KREDITNA BANKA ZAGREB d.d. - kbz.hr banka FS_ 2016_eng.pdf · Silvije Orsag Member of the...

KREDITNA BANKA ZAGREB d.d.

Financial statements for the year ended 31 December 2016

together with the Independent Auditor's Report

Kreditna banka Zagreb d.d. 31 December 2016

Contents Page Annual report for the year 2016 1 - 14 Declaration on the application of the Corporate Governance Code 15-16 Responsibility for the financial statements 17

Independent Auditor’s Report 18 - 24

Financial statements

Statement of comprehensive income for the year ended 31 December 2016 25

Statement of financial position as at 31 December 2016 26

Statement of changes in equity for the year ended 31 December 2016 27

Statement of cash flows for the year ended 31 December 2016 28

Notes to the financial statements 29

Appendix 1 – Supplementary statements for the Croatian National Bank 89

Appendix 2 – Reconciliation of financial statements and supplementary statements for the Croatian National Bank

96


Zagreb, 25 April 2017

MANAGEMENT REPORT ON THE BANK’S OPERATIONS IN 2016

MANAGEMENT BOARD OF THE BANK


3

MANAGEMENT REPORT ON THE BANK’S OPERATIONS IN 2016

Contents:

1. Management Board and Supervisory Board of the Bank

2. Operations of Kreditna banka Zagreb d.d.

Business environment and financial result for 2016

Expectations in 2017

3. Operating risks

4. Information on the purchase of treasury shares

5. Events after the balance sheet date


4

1. MANAGEMENT BOARD AND SUPERVISORY BOARD OF THE BANK

MANAGEMENT BOARD Boris Zadro President of the Management Board since 19 February 2015 Nataša Jakić Felić Member of the Management Board since 19 February 2015 SUPERVISORY BOARD Nadira Eror President of the Supervisory Board Ankica Čeko Deputy president of the Supervisory Board since 13 February 2015 Ivan Penić Member of the Supervisory Board since 13 February 2015 Silvije Orsag Member of the Supervisory Board since 24 February 2016

2. OPERATIONS OF KREDITNA BANKA ZAGREB D.D.

Kreditna banka Zagreb d.d. (hereinafter: the “Bank”) was incorporated as a public limited liability

company in accordance with applicable laws of the Republic of Croatia. It was registered at the

Commercial Court in Zagreb in 1994. The Bank's registered office is in Zagreb, Ulica grada Vukovara 74.

The principal activities of the Bank include all types of corporate and retail deposit and lending

operations, domestic and foreign payment transactions, issuance of guarantees, bills of exchange

and other forms of guarantees, repurchase of recourse or non-recourse receivables, finance leases

(leasing), payment services in compliance with special laws, rental of safes, credit-related services

such as data collection, preparation of analyses, issuance of other payment instruments and their

management, custody of financial instruments, securities trading, investment and ancillary services

and activities prescribed by a special law regulating the capital market and other banking services.

The Bank performs insurance agency operations in accordance with the insurance laws, in the part

that relates to bank insurance activities, based on the Approval dated 14 February 2007.

The Bank performs its operations through a business network of 21 branch offices and 3 local offices at the following addresses:

o Branch office Zagreb, Ulica grada Vukovara 74

o Branch office Zagreb, Koledinečka 1

o Branch office Jastrebarsko, Šetalište braće Kazića 2

o Branch office Velika Gorica, Slavka Kolara 17A

o Branch office Karlovac, Prilaz Većeslava Holjevca 2A

o Branch office Kutina, Školska ulica 11

o Branch office Sisak, Frane Lovrića 17A

o Branch office Zaprešić, Mihovila Krušlina 14

o Branch office Varaždin, Zagrebačka 63

o Branch office Split, Varaždinska 54


5

o Branch office Split, Matice Hrvatske 1

o Branch office Split, Domovinskog rata 60

o Branch office Makarska, Obala kralja Tomislava 15A

o Branch office Zadar, Obala kneza Branimira 5

o Branch office Rijeka, Riva 8

o Branch office Poreč, Ulica Alda Negria 3

o Branch office Osijek, Vukovarska cesta 31

o Branch office Osijek, Hrvatske Republike 12

o Branch office Slavonski Brod, Petra Svačića 1A

o Branch office Vinkovci, Ulica bana Jelačića 3

o Branch office Dubrovnik, Dr. Ante Starčevića 20

o Local office Sinj, Splitska 1

o Local office Opuzen, Tisno b.b.

o Local office Zvijezda, Zagreb, Marijana Čavića 1.

Kreditna banka Zagreb d.d. has no subsidiaries in EU member states or in third countries, i.e. its activity is performed solely in the territory of the Republic of Croatia.


6

Business environment and financial result for 2016

Another very dynamic business year has passed, a year in which we have long since felt a slight macroeconomic recovery and positive signs in business operations of our entrepreneurs. The economy has achieved a very solid growth of over 2.5%, i.e. a growth of the gross domestic product of 3%. The final results of banks have also taken a positive turn, which after the effects of the CHF loans conversion in 2015, have achieved a very good, some banks even a record, business result. In such circumstances, Kreditna banka Zagreb d.d. has operated very well with a slight growth in the Bank’s assets, which is especially valuable when it is evident that it consists of the growth of the substance of the banking business, i.e. loans to legal entities and natural persons. In the past year, we have also been very actively considering the operating margins of the business where we managed to slow down the trend of decreasing active rates to the trend of decreasing passive rates. The realised fall in gross interest income is considerably lower than the fall in interest expense, as newly-made deposits to natural persons, still being the main source of finance, are more favourable than the previously agreed rates. Nevertheless, the structure of the Bank's sources of finance experiences a significant turnaround. Namely, as seen in the structure of Bank's assets, a significant part refers to the securities portfolio (mainly government bonds). In addition to the interest income earned by this kind of investment, the Bank has also used the securities from its own portfolio as a source of very favourable borrowing at the Croatian National Bank through structural repo auctions. In these transactions, the Bank has provided sources at very low fixed interest rates, which it continued to offer to highly creditworthy clients (clients with whom the Bank could not do business in the past given the client's desired cost of capital and the Bank's capability to provide it). We have also successfully used the volatility of bond prices and at favourable times we realised the purchase or sale and achieved a respectable result in the category of available-for-sale financial assets. In responding to the challenges of the business environment, the Bank's management has undertaken ongoing activities in terms of revising the terms and conditions for expanding the offer of placements to legal entities and the public, as well as other products of the Bank. In creating a new loan offer, we have put special focus on the adequacy of collaterals, which is why we have succeeded in achieving an ever-increasing level of adequacy at levels above 17%. The rate of non-performing placements of the Bank is still lower than the market average, both in terms of the portfolio of loans to legal entities and the portfolio of loans to individuals. Throughout the year, the collection of non-performing placements was one of the key business goals. In that respect, we redefined business processes, some being fully automated, and hired additional staff. In conclusion, the Bank's business is stable, profitable, at a significantly higher level of capitalisation than the one envisaged by the law and the Regulator. We would like to use this opportunity to thank all our employees who, with their support, dedication and professionalism, contributed to the result we are very pleased with.


7

SUMMARY OF INDICATORS

HRK'000 31 December 2016

ASSETS 3,550,592

LOANS 1,795,143

DEPOSITS 2,598,001

REGULATORY CAPITAL 334,662

INCOME 202,829

PROFIT BEFORE PROVISIONS 43,744

BANK’S RANKING IN CROATIA 10

BALANCE SHEET

The Bank’s total assets amounted to HRK 3.5 billion at the end of the year. In 2016, they increased

by 2.33%. Loans to customers amounted to HRK 1.8bn and accounted for 50% of the total assets of

the Bank, which is 7% higher than in 2015.

Bank liabilities are dominated by customer deposits (HRK 2.6bn), accounting for 74% of the

balance sheet, and decreased by 10% compared to the end of 2015.

ASSETS

2016

2015

Index 16/15

Cash and balances with Croatian National Bank 518,381 569,390 91

Placements with other banks 121,458 205,354 59

Financial assets at fair value through profit or loss 12,277 12,156 101

Loans to customers 1,795,143 1,672,935 107

Held-to-maturity investments 120,800 67,621

179

Available-for-sale investments 834,004 781,022 107

Tangible and intangible assets 96,791 97,802 99

Other assets 51,738 63,399 82

TOTAL ASSETS 3,550,592 3,469,679 102


8

LIABILITIES

2016

2015

Index 16/15

Deposits from other banks 15,116 -

Deposits from customers 2,598,001 2,905,692 89

Borrowings 480,478 126,500 380

Issued subordinated and hybrid instruments 82,000 82,000

100

Other liabilities 65,150 72,502 90

Provisions for contingent liabilities 1,951 2,150 91

TOTAL LIABILITIES 3,242,696 3,188,844 102

SHAREHOLDERS’ EQUITY

2016

2015

Index 16/15

Share capital 193,775 193,775 100

Share premium 50,541 50,541 100

Profit/loss for the year 13,575 8,349 163

Reserves and retained earnings 38,669 35,320 109

Unrealised loss/gains on available-for-sale financial assets 11,336 (7,150) (159)

TOTAL SHAREHOLDERS’ EQUITY 307,896 280,835 110

TOTAL EQUITY AND LIABILITIES 3,550,592 3,469,679 102

INCOME STATEMENT

All circumstances described in the introductory section of this report are clearly defined and

reported in the Bank’s income statement.

The total income of the Bank amounted to HRK 203 million. Compared to the previous year it

decreased by 3%, i.e. by HRK 6 million.

In the structure of income, interest income accounts for the most significant portion with 71%,

while in 2015, interest income had a share of 81% in total income.

In 2016, interest income fell by 14% or HRK 24 million compared to 2015 and in 2016, it amounted

to HRK 143 million. In 2016, net interest income amounted to HRK 69 million and in 2015 HRK 64

million.

Fee and commission income did not experience higher fluctuations and remained at similar levels,

i.e. they increased by HRK 1.4 million or 5% compared to the previous year.


9

Net fee and commission income increased in 2016 and amounted to HRK 20.8 million, while in the

previous year it amounted to HRK 18.6 million.

In 2016, total sales amounted to HRK 186 million and are lower by HRK 14 million compared to the

previous year. Interest expense decreased by HRK 28 million due to falling interest rates on

customer deposits and a reduction in the deposit base of customers.

The fee and commission expense decreased, as well as administrative and general expenses by HRK

2 million.

Impairment and provision expenses increased significantly by HRK 17 million or 163% compared

to the previous year.

Operating expenses account for 41% in the total cost structure (2015: 38%).

In 2016, fee and commission expenses were slightly lower than in the previous year.

