and changes in the broad economic and industry factors. Financial Crises Developments on the financial markets, may affect future cash flows of the Bank that otherwise would be expected under the regular public interest. As a result, future cash flows are subject to possible fluctuations and whether the fluctuations are significant relative to the previously expected cash flows remains uncertain. 19
OHRIDSKA BANKA AD - OHRID 1. INTRODUCTION (Continued) e) Changes in the Accounting Policies, Accounting Estimates and Correction of Inaccuracies There are no changes in the accounting policies, accounting estimates or correction of errors in these financial statements. f) Compliance with Regulation The Bank Maintains its accounting records and prepares its financial statements in accordance with the local regulations prescribed by the NBRM. The accompanying financial statements are in compliance with legal regulation prescribed by the NBRM which is in force on each balance sheet date. 2. RISK MANAGEMENT The Bank s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the business, and the operational risks are an inevitable consequence of being in business. The Bank s aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank s financial performance. The Bank s risk management policies are designed to identify and analyze these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice. The Bank s risk management organization structure ensures existence of clear lines of responsibility, efficient segregation of duties and prevention of conflicts of interest at all levels, including the Supervisory Board, Executive and Senior Management, as well as between the Bank and the Societe Generale Group, its customers and all other related parties. The most important types of risk are credit risk, liquidity risk, market risk and operational risk. 2.1 Credit Risk The Bank is exposed to credit risk which represents the risk of financial loss due to customer s default on their contractual obligations. Credit risk is the most important risk for the Bank s operations, therefore the management carefully manages the Bank s exposure to credit risk. The exposure to this risk arises principally from lending activities and advances, as well as activities related to off-balance sheet financial instruments, such as loan commitments, L/G and L/C. 20
OHRIDSKA BANKA AD - OHRID 2. FINANCIAL RISK MANAGEMENT (Continued) 2.1 Credit risk (Continued) 2.1.1 Credit Risk Measurement, Limits and Mitigation Policies Initially, when approving loans and loan commitments, different Credit Committees assess creditworthiness of the clients depending on the type and size of the exposure based on defined criteria. The Bank s credit risk management, which encompasses identification, measurement, monitoring and control of credit risk, is performed by the Risk Management Committee and Committee for classification of assets and provisioning for potential losses, commitments and contingencies and it is mainly based on reports and analyses prepared by relevant organization units of the Bank. The Board of Directors and Supervisory Board are regularly informed of the credit risk that the Bank is exposed to. The Bank has an internal system of client classification the main purpose of which is to determine their creditworthiness and assess the acceptable level of credit risk at the start of lending. The Bank employs a range of practices to mitigate credit risk. Common practice is accepting suitable collateral for approved loans. The main collateral types for loans and other credit exposures are: Mortgages over residential properties; Charges over business assets such as premises, inventory and accounts receivable; Charges over financial instruments such as debt and equity securities; Pledges over movables, such as vehicles, equipment and other. 2.1.2 Impairment and Provisioning Policies The impairment losses are identified losses of the Bank credit portfolio that incurred at the balance sheet date and for which there is objective evidence of impairment. The Bank calculates the impairment provision after making the classification of credit exposure in the appropriate risk category. The classification is made according to the following criteria: Client s creditworthiness; Client s regularity in settling the liabilities, and Collateral quality. According to the Bank policies, impairment and provisioning are defined on an individual basis, considering all exposures as individually significant. Impairment provision of individually assessed items on individual base are determined by evaluation of generated loss on the balance sheet date, which represents difference between the carrying and current value of projected future cash flows. Effective interest rate is used at discounting the future cash flows that include also the collateral value. The calculated impairment provision is within the following parameters: From 0% to 10% of credit exposure, classified in risk category A Over 10% to 25% of credit exposure, classified in risk category B Over 25% to 50% of credit exposure, classified in risk category V Over 50% to 75% of credit exposure, classified in risk category G Over 75% to 100% of credit exposure, classified in risk category D 21
OHRIDSKA BANKA AD - OHRID 2. FINANCIAL RISK MANAGEMENT (Continued) 2.1 Credit risk (Continued) А. Analysis of maximum exposure to credit risk Loans and advances to banks Loans and advances to customers Investment in financial assets available-for-sale Current 2010 Previous 2009 Investment in financial assets heldto-maturity Current 2010 Previous 2009 Cash and cash equivalents Fee and commission receivables Other receivables Off-balance sheet exposure I. Carrying amount of exposure with an allowance for impairment/special reserve Carrying amount of individually significant exposures, before the allowance for impairment and the special reserve, on individual basis Risk category А - 225,000 9,807,752 7,633,410 20,417 19,117 - - 1,047,867 314,803 2,835 1,914 138 3 3,952,199 2,444,068 14,831,208 10,638,315 Risk category B - - 168,053 91,142 - - - - - - 86 1,080-374 4,438 10,355 172,577 102,951 Risk category V - 304 211,917 318,774 - - - - - - 511 1,152 5 49 15,055 11,327 227,488 331,606 Risk category G - - 108,100 122,659 - - - - - - 53 407-454 318 2,490 108,471 126,010 Risk category D 23,047 20,051 566,732 364,781 - - - - - - 5,891 2,295 5,452 1,949 1,555 1 602,677 389,077 23,047 245,355 10,862,554 8,530,766 20,417 19,117 - - 1,047,867 314,803 9,376 6,848 5,595 2,829 3,973,565 2,468,241 15,942,421 11,587,959 (Allowance for impairment and special reserve, on individual basis) (23,047) (20,413) (659,917) (499,146) (20) (19) - - (308) (171) (5,533) (2,683) (4,089) (2,193) (7,049) (10,742) (699,963) (535,367) Carrying amount of individually significant exposures,reduced by allowance for impairment and the special reserve, on individual basis - 224,942 10,202,637 8,031,620 20,397 19,098 - - 1,047,559 314,632 3,843 4,165 1,506 636 3,966,516 2,457,499 15,242,458 11,052,592 Current 2010 Total Previous 2009 22