INCOME STATEMENT

2016

2015

Index 16/15

Interest and similar income 143,434 167,335 86

Interest and similar expense (74,909) (103,243) 73

Net interest income 68,525 64,092 107

Fee and commission income 28,716 27,300 105

Fee and commission expense (7,894) (8,615) 92

Net fee and commission income 20,822 18,685 111

Net gains from dealing in foreign currencies 10,856 9,776 110

Net gains from fair valuation of securities 121 156 77

Gain/loss from available-for-sale financial assets 17,338 2,492 696

Gain/loss from held-to-maturity financial assets - - -

Other operating income 2,261 1,296 182

Net operating income 119,923 96,497 124

Operating expenses (76,179) (77,879) 98

Impairment losses and provisions (26,606) (10,093) 264

Profit before tax 17,138 8,525 201

Income tax 3,563 176 2,024

Net profit for the year 13,575 8,349 163

INTEREST INCOME

2016

2015

Index 16/15


10

Loans to corporate clients 78,068 94,860 82

Loans to citizens 32,448 34,410 94

Placements with other banks 126 553 23

Debt securities 25,952 30,461 85

Other companies 6,840 7,051 97

Total interest income 143,434 167,335 86

INTEREST EXPENSE

2016

2015

Index 16/15

Citizens 53,645 77,032 70

Corporate clients 6,350 11,473 55

Banks 6,929 2,601 266

Other companies 5,056 8,070 63

Non-residents 2,929 4,067 72

Total interest expense 74,909 103,243 73

FEE AND COMMISSION INCOME

2016

2015

Index 16/15

Fee and commission income from corporate clients 16,528 16,709 99

Fee and commission income from citizens and craftsmen 5,120 4,822 106

Fee and commission income from banks 7,068 5,769 123

Total fee and commission income 28,716 27,300 105

FEE AND COMMISSION EXPENSE

2016

2015

Index 16/15

Fee and commission for domestic payment transaction services 5,258 5,733 92

Other fees and commissions 2,636 2,882 91

Fee and commission income from banks 7,894 8,615 92


11

EXPECTATIONS IN 2017

The realised business result of the Bank and the banking sector of the Republic of Croatia once

again undoubtedly underscores the thesis on the scope and intensity of the impact of economic

circumstances. Available macroeconomic forecasts for 2017 and the expected growth of the

Croatian economy continue to provide room for business optimism.

The legal framework will surely play an important role in the business results of 2017. We have

witnessed many times that its instability or the influence of socio-political decisions may

discourage investors, and they are of crucial importance to us; investments are the "engine" of

every economy. We have recently witnessed the adoption of emergency legal measures whose

effects will be strongly felt for a long period of time.

In such circumstances, we at KBZ continue to maintain the strategic goals we have set for ourselves,

i.e. further strengthening the market position by increasing our own efficiency and recognisability,

which means monitoring trends in banking and maximising the satisfaction of our clients.

3. OPERATING RISKS

The most significant types of financial risk to which the Bank is exposed are credit risk, liquidity

risk, market risk and operational risk. Market risk includes currency risk, interest rate risk and debt

and equity quoted securities price risk.

The Bank has established an integrated system of risk management by introducing a set of policies

and procedures and establishing the limits of risk levels acceptable to the Bank. The methodology

and models for managing operational risk have been developed.

a) Credit risk

The Bank takes on exposure to credit risk which is the risk upon that the counter party will be

unable to pay amounts in full when due. The Bank structures the levels of credit risk it undertakes

by placing limits on the amount of risk accepted in relation to one borrower, or groups of

borrowers, and to industry segments. Such risks are monitored on a revolving basis and subject to

an annual or more frequent review.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential

borrowers to meet interest and principal repayment obligations and by changing these lending limits

where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate

and personal guarantees. In accordance with the legal provisions governing the internal control system,

when approving loans the Bank has established decision-making levels governed by the principle that

when the loan approval decision is not made by the Bank's Management Board and the amount of client

exposure exceeds the internally specified amounts of client exposure, at least two persons should

participate, whereby the person with the sales function makes a decision which is approved by the

person from the Credit Risk Assessment Service or a member of the Management Board responsible for

control functions. Also, prior to making a decision in case when the client's exposure exceeds certain

internally established exposure amounts, the draft decision of the sales function is subject to a review

by the Credit Risk Assessment Service.

In addition the Bank monitors and analyses the structure and quality of its loan portfolio through

different indicators pointing to the improvement or deterioration in asset quality of the Bank, thus

enabling the Bank a better credit risk management as well as timely actions in order to reduce

credit risk. Also, the Bank monitors and analyses the degree of concentration of loans by sector and

the largest client exposures using the HHI index methodology.


12

Credit related commitments

The primary purpose of these instruments is to ensure that funds are available to a customer as

required. Guarantees and standby letters of credit represent irrevocable assurance that the Bank

will make payments in the event that customer cannot meet its obligations to third parties and

carry the same credit risks as loans given. Documentary and commercial letters of credit are

written undertakings on behalf of a customer authorizing a third party to draw drafts on the Bank

up to a stipulated amount under specific terms and conditions.

Letters of credit are secured by collateral in the form of goods to which they relate.

Loans are classified into the following three main groupings, in accordance with the regulations of

the CNB:

fully recoverable loans – A Risk Group – measured on the collective basis

partially recoverable loans – B Risk Group – measured on an individual basis, or on the

collective basis for a "small loans portfolio" that are not sued, or secured by adequate

collateral according to the CNB Decision on Classification of Placements and Off-Balance-

Sheet Liabilities of Credit Institutions

fully irrecoverable loans – C Risk Group – measured on an individual basis, or on the

collective basis for a "small loans portfolio" that are not sued, or secured by adequate

collateral according to the CNB Decision on Classification of Placements and Off-Balance-

Sheet Liabilities of Credit Institutions

All three levels contain sub-categories, which are mandatory for partially recoverable loans. In

certain cases, the Bank's policy is to require a suitable guarantee prior to the disbursement of

approved loans. Collateral for loans, guarantees and letters of credit is usually in the form of

deposits, pledges, investments, housing or commercial mortgages, bills of exchange, promissory

notes or other types of assets.

Commitments to lend represent unused portions of authorizations to extend credit in the form of

loans, guarantees or letters of credit. With respect to credit risk on commitments to lend, the Bank

is potentially exposed to loss in an amount equal to the total unused commitments. However, the

likely amount of loss is less than the total unused commitments, as most commitments to lend are

contingent upon customers maintaining specific credit standards. The Bank monitors the term to

maturity of credit commitments because long-term commitments generally have a greater degree

of credit risk than short-term commitments.

b) Liquidity risk

The Bank is exposed to daily calls which it settles through available cash resources, which include

overnight deposits, current account funds, maturing deposits and loan drawdowns.

The matching and controlled mismatching of the maturities and interest rates of assets and

liabilities is fundamental to the management of the Bank. It is unusual for banks ever to be

completely matched since business transacted is often of uncertain term and of different types. An

unmatched position potentially enhances profitability, but can also increase the risk of losses.

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-

bearing liabilities as they mature, are important factors in assessing the liquidity of the Bank and its

exposure to changes in interest rates and exchange rates. Liquidity requirements to support

guarantee payments and standby letters of credit are considerably less than the amount of the


13

commitment because the Bank does not generally expect the third party to draw funds under the

agreement.

The Bank carries out its liquidity risk management through a gap analysis in which the maturity of

assets and liabilities are divided into several time categories and differences are observed in certain

time categories in order to timely harmonise its assets and liabilities. In addition, the Bank

monitors and analyses the movement of the minimum liquidity ratio (weekly and monthly) in

terms of legislation and established internal limits. In the event that an indicator of the minimum

liquidity ratio falls below the internally prescribed limits, the Risk Control Department shall inform

the Assets and Liabilities Commission as well as the Bank’s Management Board in order to take

measures. As of 1 January 2017, the statutory obligation of monitoring this indicator ceased.

In accordance with EU regulations, the Bank monitors and analyses the movement of the liquidity

coverage ratio in terms of legislation and established internal limits. In the event that the liquidity

coverage ratio falls below the internally prescribed limits, the Risk Control Department shall inform

the Assets and Liabilities Commission as well as the Bank’s Management Board in order to take

measures.

The total outstanding contractual amount of commitments to extend credit at the balance sheet

date does not necessarily represent future cash flows, since many of these commitments will expire

or be terminated without being funded.

c) Market risk

The majority of available-for-sale instruments are subject to market risk, the risk that future

changes in market conditions may impair the value of the instrument. The instruments are

recognised at fair value, and all changes in market conditions directly affect net trading income. The

Bank manages its use of trading instruments in response to changing market conditions.

The limits are defined following the needs and strategy of the Bank and in accordance with the

senior management risk policy provisions.

The exposure to market risk is formally managed in accordance with the risk limits approved by the

senior management and revised at least annually. The exposure figures and limit utilization are

delivered to the Treasury Division on a daily basis. In addition, limit control is performed by the

Risk Control Department as a second level of control, which in the case of exceeding certain limits

of market risk notifies the Management Board.

d) Interest rate risk

The Company is exposed to various risks associated with the effect of changes in market interest

rates on its financial position and cash flows. The interest rate gap table summarises the Bank's

exposure to interest rate risks. Included in the table are the Bank’s assets and liabilities at carrying

amounts, categorized by the earlier of contractual re-pricing or maturity dates (see Note 33).

The Bank carries out the control and analysis of interest rate risk exposure via a standard interest

rate shock, a methodology prescribed by by-laws and according to which the interest rate risk in

the banking book is viewed as a change in the value of banking book in relation to its regulatory

capital. In addition to statutory limits, the Bank prescribed internal limits that are monitored by the

Risk Control Department and in case they are exceeded, it notifies the Assets and Liabilities

Commission as well as the Management Board of the Bank.


14

e) Foreign exchange risk

The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange

rates on its financial position and cash flows. The Bank sets limits on the level of exposure by

currency and in total for both overnight and intra-day positions.

In addition to monitoring currency risk and open foreign currency position on a daily basis, in

accordance with the by-laws, the Bank monitors and analyses the impact of the currency risk on the

basis of stress tests under certain conditions. Monitoring with the use of the VAR indicators

methodology is also being introduced.

Foreign currency balance sheet and foreign exchange risk table summarizes the Bank’s exposure to

foreign currency exchange rate risk at 31 December 2016 and 31 December 2015. Included in the

table are the Bank’s assets and liabilities at carrying amounts, categorised by domestic currency

and foreign currency (see Note 34).

f) Equity price risk

Equity price risk is the possibility that equity prices will fluctuate affecting the fair value of equity

investments and other derivative instruments.

The primary exposure to equity prices arises from the Bank’s holding of equity instruments

available for sale. The Bank does not actively trade in equity securities.

4. INFORMATION ON THE PURCHASE OF TREASURY SHARES

During 2016, the Bank did not purchase treasury shares.

5. EVENTS AFTER THE BALANCE SHEET DATE

There were no significant changes in the current period after the balance sheet date.

Zagreb, 25 April 2017 President of the Management Board Boris Zadro

15

DECLARATION ON THE APPLICATION OF THE CORPORATE GOVERNANCE CODE

In accordance with Article 272p of the Companies Act, and Article 22 of the Accounting Act, the Management Board of Kreditna banka Zagreb d.d. declares that the Bank voluntarily applies the Corporate Governance Code, as jointly prepared by the Croatian Financial Services Supervisory Agency (“HANFA”) and the Zagreb Stock Exchange (“ZSE”). The Corporate Governance Code is published on the website of HANFA and ZSE.

The 2016 Annual Questionnaire (available on the Bank’s website, www.kbz.hr and on the website of the ZSE www.zse.hr) which reflects the state and the practice of Corporate Governance is enclosed and forms an integral part of the Declaration, in relation to the recommendations contained in the Corporate Governance Code, with explanations of certain discrepancies. Namely, at the Bank Corporate Governance is realised not only by fulfilling the regulatory requirements in their entirety, but it also emanates from the established corporate culture and personal integrity of management and employees.

In accordance with the consistent application of the Code, the Bank develops and operates in accordance with good corporate governance practices and with its business strategy, business policy, key internal documents and business practice strives to contribute to transparent and efficient business operations and strong relations with the business environment in which it operates.

In order to protect the interests of all investors, shareholders, customers, employees and other stakeholders, the Bank has established high standards of corporate governance.

In accordance with applicable legal regulations, the Bank has drafted a Declaration on the Application of the Corporate Governance Code for 2016, confirming its operation and development in accordance with good corporate governance practice in all business segments.

Pursuant to the principles of the Code and its recommendations based on the “PROCEED OR EXPLAIN” principle, below the Bank states those parts of the Code from which it deviates together with explanations, as follows:

15

Are the shareholders allowed to participate and to vote at the general assembly of the company using modern communication technology? (if not, explain)

NO

No, there was no recorded need. The shareholders did

not express the need for such form of voting.

18 Did the management of the company publish the data on legal actions, if any, challenging those decisions? (if not, explain)

NO There were no such cases.

23

Is the remuneration received by the members of the Supervisory or Management Board entirely or partly determined according to their contribution to the company’s business performance? (if not, explain)

NO

The fees received by the members of the

Supervisory Board are determined in a fixed

amount.

25

Have detailed records on all remunerations and other earnings of each member of the Supervisory or Management Board received from the company or from other persons related

NO We do not consider this to

be necessary.

http://www.kbz.hr/

http://www.zse.hr/

16

to the company, including the structure of such remuneration, been made public? (if not, explain)

26

Does every member of the Supervisory or Management Board inform the company of each change relating to their acquisition or disposal of shares of the company, or to the possibility to exercise voting rights arising from the company’s shares, not later than five trading days, after such a change occurs? (if not, explain)

NO

The Supervisory Board does not own any shares. Should this change, steps will be taken according to

the rules.

29 Did they obtain prior approval of the Supervisory or Management Board? (if not, explain)

NO There were no such

contracts or agreements.

30 Are important elements of all such contracts or agreements included in the annual report? (if not, explain)


contracts or agreements.

34 Was the majority of the committee members selected from the group of independent members of the Supervisory Board? (if not, explain)

NO The members of the Audit Committee are members of the Supervisory Board.

43

Did the audit committee ensure the submission of high quality information by dependent and associated companies, as well as by third parties (such as expert advisors)? (if not, explain)


situations.

47

Did the company publish a statement on the remuneration policy for the management, Management Board and the Supervisory Board as part of the annual report? (if not, explain)

NO There is no such policy.

48

Is the statement on the remuneration policy for the management or executive directors permanently available on the website of the company? (if not, explain)

NO There is no such policy.

49

Are detailed data on all earnings and remunerations received by each member of the management or each executive director from the company published in the annual report of the company? (if not, explain)

NO Aggregate data is available.

50

Are all forms of remuneration to the members of the management, Management Board and Supervisory Board, including options and other benefits of the management, made public, broken down by items and persons, in the annual report of the company? (if not, explain)

NO

There were no special remunerations for the

Management and Supervisory Board beyond the fixed benefits and fees.

56 Has the company publicly disclosed the fees paid to external auditors for the audit performed and other services rendered? (if not, explain)

NO We do not consider this to be necessary, Bank rules.

Data on significant shareholders in the company are listed in the overview of the ownership structure. The description of the main elements of the internal controls and risk management system in relation to the financial reporting process is provided below in this Report.

17

Responsibility for the financial statements

Pursuant to the Croatian Accounting Act (Official Gazette 78/15 and 134/75), the Management Board is

responsible for ensuring that the financial statements are prepared for each financial year in accordance with

statutory accounting regulations applicable to banks in Croatia in order to give a true and fair view of the

financial position and results of the Bank for that period.

The Management Board has a reasonable expectation that the Bank has adequate resources to continue in

operational existence for the foreseeable future. For this reason, the Management Board continues to adopt

the going concern basis in preparing financial statements.

In preparing the financial statements, the responsibilities of the Management Board include ensuring that:

suitable accounting policies are selected and then applied consistently;

judgements and estimates are reasonable and prudent;

applicable accounting standards are followed, subject to any material departures disclosed and explained in

the financial statements; and

the financial statements are prepared on the going concern basis unless it is inappropriate to presume that

the Bank will continue in business.

The Management Board is responsible for keeping proper accounting records, which reflect with reasonable

accuracy at any time the financial position of the Company and their compliance with the Croatian Accounting

Act (Official Gazette 78/15 and 134/75). The Management Board is also responsible for safeguarding the

assets of the Bank and hence for taking reasonable steps for the prevention and detection of fraud and other

irregularities.

Signed on behalf and in the name of the Management Board:

Boris Zadro Nataša Jakić Felić

President of the Management Board Member of the Management Board

Kreditna banka Zagreb d.d.

Ulica grada Vukovara 74

10000 Zagreb

Republic of Croatia

25 April 2017

PricewaterhouseCoopers d.o.o., Ulica kneza Ljudevita Posavskog 31, 10000 Zagreb, Croatia T: +385 (1) 6328 888, F:+385 (1)6111 556, www.pwc.hr Commercial Court in Zagreb, no. Tt-99/7257-2, Reg. No.: 080238978; Company ID No.: 81744835353; Founding capital: HRK 1,810,000.00, paid in full; Management Board: J. M. Gasparac, President; S. Dusic, Member; T. Macasovic, Member; Giro-Account: Raiffeisenbank Austria d.d., Petrinjska 59, Zagreb, IBAN: HR8124840081105514875.

Independent Auditor’s Report

To the Shareholders and Management Board of Kreditna banka Zagreb d.d.:

Report on the audit of the financial statements

Our opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of Kreditna banka Zagreb d.d. (the “Bank”) as at 31 December 2016, and its financial performance and its cash flows for the year then ended in accordance with accounting regulations applicable to banks in Croatia as set out in Note 2 – ‘Basis of preparation’ to the financial statements.

What we have audited

The Bank’s financial statements comprise:

the statement of financial position as at 31 December 2016;

the statement of comprehensive income for the year then ended;

the statement of changes in equity for the year then ended;

the statement of cash flows for the year then ended; and

the notes to the financial statements, which include significant accounting policies and other explanatory information.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Bank in accordance with the International Ethics Standards Board for

Accountants’ Code of Ethics for Professional Accountants (IESBA Code). We have fulfilled our other

ethical responsibilities in accordance with the IESBA Code.

Our audit approach

Overview

Materiality Overall materiality for financial statements as a whole: HRK (Croatian kuna) 5 million, which represents 2.5% of total revenues (interest and similar income, fee and commission income and other revenue).

Key audit matters Impairment of loans and advances to customers

How we tailored our audit scope

We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the Bank, the accounting processes and controls, and the industry in which the Bank operates.

Materiality

The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality,

including the overall materiality for the financial statements as a whole as set out in the table below.

These, together with qualitative considerations, helped us to determine the scope of our audit and the

nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, if any,

both individually and in aggregate on the financial statements as a whole.

Overall materiality for financial statements as a whole

HRK 5 million

How we determined it 2.5% of total revenues (interest and similar income, fee and commission income and other revenue).

Rationale for the materiality benchmark applied

We have considered using profit before tax as the benchmark, but due to significant fluctuations of profit (loss) before tax in previous years, we decided to use total revenue as we believe it is a reasonable indicator of the Bank’s operations. We selected 2.5% based on our professional judgement, noting that it is also within the range of commonly acceptable quantitative materiality thresholds.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matter How our audit addressed the Key audit matter

Impairment of loans and advances to

customers

See note 14 of the financial statements under

the heading “Loans and advances to

customers” in the amount of HRK 1,795,143

thousand, note 3.17 (Critical accounting

estimates and assumptions) and notes 9 and

31 for more information.

Impairment allowances are the management’s best estimate of inccurred losses of loans and receivables portfolio at the reporting date.

The allowance for potential loan losses is established if there is objective evidence that the Bank will not be able to collect all amounts due. The amount of the allowance is determined in accordance with accounting regulations applicable to banks in Croatia described in Note 2. It is generally determined as the difference between book value and recoverable value, which represents the present value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted at the original effective interest rate for a loan.

We tested controls for approving and monitoring of loans and advances to customers, including appropriateness of classification of performing and non-performing loans, calculation of days past due and calculation of impairment allowances.

We have selected a sample of loans and advances to customers with focus on exposures with potentially highest impact on the financial statements due to their size or risk profile. We have also focused on other exposures we independently assessed as highly risky, such as restructured exposures and non-performing loans with low coverage of impairment allowances.

We have reviewed supporting documentation for selected exposures and discussed any issues with responsible persons. For impaired exposures, we have re-examined key assumptions used in future cash flows estimates, such as value of collateral to ensure the exposures have been classified and measured in accordance with accounting regulations applicable to banks in Croatia.

We found no material issues arising from our work.

Other information

Management is responsible for the other information. The other information comprises the Annual Report of the Bank, which includes the Management Report and Corporate Governance Statement, but does not include the financial statements and our independent auditor’s report thereon.

Our opinion on the financial statements does not cover the other information, including the Management Report and Corporate Governance Statement.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

With respect to the Management Report and Corporate Governance Statement, we also performed procedures required by the Accounting Act in Croatia. Those procedures include considering whether the Management Report includes the disclosures required by Article 21 of the Accounting Act, and whether the Corporate Governance Statement includes the information specified in Article 22 of the Accounting Act.

Based on the work undertaken in the course of our audit, in our opinion:

the information given in the Management Report and the Corporate Governance Statement for the financial year for which the financial statements are prepared is consistent, in all material respects, with the financial statements;

the Management Report has been prepared in accordance with the requirements of Article 21 of the Accounting Act; and

the Corporate Governance Statement includes the information specified in Article 22 of the

Accounting Act.

In addition, in light of the knowledge and understanding of the Bank and its environment obtained in the course of the audit, we are also required to report if we have identified material misstatements in the Management Report and Corporate Governance Statement. We have nothing to report in this respect.

Responsibilities of management and those charged with governance for the financial statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting regulations applicable to banks in Croatia as set out in Note 2 – ‘Basis of preparation’ to the financial statements, 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.

In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Bank’s financial reporting process.

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an independent auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit 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 Bank’s internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our independent auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our independent auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our independent auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

PricewaterhouseCoopers d.o.o. Siniša Dušić Ulica kneza Ljudevita Posavskog 31, Zagreb Member of the Board, certified auditor 28 April 2017

This version of our report is a translation from the original, which was prepared in Croatian language. All possible care has been

taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of

information, views or opinions, the original language version of our report takes precedence over this translation.

Statement of comprehensive income

For the year ended 31 December 2016

(all amounts are expressed in thousands of HRK)

The notes to the financial statements are an integral part of the Statement of comprehensive income. 25

Note 2016 2015

Interest and similar income 4 143,434 167,335

Interest and similar expense 5 (74,909) (103,243)

Net interest income 68,525 64,092

Fee and commission income 6 28,716 27,300

Fee and commission expense 6 (7,894) (8,615)

Net fee and commission income 20,822 18,685

Net gains from dealing in foreign currencies 7 10,856 9,776 Gain/loss from financial assets at fair value through profit or loss 7 121 156

Gain/loss from available-for-sale financial assets 7 17,338 2,492

Other operating income 7 2,261 1,296

Operating income 119,923 96,497

Operating expenses 8 (76,179) (77,878)

Impairment losses and provisions 9 (26,606) (10,093)

Operating expenses (102,785) (87,971)

Profit before tax 17,138 8,525

Income tax 10 (3,563) (176)

Net profit for the year 13,575 8,349

Net other comprehensive income reclassified in the future to profit or loss

Available-for-sale financial assets:

Unrealised gains (losses) on available-for-sale financial

assets

18,485 (7,840)

Other comprehensive income 18,485 (7,840)

Total comprehensive income 32,060 509

Earnings per share in HRK 26 7.01 4.43

Statement of financial position

as at 31 December 2016


The notes to the financial statements are an integral part of the Statement of financial position. 26

Note

31 December 2016

31 December 2015

ASSETS

Cash and balances with Croatian National Bank 11 518,381 569,390

Placements with other banks 12 121,458 205,354

Financial assets at fair value through profit or loss 13 12,277 12,156

Loans to customers 14 1,795,143 1,672,935

Held-to-maturity financial assets 15 120,800 67,621

Available-for-sale financial assets 16 834,004 781,022

Intangible assets 17 25,772 26,789

Tangible assets 18 71,019 71,013

Other assets 19 51,738 63,399

Total assets 3,550,592 3,469,679

LIABILITIES

Deposits from other banks 20 15,116 -

Deposits from customers 20 2,598,001 2,905,692

Borrowings 21 480,478 126,500

Issued subordinated instruments 23 82,000 82,000

Other liabilities 22 65,150 72,502

Provisions for contingent liabilities 27 1,951 2,150

Total liabilities 3,242,696 3,188,844

SHAREHOLDERS’ EQUITY

Share capital 24 193,775 193,775

Share premium 24 50,541 50,541

Unrealised (loss)/gains on available-for-sale financial assets

11,336 (7,150)

Retained earnings and reserves 25 38,669 35,320

Profit/(loss) for the year 13,575 8,349

Total shareholders’ equity 307,896 280,835

Total liabilities and shareholders’ equity 3,550,592 3,469,679

Statement of changes in equity



The notes to the financial statements are an integral part of the Statement of changes in equity. 27

Share capital

Share premium

Unrealised (loss)/gains on

available-for-sale financial assets

Retained earnings

and reserves

Profit/loss for the year Total

At 31 December 2014 186,553 44,763 690 73,412 (38,092) 267,326

New paid shares 7,222 5,778 - - 13,000

Transfer to reserves - - - -

Transfer of profit to retained earnings - - - (38,092) 38,092 -

Total transactions with owners 7,222 5,778 - (38,092) 38,092 13,000

Net profit for the year - - - - 8,349 8,349

Unrealised loss from available-for-sale financial assets - - (7,840) - - (7,840)

Total comprehensive income - - (7,840) - 8,349 509

At 31 December 2015 193,775 50,541 (7,150) 35,320 8,349 280,835

Dividends paid - (5,000) - (5,000)

Transfer to reserves - - - 417 (417) -

Transfer of profit to retained earnings - - - 7,932 (7,932) -

Total transactions with owners 193,775 50,541 (7,150) 38,669 - 275,835

Net profit for the year - - - - 13,575 13,575

Unrealised loss from available-for-sale financial assets - - 18,486 - - 18,486

Total comprehensive income - - 18,486 - 13,575 32,060

At 31 December 2016 193,775 50,541 11,336 38,669 13,575 307,896

Statement of cash flows



The notes to the financial statements are an integral part of the Statement of changes in equity. 28

Note 2016 2015

CASH FLOW FROM OPERATING ACTIVITIES

Profit before tax 17,138 10,150

Adjustments:

Depreciation and amortisation and impairment 7,183 6,599

Impairment of other assets (3,456) (6,362)

Impairment of loans given 29,723 21,983

Impairment of investments available-for-sale 537 (2,948)

(Decrease)/increase in contingent liabilities (199) (3,156)

Income tax 3,564 1,801

Other gains/losses (20,446) (24,032)

Cash flow from operating activities before working capital changes

34,045 4,035

Decrease/(increase) in receivables from CNB and other banks

(123,167) 38,206

(Increase)/decrease in loans and advances to customers (122,208) 251,504

Decrease in deposits from other banks 83,896 6,766

(Decrease)/increase in deposits from customers (292,575) (690,696)

Increase in other assets 11,809 3,197

Increase/(decrease) in other liabilities (7,352) 6,952

Income tax paid (147) (50)

Net cash flow from/(used in) operating activities (449,744) (384,121)

CASH FLOW FROM INVESTING ACTIVITIES

Purchase of tangible and intangible assets (6,174) (3,997)

Increase/decrease in available-for-sale securities (52,982) (285,724)

Increase/decrease in assets at fair value through profit or loss

(121) 1,685

Increase/decrease in held-to-maturity assets (53,178) 291,837

Net cash flow from investing activities (112,455) 3,801

CASH FLOW FROM FINANCING ACTIVITIES

Net proceeds from/(repayment of) borrowings 353,978 (132,020)

Share capital increase - 13,000

Issued/returned subordinated/hybrid instruments - 9,000

Net cash flow (used in)/from financing activities 353,978 (110,020)

Net (decrease)/increase in cash and cash equivalents (174,175) (486,305)

Cash and cash equivalents at beginning of year 29 520,449 1,006,754

Cash and cash equivalents at end of year 29 346,274 520,449

Notes to the financial statements


Kreditna banka Zagreb d.d. 29

1. General information

Kreditna banka Zagreb d.d. (the Bank) was incorporated as a public limited liability company in accordance

with applicable laws of the Republic of Croatia. It was registered at the Commercial Court in Zagreb in 1994.

The Bank's registered office is in Zagreb, Ulica grada Vukovara 74.

The principal activities of the Bank include all types of corporate and retail deposit and lending operations,

domestic and foreign payment transactions, issuance of guarantees, bills of exchange and other forms of

guarantees, securities trading and other banking services. The Bank operates only in the banking sector

through 24 branch offices on the Croatian market.

The Bank performs insurance agency operations in accordance with the insurance laws, in the part that relates

to bank insurance activities, based on the license dated 14 February 2007.

Management Board

Boris Zadro

Nataša Jakić Felić

President of the Management Board from 19 February 2016

Member of the Management Board from 19 February 2016

Supervisory Board

Nadira Eror President of the Supervisory Board from 1 October 2014

Ankica Čeko Vice President of the Supervisory Board from 13 February 2015

Ivan Penić

Silvije Orsag

Member of the Supervisory Board from 13 February 2015

Member of the Supervisory Board from 24 February 2016

Audit Committee

Nadira Eror President of the Supervisory Board from 1 October 2014

Ankica Čeko Vice President of the Supervisory Board from 13 February 2015

Ivan Penić Member of the Supervisory Board from 13 February 2015

Notes to the financial statements (continued)



2. Basis of preparation

2.1. Compliance with statutory requirements for accounting of banks in Croatia

The financial statements have been prepared in accordance with statutory accounting requirements for banks

in Croatia. The Bank's operations in Croatia are subject to the Credit Institutions Act, in accordance with which

the Bank’s financial reporting is regulated by the Croatian National Bank (the CNB) which is the central

monitoring institution of the banking system in Croatia. These financial statements have been prepared in

accordance with these banking regulations.

The accounting regulations for banks in the Republic of Croatia are based on International Financial Reporting

Standards (IFRS) as adopted in the European Union, modified for specific accounting rules issued by the CNB.

The main differences between the requirements of the International Financial Reporting Standards (IFRS) and

the accounting regulations of the CNB relate to the recognition of impairment losses of financial assets

calculated on a portfolio basis. In accordance with CNB regulations, banks domiciled in Croatia should

recognise provisions on the portfolio basis by the prescribed rates (except for financial assets carried at fair

value) on balance sheet and off-balance sheet exposure to credit risk of counterparties for which impairment on

individual basis is not determined, while IFRS requires that the provisions on the portfolio basis should be

determined for existing but unidentified losses on the basis of valuation models taking into account individual

characteristics of the Bank and the counterparty in the portfolio (e.g. collateral, type and rating of a debtor,

etc.).

Additionally, CNB prescribes the minimum levels of impairment losses against certain specifically identified

impaired exposures, which may be different from the impairment loss required to be recognised in accordance

with IFRS.

2.2. Basis of preparation of the financial statements

The financial statements have been prepared in Croatian kuna (HRK), which is the primary currency of the

economic environment in which the Bank operates (the functional currency) and are rounded to the nearest

thousand.

The financial statements have been prepared on the historical cost basis except for financial assets and

liabilities carried at fair value in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

The financial statements have been prepared on the accrual basis of accounting, under the going concern

assumption.




2. Basis of preparation (continued)

2.2. Basis of preparation of the financial statements (continued) The Bank has adopted the following new and amended IFRS and IFRIC interpretations during the year which

were endorsed by the EU. When the adoption of the standard or interpretation is deemed to have an impact on

the financial statements or performance of the Bank, its impact is described below.

Standards and interpretations issued and effective:

The new standards, amendments and interpretations that are effective for annual periods beginning on or after

1 January 2016 are not applicable to the Bank’s financial statements.

New standards and interpretations not yet adopted:

Certain new standards and interpretations have been published that are not mandatory for 31 December 2016

reporting periods and have not been early adopted by the Bank. None of these is expected to have a significant

effect on the Bank's financial statements, except for the following standards:

IFRS 9 Financial instruments and associated amendments to various other standards (effective for

annual periods beginning on or after 1 January 2018)

The complete version of IFRS 9 replaces most of the guidance in IAS 39. IFRS 9 retains but simplifies

the mixed measurement model and establishes three primary measurement categories for financial

assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification

depends on the entity’s business model and the contractual cash flow characteristics of the financial

asset. Investments in equity instruments are required to be measured at fair value through profit or loss

with the irrevocable option at inception to present changes in fair value in OCI. There is now a new

expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For

financial liabilities, there were no changes to classification and measurement except for the recognition

of changes in own credit risk in other comprehensive income, for liabilities designated at fair value

through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright

line hedge effectiveness tests. It requires an economic relationship between the hedged item and

hedging instrument and for the ‘hedged ratio’ to be the same as the one the Management Board

actually uses for risk management purposes. Adequate documentation is still required but is different

to that currently prepared under IAS 39. The Bank plans to adopt this new standard on the effective

date as of and when adopted by the EU. The Bank is still assessing the impact of this standard.





2.2. Basis of preparation of the financial statements (continued)

IFRS 15 Revenue from contracts with customers and associated amendments to various other

standards (effective for annual periods beginning on or after 1 January 2018)

The IASB has issued a new standard for the recognition of revenue. This will replace IAS 18 which

covers contracts for goods and services and IAS 11 which covers construction contracts.

The new standard is based on the principle that revenue is recognised when control of a good or

service transfers to a customer – so the notion of control replaces the existing notion of risks and

rewards.

Key changes to current practice are:

• Any bundled goods or services that are distinct must be separately recognised, and any

discounts or rebates on the contract price must generally be allocated to the separate

elements.

• Revenue may be recognised earlier than under current standards if the consideration varies

for any reasons (such as for incentives, rebates, performance fees, royalties, success of an

outcome, etc.)

• The point at which revenue is able to be recognised may shift: some revenue which is

currently recognised at a point in time at the end of a contract may have to be recognised over

the contract term and vice versa.

• There are new specific rules on licenses, warranties, non-refundable upfront fees and,

consignment arrangements, to name a few; and

• As with any new standard, there are also increased disclosures.

Entities will have a choice of full retrospective application, or prospective application with additional

disclosures. The Bank is currently assessing the impact of the amendments on its financial

statements, but does not expect any impact. The Bank plans to adopt this amendment on its effective

date.

IFRS 16 Leases (issued in January 2016 and effective for annual periods beginning on or after 1

January 2019)

The new standard sets out the principles for the recognition, measurement, presentation and

disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the

lease and, if lease payments are made over time, also obtaining financing. Accordingly, IFRS 16

eliminates the classification of leases as either operating leases or finance leases as is required by

IAS 17 and, instead, introduces a single lessee accounting model. Lessees will be required to

recognize: a) assets and liabilities for all leases with a term of more than 12 months, unless the

underlying asset is of low value, and b) depreciation of lease assets separately from interest on lease

liabilities in the income statement. IFRS 16 substantially carries forward the lessor accounting

requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or

finance leases, and to account for those two types of leases differently. The Bank is currently

assessing the impact of the amendments on the financial statements.





2.3. Critical accounting judgements and key sources of estimation uncertainty

In the application of the Bank’s accounting policies, the Management Board is required to make judgements,

estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent

from other sources. The estimates and associated assumptions are based on historical experience and other

factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting

estimates are recognised in the period in which the estimate is revised if the revision affects only that period or

in the period of the revision and future periods if the revision affects both current and future periods.

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance

sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and

liabilities within the next financial year, are discussed below.

While it is possible that in particular periods the Bank may sustain losses, which are substantially relative to the

allowance for impairment losses, it is the judgement of Management that the allowance for impairment losses

is adequate to absorb losses incurred on the risk assets.

There are several legal actions against the Bank, which have arisen from the regular course of its operations.

The Management Board believes that any ultimate liability of the Bank as a result of the outcome of the

disputes will have no additional significant negative effects - after making provisions up to the date of this report

- on the financial position or future results of the Bank's operations.




3. Summary of significant accounting policies

The principal accounting policies adopted in the preparation of these financial statements are set out below.

These accounting policies have been consistently applied to all the years presented, unless otherwise stated.

3.1. Interest income and expense

Interest income and expense are accounted for on an accrual basis at the effective interest rate, which includes

the amortisation of any discount or premium or other differences between the initial carrying amount of an

interest-earning instrument and its amount at maturity, calculated on an effective interest rate basis.

The effective interest method is the method of calculating the amortised cost of a financial asset and of

allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts

estimated future cash receipts, including all paid or received fees that form an integral part of the effective

interest rate, transaction costs and other premiums or discounts, through the expected life of the financial

asset, or, where appropriate, a shorter period.

Loan origination fees are deferred, together with related direct costs, and recognised as an adjustment to the

effective yield on the loan and as such adjust interest income or expense.

When loans become impaired, they are written down to their recoverable amounts and interest income

thereafter is recognised based on the rate of interest that was used to discount the future cash flows for the

purpose of measuring the recoverable amount. Other fees receivable are recognised when earned. Dividend

income is recognised when the right to receive payment is established.

3.2. Fee and commission income and expense

Fee and commission income is comprised mainly of fees receivable from enterprises for loans and guarantees

granted and other services provided by the Bank, together with commissions from managing funds on behalf of

legal entities and individuals and fees for foreign and domestic payment transactions.

Fees and commissions are recognised on an accrual basis.

3.3. Foreign currencies

Income and expenses arising from transactions in foreign currencies are translated into HRK at the official

rates of exchange on the transaction date. Monetary assets and liabilities denominated in foreign currencies

are translated into HRK at the middle exchange rate of the CNB on the last day of the accounting period. Gains

and losses resulting from foreign currency translation are included in the income statement for the year.




3. Summary of significant accounting policies (continued)

3.3 Foreign currencies (continued)

The Bank has assets and liabilities originated in HRK, which are linked to foreign currencies with a one-way

currency clause. Due to this clause, the Bank has an option to revalue the asset by the higher of: foreign

exchange rate valid as of the due date or foreign exchange rate valid as of the date of origination of the

financial instrument. In case of a liability linked to this clause, the counterparty has this option. Due to the

specific conditions of the market in the Republic of Croatia, the fair value of this option cannot be calculated as

the forward rates for HRK for periods over 6 months are generally not available. Accordingly, the Bank

calculates its assets and liabilities related to this clause at the higher of: the middle exchange rate of the

Croatian National Bank at the balance sheet date or the agreed reference rate (rate valid at origination).

3.4. Personnel contributions

According to national legislation, the Bank is obliged to pay contributions to pension and health insurance

funds. This obligation relates to all employees and provides for paying contributions in the amount of certain

percentages determined on the basis of the gross salary as follows:

2016 2015

Pension insurance contributions 20% 20%

Health insurance contributions 15% 15%

Contribution to the Croatian Employment Service 1.7% 1.7%

Occupational injuries 0.5% 0.5%

Contributions on behalf of employees and the employer are recognised as an expense in the period when incurred.

3.5. Income tax

Income tax expense represents the sum of the tax currently payable and deferred tax.

The current tax liability is based on taxable profit for the year. Taxable profit differs from profit as reported in the

income statement because it excludes items of income or expense that are taxable or deductible in other years

and it further excludes items that are never taxable or deductible. The Bank’s liability for current tax is

calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable based on differences between the carrying

amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the

computation of taxable profit, calculated using the liability method. Deferred tax liabilities are generally

recognised for all taxable temporary differences, and deferred tax assets are generally recognised to the extent

that it is probable that taxable profits will be available against which those deductible temporary differences can

be utilised.





3.5 Income tax (continued)

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent

that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be

recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in

which the liability is settled or the asset realised. Deferred tax is recognised as an expense or income in profit

or loss, except when they relate to items credited or debited directly to equity, in which case the deferred tax is

also recognised directly in equity.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation

authority and the Bank has the ability and intention to settle its current tax asset and liability on a net basis.

The Bank is liable to pay various indirect taxes which have been presented under administrative expenses.

3.6. Cash and cash equivalents

For the purposes of the statement of cash flows, cash and cash equivalents comprise cash on hand, balances

with the CNB, balances with banks on giro accounts and term deposits with other banks with original maturities

of three months or less from the date of acquisition.

Cash and cash equivalents exclude the obligatory reserves with the CNB as these funds are not available for

the Bank’s day to day operations. The obligatory reserve with the CNB is a required reserve to be held by all

commercial banks licensed in Croatia.

3.7. Financial assets and financial liabilities

The Bank’s financial assets and financial liabilities recorded on the balance sheet include cash and cash

equivalents, marketable securities, trade and other receivables and payables, long-term loans, deposits and

investments. The accounting principles for these items are disclosed in the respective accounting policies.

The Bank recognises financial assets and liabilities on its balance sheet when, and only when, it becomes a

party to the contractual provisions of the instrument.

Financial assets held by the Bank are categorised into portfolios in accordance with the Bank’s intent upon

acquisition of a financial asset and pursuant to the Bank’s investment strategy. Financial assets and liabilities

are classified as ‘At fair value through profit or loss’, ‘Held to maturity’, ‘Assets available for sale’ or as ‘Loans

and receivables’. The principal difference among the portfolios relates to the measurement of financial assets

and the recognition of their fair values in the financial statements as described below.





3.7 Financial assets and financial liabilities (continued)

Financial assets and liabilities are offset and the net amount is recognised in the balance sheet when there is a

legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or

to realise the asset and settle the liability simultaneously.

All routine financial instrument transactions are recognised at the date when the instruments are transferred

(settlement date). Under the settlement date accounting, the underlying asset or liability is not recognised until

the settlement date, with the changes in fair value of the underlying asset or liability being recognised starting

from the trade date. When a financial asset or financial liability is recognised initially, the Bank measures it at

its fair value plus transaction costs, in the case of financial assets, that are directly attributable to the

acquisition or issue of the financial asset or financial liability.

Financial assets at fair value through profit or loss

Upon initial recognition designated by the Bank as at fair value through profit or loss in accordance with the

Bank’s investment policy, any financial asset within the scope of IAS 39 can be classified as designated at fair

value through profit or loss except for investments in equity instruments that do not have a quoted market price

in an active market, and whose fair value cannot be reliably measured.

Measurement:

Subsequent to initial recognition, financial assets at fair value through profit or loss are accounted for and

stated at fair value which approximates the price quoted on recognised stock exchanges or acceptable

valuation models. The Bank includes unrealised gains and losses in ‘Net profit/(loss) from financing activities’.

Interest earned on assets at fair value through profit or loss is accrued on a daily basis and reported as

‘Interest income’ in the income statement.

Held-to-maturity financial assets

Investments held to maturity are non-derivative financial assets with fixed or determinable payments and fixed

maturity that the Bank has the positive intent and ability to hold to maturity. This portfolio comprises debt

securities. Held-to-maturity investments are carried at amortised cost using the effective interest method, less

any allowance for impairment.

The Bank assess on a regular basis whether there is an objective evidence that an investment held to maturity

may be impaired. The amount of the impairment loss for assets carried at amortised cost is calculated as the

difference between the asset’s carrying amount and the present value of the expected future cash flows

discounted at the financial instrument’s original effective interest rate. When an impairment of assets is

identified, the Bank recognises allowances through the income statement under “Allowance for impairment

losses on securities”.






Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available for

sale or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at

fair value through profit or loss.

This portfolio comprises equity securities, as well as receivables under factoring and forfeiting arrangements.

Subsequent to initial recognition, equity securities as part of available-for-sale financial assets are re-measured

at fair value based on quoted prices. The fair value of unquoted equity instruments is estimated using the

present value of expected cash flows and/or comparative assessment methods based on indicators of market

capitalisation. Financial assets are derecognised when the rights to receive cash flows from the financial assets

have expired or where the Bank has transferred substantially all risks and rewards of ownership.

For available-for-sale assets, gains and losses arising from changes in fair value are recognised directly in

equity until the financial asset is disposed of or is determined to be impaired, at which time the cumulative gain

or loss previously recognised in equity is included in the net profit or loss for the period.

Dividends on securities available for sale are recorded as declared and included as a receivable in the balance

sheet line ‘Other assets’.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not

quoted in an active market, other than (a) those that the Bank intends to sell immediately or in the short term,

which shall be classified as held for trading, and those that the entity upon initial recognition designates as at

fair value through profit or loss; (b) those that the Bank upon initial recognition designates as available for sale;

or (c) those for which the Bank may not recover substantially all of its initial investment, other than because of

credit deterioration, which shall be classified as available for sale. This portfolio comprises loans granted to

customers.

Loans originated by the Bank by providing money directly to the borrower are categorised as loans granted by

the Bank and are carried at amortised cost using the effective interest method, less any allowance for

impairment. Third party expenses, such as legal fees, incurred in securing a loan are treated as part of the cost

of the transaction as well as fees received from customers. Loan origination fees for loans which are probable

of being drawn down, are deferred (together with related direct costs) and recognised as an adjustment to the

effective yield of the loan and as such adjust the interest income. All loans and advances are recognised when

loans are issued, or cash is advanced to borrowers.






The allowance for potential loan losses is established if there is objective evidence that the Bank will not be

able to collect all amounts due. The amount of the allowance is determined as the difference between book

value and recoverable value, which represents the present value of expected cash flows, including amounts

recoverable from guarantees and collateral, discounted at the original effective interest rate for a loan.

The loan loss allowance also covers losses where there is objective evidence that these losses are present in

components of the loan portfolio at the balance sheet date. These have been estimated based upon historical

patterns of losses in each component, the credit ratings allocated to the borrowers and reflecting the current

economic climate in which the borrowers operate, in accordance with the methodologies prescribed by positive

regulations in the segment of decisions/regulations of supervision of credit institutions.

When a loan is uncollectible, it is fully written off. Subsequent recoveries are credited to the income statement.

Collateral pending sale

The Bank occasionally acquires real estate in exchange for settling certain loans and advances. Real estate is

stated at the lower of net recoverable value of dependent loan and advances receivables and the current fair

value of such assets. Gains or losses on disposal are recognised in the income statement. Real estate used as

collateral for loans given to customers can be sold only through an enforcement procedure.

Sale and repurchase agreements

Securities sold under sale and repurchase agreements (repos) are retained in the financial statements and the

counterparty is included in due to banks or customers as appropriate. Securities purchased under agreements

to resell (reverse repo) are recorded as placements with other banks and loans to customers as appropriate.

The difference between the sale and repurchase price is treated as interest and accrued on a straight-line

basis over the life of the agreements at the effective interest rate.





3.8. Tangible and intangible assets

Property and equipment are initially carried at cost less accumulated depreciation and any accumulated

impairment losses. Cost includes the purchase price and all costs directly attributable to bringing the asset to

working condition for its intended use. Maintenance and repairs, replacements and improvements of minor

scale are expensed when incurred. Items of tangible and intangible assets with a unit value less than HRK

2,000 are expensed when put into use.

Depreciation and amortisation are computed under the straight-line method over the estimated useful life of the

assets according to the following annual rates:

2016 2015

Description % %

Buildings 2.50 - 3.03 2.50 - 3.03

Computer hardware 15 15

Furniture and equipment 10 10

Motor vehicles 20 20

Computer software 10 10

Leasehold improvements 10 10

Land is not depreciated.

The Management Board periodically tests whether there are circumstances indicating the impairment of

tangible and intangible assets. Where the carrying amount of an asset is greater than its estimated recoverable

amount, it is written down to its recoverable amount. Gains and losses on disposal of non-current assets are

determined by reference to their carrying amount and are recognised in the income statement line ‘Other

income/(expense)’ in the year of disposal. Repairs and maintenance are charged to the income statement

when the expenditure is incurred.





3.9. Foreign currency translation

The financial statements are presented in Croatian kuna (HRK) and rounded to the nearest thousand. The

year-end exchange rates were as follows:

31 December 2016 EUR 1 = HRK 7.557787 USD 1 = HRK 7.168536

31 December 2015 EUR 1 = HRK 7.635047 USD 1 = HRK 6.991801

Transactions in foreign currencies are translated at the foreign exchange rate at the date of the transaction.

Monetary assets and monetary liabilities in foreign currencies and linked to foreign currencies are translated at

the middle exchange rates of the Croatian National Bank valid on the balance sheet date. Foreign currency

differences arising on translation are recognised in the income statement.

3.10. Off-balance-sheet financial instruments

In the ordinary course of business, the Bank disclosed in its off-balance-sheet records contingent liabilities and

commitments, comprising primarily guarantees, letters of credit and undrawn loan commitments. Such financial

instruments are recognised in the Bank’s balance sheet if and when they become payable.

3.11. Provisions

The Bank recognises a provision when it has a present obligation as a result of a past event, it is probable that

the Bank will have to settle the obligation and the amount of this obligation can be reliably estimated. The

Management Board determines the allowance based upon reviews of individual items and past experience,

considering all relevant factors.





3.12. Derivative financial instruments

Derivative financial instruments include foreign exchange rate forward contracts and are initially recognised in

the balance sheet at fair value and subsequently re-measured at their fair value. Fair values are obtained from

quoted market prices or pricing models as appropriate. All derivatives are carried as assets when fair value is

positive and as liabilities when fair value is negative.

Derivative financial instruments also include contracts with one-way currency clause whose reference

exchange rate, placement date and contracted value are recognised initially in off-balance-sheet records and

as a loans given with a one-way currency clause in the balance sheet. They are subsequently measured at

amortised cost just as all other placements that carry credit risk in the balance sheet. Increase in exchange

rates (fair value of the embedded derivative) above the contracted rate is recorded in the balance sheet as an

embedded derivative and recognised within profit or loss from embedded derivatives in the income statement.

The Bank's derivative instruments do not qualify for hedge accounting. Changes in the fair value of any

derivative instrument that does not qualify for hedge accounting are recognised immediately in the income

statement under net trading income. However, the gains and losses arising from changes in the fair value of

derivatives that are managed in conjunction with designated financial assets or financial liabilities are included

in ‘net income from financial assets designated at fair value’.

3.13. Managed funds

The Bank manages funds for and on behalf of corporate and retail customers, for which it charges a fee. As

these amounts do not represent the Bank's assets and liabilities, they are excluded from the accompanying

balance sheet (Note 28).

3.14. Sale and repurchase agreements

If a financial asset is sold under an agreement to repurchase it at a fixed price or at the sale price plus a

lender’s return or if it is loaned under an agreement to return it to the transferor, it is not derecognised as the

Bank retains substantially all the risks and rewards of ownership.

Securities sold under sale and repurchase agreements (“repos”) are recorded in the balance sheet items in line

with the original classification of assets or the Bank reclassifies them in its balance sheet. The liability to the

counterparty is included within “Borrowings”.





3.15. Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a

legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or

realise the asset and settle the liability simultaneously.

3.16. Accounting for financial guarantee contracts

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse

the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with

the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other

bodies on behalf of customers to secure loans, overdrafts and other banking products.

Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee

was given. The initial fair value is amortised over the life of the financial guarantee. The guarantee liability is

subsequently carried at the higher of this amortised amount or the present value of any expected payment

(when a payment under the guarantee has become probable). Financial guarantees are included within other

liabilities.

Any increase in guarantee liabilities is recognised in profit or loss.





3.17. Significant accounting estimates and judgements

Judgements

In the process of applying the Bank’s accounting policies, the Management Board has made the following

judgements, which have the most significant effect on the amounts recognised in the financial statements:


The Bank follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or

determinable payments and fixed maturity as held to maturity. This classification requires significant

judgement. In making this judgement, the Bank evaluates its intention and ability to hold such investments to

maturity. If the Bank fails to keep these investments to maturity other than in specific circumstances (such as

selling an insignificant amount close to maturity), it will be required to reclassify the entire class as available for

sale and measure it at fair value instead of at amortised cost.

Estimation uncertainty

Key estimates and assumptions are based on historical experience and various other factors that are believed

to be reasonable under the circumstances and information available at the date of the financial statements, the

results of which form the basis for making judgements about the value of assets and liabilities that are not

readily apparent from other sources. Actual results may differ significantly from these estimates. Key estimates

and assumptions are discussed below.

Provision for impairment of loans and receivables

The Bank regularly reviews the balances of loans and receivables in order to assess whether there is objective

evidence of impairment. The Bank uses its experienced judgement to estimate the amount of any impairment

loss in cases where a borrower is in financial difficulties and there are few available historical data relating to

similar borrowers. Similarly, the Bank estimates changes in future cash flows based on the observable data

indicating that there has been an adverse change in the payment status of borrowers in a group, or national or

local economic conditions that correlate with defaults on assets in the group. The Management Board uses

estimates based on historical loss experience for assets with credit risk characteristics and objective evidence

of impairment similar to those in the group of loans and receivables. The Bank uses its experienced judgement

to adjust observable data to reflect current circumstances.




4. Interest and similar income

2016 2015

Loans to corporate clients 78,068 94,860

Loans to retail clients 32,448 34,410

Placements with other banks 126 553

Debt securities 25,952 30,461

Other companies 6,840 7,051

143,434 167,335

a) Analysis by product

2016 2015

Loans to customers 117,356 136,321

Placements with banks 126 553

Debt securities 25,952 30,461

143,434 167,335

5. Interest and similar expense

2016 2015

Retail clients 53,645 77,032

Corporate clients 6,350 11,473

Banks 6,929 2,601


Non-residents 2,929 4,067

74,909 103,243

a) Analysis by product

2016 2015

Deposits 67,650 100,599

Borrowings 7,259 2,644

74,909 103,243




6. Fee and commission income and expense

2016 2015

Fee and commission income

Commission income from corporate clients 16,528 16,709

Commission income from retail clients 4,982 4,822

Commission income from banks 7,068 5,657

Commission income from non-residents 138 112

28,716 27,300

Fee and commission expense

Commission for domestic payments (5,258) (5,733)

Other fees and commissions (2,636) (2,882)

(7,894) (8,615)

7. Net profit from financing activities

2016 2015

Net gains from dealing in foreign currencies 10,857 9,231

Gain/loss from financial assets at fair value through profit or loss 121 156

Gain/loss from available-for-sale financial assets 17,338 2,492

Other operating income 2,261 1,841

30,577 13,720

8. Operating expenses

2016 2015

Staff costs (Note 8.1) 24,437 25,301

Material and services 33,795 34,056

Depreciation and amortisation (Note 17 and 18) 7,183 6,023

Administration and marketing expenses 1,365 1,194

Insurance premiums 6,401 7,131

Taxes and contributions 994 830

Other expenses 2,003 1,719

76,179 76,254




8.1. Staff costs

2016 2015

Net salaries 13,678 14,217

Taxes and contributions from salaries 6,218 6,379

Contributions on salaries 3,469 3,582

Other staff costs 1,072 1,123

24,437 25,301

As at 31 December 2016, the Bank had 187 employees (31 December 2015: 183).

9. Impairment losses and provisions

Note 2016 2015

Loans to customers 14 (54,427) (59,614)

Interest 19 (2,356) (3,459)

Investments in debt securities (until maturity) (739) (2,191)

Other assets 19 (17,126) (32,587)

Impairment of tangible assets - (576)

Provisions for legal disputes against the Bank (45) (146)

Contingent liabilities 27 (4,366) (5,270)

(79,059) (103,842)

Less: amounts collected and reversed

Loans to customers 14 24,704 37,631

Interest 19 3,317 4,773

Investments in debt securities (until maturity) 202 5,139

Other assets 19 19,665 37,781

Contingent liabilities 27 4,565 8,426

52,453 93,749

Total impairment losses and provisions (26,606) (10,093)




10. Income tax

Income tax is determined by applying the rate of 20% to taxable profits (2015: 20%).

Reconciliation of income tax:

2016 2015

Current income tax (3,563) (177)

Effect of deferred tax (1,074) (1,624)

(4,637) (1,801)

Tax returns remain open and subject to tax audit at least over a three-year period. The Management Board

believes that the Bank has made adequate provisions for tax liabilities in the accompanying financial

statements. However, the risk remains that the relevant authorities could take a different view with regard to the

interpretation of the applicable provisions.

Reconciliation of current tax:

2016 2015

Accounting profit/(loss) before tax 17,138 8,525

Effect of non-taxable income 504 293

Effect of non-deductible expenses (1,184) (772)

Taxable profit 17,818 9,004

Utilised tax losses carried forward - (8,122)

Income tax base for the year 17,818 882

Income tax at 20% 3,563 117

Current income tax (3,563) (177)

Effective tax rate 20.79% 2.07%

Non-deductible expenses mostly relate to the entertainment costs, costs of personal transportation, write-offs

of receivables, non-deductible costs of property valuation and other non-deductible expenses.




11. Cash and balances with Croatian National Bank

31 December

2016 31 December

2015

Cash on hand 55,530 47,191

Instruments in the course of collection - -

Total cash 55,530 47,191

Giro account with Croatian National Bank 266,651 264,387

Obligatory reserve in HRK 192,919 224,554

Obligatory reserve in foreign currency - 33,258

Other deposits with Croatian National Bank 3,281 -

Total assets with the Croatian National Bank 462,851 522,199

Total cash and balances with the Croatian National Bank 518,381 569,390

The CNB determines the requirement for banks to calculate an obligatory reserve, which is required to be

deposited with the CNB and held in the form of other liquid receivables.

The statutory reserve requirement ratio in 2016 was 12%, the same as in 2015.

As at 31 December 2016, the required rate of maintenance of the HRK obligatory reserve with the CNB

amounted to 70% (31 December 2015: 70%), while the remaining 30% (31 December 2015: 30%) had to be

held in the form of other liquid receivables. This includes the part of the foreign currency obligatory reserve

required to be held in HRK (see below).

60% of the foreign currency part of the obligatory reserve (31 December 2015: 60%) was allocated to the CNB

until 13 July 2016, when a new Obligatory Reserve Decision (Official Gazette No. 55/2016) came into force

stating that the foreign currency component of the OR is not allocated, i.e. that it is 0%, while 75% of the

foreign currency component of the obligatory reserve is still included in the accrued HRK component of the

obligatory reserve and is allocated in HRK (see above).




12. Placements with other banks

31 December

2016 31 December

2015

Current accounts with other banks

- denominated in foreign currency 98,181 195,085

Loans and time deposits with other banks

- denominated in foreign currency 3,928 17,633

- denominated in HRK 25,000 -

Total placements with other banks 127,109 212,718

Allowance for impairment losses (5,651) (7,364)

Total placements with other banks, net 121,458 205,354

Of the total amount of placements with other banks, HRK 3,928 thousand relates to guarantee deposits with Erste

Bank with the original maturity exceeding 3 months.

Geographical analysis:

31 December

2016 31 December

2015

Germany 40,496 78,581

Italy 10,175 16,203

Croatia 32,837 24,240

Austria 17,146 35,335

USA 2,185 20,905

Spain 7,241 33,961

Belgium 11,377 3,342

Norway - 150

121,458 212,718

All foreign placements are kept with banks with credit ratings from A+ to BBB+.




13. Financial assets at fair value through profit or loss

31 December

2016 31 December

2015

Units in investment funds 12,277 12,156

Total financial assets at fair value through profit or loss 12,277 12,156

In its portfolio of at fair value through profit or loss, the Bank values certain units in investment funds.

14. Loans to customers

a) Analysis of lending portfolio

31 December

2016 31 December

2015


Corporate clients 1,210,882 1,219,418


Financial institutions 155,225 48,923

Gross loans 1,978,519 1,827,435

Less: impairment allowance (183,376) (154,499)

Total loans to customers 1,795,143 1,672,936

Loans are secured by specific pledges on properties of appropriate value, deposits, guarantees, securities, policies

and other types of collaterals.

In the period from 1 January 2016 to 31 December 2016, the interest rates on loans to corporate clients were set at

5.55% to 10.55% (2015: from 5% to 12.9%), and for loans to retail clients they were set at 2.25% to 9.88% (2015:

2.6% to 10.50%), while for financial institutions the interest rates were set at 0.35% to 2.2% during 2016 (2015: 0.25%

to 5%).




14. Loans to customers (continued)

b) Changes in the principal of partially and fully recoverable loans

2016 2015

Partially

recoverable

loans

Fully

irrecoverable

loans

Partially

recoverable

loans

Fully

irrecoverable

loans

At 1 January 230,872 65,261 212,184 60,555

___________ ___________ ___________ ___________

Transfer from fully recoverable loans 121,633 1,184 61,845 933

Transfer from fully irrecoverable loans 433 - 2,321 -

Transfer from partially recoverable

loans - 17,917 - 8,533

Transfer to fully recoverable loans (38,446) (1,263) (16,410) (1,359)

Transfer to fully irrecoverable loans (17,917) - (8,533) -

Transfer to partially recoverable loans - (433) - (2,321)

Collection (33,021) (163) (22,390) (934)

Write-offs - (541) - (79)

Other increases 1,742 287 3,463 236

Other decreases (2,492) (499) (1,608) (303)

___________ ___________ ___________ ___________

At 31 December 262,804 81,750 230,872 65,261

___________ ___________ ___________ ___________




14. Loans to customers (continued)

c) Movements in impairment allowances

Specific impairment allowances

Impairment allowance on

collective assessment

basis Total

At 31 December 2014 114,826 17,915 132,741

New impairment losses (Note 9) 36,969 22,645 59,614

Amounts collected (Note 9) (12,378) (25,252) (37,630)

Write-off (79) - (79)

Foreign exchange differences (147) - (147)

At 31 December 2015 139,191 15,308 154,499

New impairment losses (Note 9) 38,799 15,628 54,427

Amounts collected (Note 9) (10,359) (14,346) (24,705)

Write-off (541) - (541)

Foreign exchange differences (304) - (304)

At 31 December 2016 166,786 16,590 183,376

d) Deferred fee income recognised as an adjustment to the effective interest

2016 2015

At 1 January 7,503 7,702

Collected and deferred fees (7,229) (6,800)

Fees recognised 7,288 6,601

At 31 December 7,562 7,503




15. Held-to-maturity financial assets

31 December

2016 31 December

2015

Other securities 24,007 517

Bonds 98,530 68,304

Allowance for impairment losses (1,737) (1,200)

Total held-to-maturity financial assets 120,800 67,621

As at 31 December 2016, other securities mature in 2017 within a period of eight months.

The portfolio also includes HEP foreign exchange dollar bonds with an interest rate of 6% and a maturity of 2017.

As at 31 December 2016, the collective assessment based allowances for financial assets held to maturity amounted

to HRK 1,220 thousand.

16. Available-for-sale financial assets

31 December

2016 31 December

2015

Available-for-sale debt securities 787,304 736,713

Available-for-sale equity securities 46,700 44,309

834,004 781,022

Available-for-sale debt securities

31 December

2016 31 December

2015

Treasury bills of the Ministry of Finance - 79,339

Bonds /i/ 782,446 657,374

Commercial papers 4,858 -

787,304 736,713

Listed on the stock exchange 787,304 736,713

Not listed on the stock exchange -




16. Available-for-sale financial assets (continued)

/i/ Bonds

31 December

2016 31 December

2015

Bonds of the Republic of Croatia 627,288 435,532

State corporate bonds 22,159 13,390

Other corporate bonds 15,000 14,976

Bank bonds 89,513 112,470

Foreign government bonds 28,486 81,006

782,446 657,374

Listed on the stock exchange 782,446 657,374

Available-for-sale equity securities

31 December

2016 31 December

2015

Investments in investment funds 42,730 43,695

Securities listed on the stock exchange 93 93

Securities not listed on the stock exchange 3,877 521

46,700 44,309

Equity securities which are not listed on stock exchange markets contain a number of smaller individual investments

carried at cost less impairment losses. There is no market for such investments which amount to less than 1% of their

share capital.

Movements in equity securities during the year:

2016 2015

At 1 January 44,309 44,507

Change in fair value of shares 16 19

Purchase of shares/units in investment funds 13,340 -

Sale of shares/units in investment funds (10,401) -

Change in fair value of units 230 180

Realised gain 380 -

Foreign exchange differences (1,174) (396)

At 31 December 46,700 44,309




17. Intangible assets

External software

and other rights

Internally developed

software

Other intangible

assets

Intangible assets under

construction

Total intangible

assets

Cost

At 1 January 2015 29,574

5,502

8,539 669 44,283

Additions 327 1,547 1,547 581 2,455

Transfer from assets under construction (533) (327) (860)

At 31 December 2015 29,368

7,049

8,539 923 45,878

Additions - 1,562 18 505 2,085

Transfer from assets under construction 687 - - (687) -

Write-offs/disposals (3,980) - (7) (3,987)

At 31 December 2016 26,074 8,611 8,550 741 43,976

Amortisation

At 1 January 2015 9,461 6,705 - 16,166

Charge for the year 2,466

-

458 - 2,923

Expense -

-

- - -

At 31 December 2015 11,927 - 7,163 - 19,089

Charge for the year 5,336

870 6,206

Write-offs/disposals (6,649)

(442) - (7,091)

At 31 December 2016 10,613 - 7,592 - 18,205

Net book amount

At 31 December 2015 17,441 7,049 1,376 923 26,789

At 31 December 2016 15,462 8,611 958 741 25,772




18. Tangible assets

Land

Buildings

IT and other

equipment

Furniture, vehicles and

similar assets

Other tangible

assets

Tangible assets under

construction Total

Cost

At 1 January 2015 15,130 86,669 7,894 7,444 13,392 16,867 147,397

Additions - - - - 1,239 1,239

Transfer from assets under construction - - 1,007 397 300 (1,244) 460

Transfers - - - - - - -

Disposals/write-off - - - - (281) - (281)

At 31 December 2015 15,130 86,669 8,901 7,841 13,411 16,862 148,814

Increase in assets under construction - - - - 4,245 4,245

Transfer from assets under construction - 999 2,734 311 220 (4,282) (18)

Disposals/sales - - - (119) - - (119)

Write-offs - - (1,175) (175) (7,101) - (8,451)

At 31 December 2016 15,130 87,668 10,460 7,858 6,530 16,825 144,471

Depreciation

At 1 January 2015 - 49,472 3,038 4,844 10,695 6,965 75,015

Charge for the year - 1,628 536 408 1,170 - 3,742

Impairment - (823) 182 - - - (641)

Disposals/sales - - - (30) (281) - (311)

At 31 December 2015 - 50,277 3,756 5,222 11,584 6,965 77,804

Charge for the year - 3,646 1,548 1,205 1,761 - 8,160

Disposal/sales - (1,823) (1,803) (839) (8,047) - (12,514)

At 31 December 2016 - 52,100 3,501 5,588 5,298 6,965 73,452

Net book amount

31 December 2015 15,130 36,392 5,145 2,619 1,827 9,897 71,010

31 December 2016 15,130 35,568 6,959 2,270 1,232 9,860 71,019




18. Tangible assets (continued)

As at 31 December 2016, there is no pledge over the building and depreciation is calculated at a rate of 3.03%.

19. Other assets

31 December

2016 31 December

2015

Non-financial assets

Accrued interest 19,578 24,653

Repossessed assets 17,063 21,020

Total non-financial assets 36,641 45,673

Financial assets

Fees and commissions 1,187 1,311

Receivables from credit card operations 3,344 2,768

Prepaid expenses and deferred income 8,100 9,381

Guarantee funds 1,086 2,541

Other receivables 6,007 7,347

Total financial assets 19,724 23,348

Total other assets before impairment 56,365 69,021

Less impairment allowance: (4,627) (5,623)

Total other assets 51,738 63,398

Accrued interest and fee income is presented on a net basis less accumulated impairment amounting to HRK

15,483 thousand (31 December 2015: HRK 18,356 thousand), while the impairment of other assets is

presented in the table and amounts to HRK 4,627 thousand (31 December 2015: HRK 5,623 thousand).

All stated assets become due within one year.




19. Other assets (continued)

Changes in impairment allowance

Interest and

fees Other

assets

At 31 December 2014 19,622 5,708

Impairment allowance on collective assessment basis - (57)

New allowances (Note 9) 4,292 1,124

Amounts collected (Note 9) (5,537) (1,150)

Amounts written off (21) (2)

At 31 December 2015 18,356 5,623

Impairment allowance on collective assessment basis - (52)

New allowances (Note 9) 3,029 386

Amounts collected (Note 9) (3,914) (1,328)

Amounts written off (356) (2)

At 31 December 2016 17,116 4,627

The allowance based on collective assessment includes other receivables from clients based on issued

invoices, fees and expenses paid for the client, except for accrued interest, which according to the

Classification of placements are fully provided for on an individual basis.




20. Deposits from banks and customers

31 December

2016 31 December

2015

Demand deposits

Banks and financial institutions 119,880 90,563




Total demand deposits 453,434 361,548

Time deposits

Banks and financial institutions 80,479 79,686

Retail clients 1,925,884 2,233,653



Total term deposits 2,159,683 2,544,144

Total amounts due to customers 2,613,117 2,905,692

The interest rate on demand deposits for legal entities ranged from 0.05% to 0.20% during 2016 (2015: from

0.10% to 0.20%).

The interest rate on term deposits for retail clients ranged from 0.05% to 7.0% during 2016, and from 0.10% to

7.0% during 2015, while for term deposits of legal entities and other companies the interest rate in 2016 ranged

from 0.10% to 3.00% (2015: from 0.20% to 3.15%), and for financial institutions it ranged from 0.30% to 2.10%

during 2016 (2015: from 0.10% to 5.56%).

21. Borrowings

31 December 2016

31 December 2015

Long-term borrowings 112,216 123,700

Short-term borrowings - -

Repo loans 368,262 2,800

Total borrowings 480,478 126,500

31 December 2016

31 December 2015

Denominated in HRK 420,016 126,500

Denominated in foreign currency 60,462 -

Total borrowings 480,478 126,500




21. Borrowings (continued)

Borrowings comprise the following:

31 December 2016

31 December 2015

CROATIAN NATIONAL BANK 305,000 -

CROATIAN BANK FOR RECONSTRUCTION AND DEVELOPMENT

(HBOR) 112,216

123,700

ZAGREBAČKA BANKA d.d. 60,462 -

KD LOCUSTA FONDOVI (LOCUSTA INVEST) 2,800 2,800

480,478 126,500

Borrowings from the Croatian Bank for Reconstruction and Development (HBOR) relate to borrowings placed

by HBOR through the Bank in accordance with its financing programs. The relationship between the Bank and

HBOR is the subject of a separate agreement. The interest rate on HRK borrowings from HBOR ranged from

0% to 5%, while for the end user of these borrowings the interest rate ranged from 1% to 6% during 2016

(2015: from 1% to 7%). Other borrowings from financial institutions were set at an interest rate of 0.05% to

1.8% (2015: from 0.80% to 3.00%).

Collaterals

At 31 December 2016, the Bank had repo loans received from the CNB in the amount of HRK 305 million, for

which the Bank has pledged government bonds of the Ministry of Finance of the Republic of Croatia

denominated in HRK and foreign currencies with a fixed interest rate of 1.4% and 1.8% and maturities

throughout 2020. For bank repo loans received from Zagrebačka banka that mature in January 2017 in the

amount of EUR 8 million, the Bank has pledged government bonds of the Ministry of Finance of the Republic of

Croatia with a fixed interest rate of 0.05% due in November 2017, while for the repo loan received from Locusta

Value I in the amount of HRK 2.8 million and also maturing in January 2017, the Bank has pledged a bond of

the Ministry of Finance of the Republic of Croatia due in November 2017.




22. Other liabilities

31 December

2016 31 December

2015

Accrued expenses:

Accrued interest 48,959 63,084

Deferred income 35 112

Total accrued liabilities 48,994 63,196

Financial liabilities:

Trade payables 4,993 4,706

Liabilities for credit card operations 1,791 450

Other liabilities 9,372 4,150

Total financial liabilities 16,156 9,306

Total other liabilities 65,150 72,502

23. Issued subordinated instruments

31 December 2016

31 December 2015

Subordinated bonds 82,000 82,000

82,000 82,000

Subordinated instruments were issued at an interest rate set at 6% and maturity on 31 July 2022. Interest on

subordinated bonds is paid on a semi-annual basis.




24. Equity

As at 31 December 2016, the Company’s share capital amounts to HRK 197,775,300 (2015: HRK

193,775,300) and is divided among 1,937,753 ordinary shares (KBZ-R-A) with a nominal value of HRK 100 per

share.

The following shareholders owned more than a 5% share in the Bank as at 31 December 2016 and 31

December 2015:

Shareholders Holding in share capital (%)

31 December 2016

31 December 2015

Euroherc osiguranje d.d. 19.97 19.98

Jadransko osiguranje d.d. 19.97 19.97

Agram životno osiguranje d.d. 19.86 19.86

Euroleasing d.o.o. 1.02 7.42

Podravska banka 13.21 5.47

Primorska banka 11.20 -

Varaždinska banka - 5.16

Agram Invest d.o.o 10.10 4.37

Others 4.67 17.77

Total share capital 100.00 100.00

Share premium

During 2016, there were no changes in share premium (in 2015 it was increased by HRK 5,778 thousand).

Dividends

Based on the decision of the General Assembly, the net profit for 2015 amounting to HRK 8,348 thousand was

transferred to retained earnings amounting to HRK 7,932 thousand and the legal reserves amounting to HRK

417 thousand. In addition, based on the decision of the General Assembly, dividends in the amount of HRK

5,000 thousand were paid from retained earnings of previous years.




24. Share capital (continued)

Regulatory capital

In accordance with legal requirements arising from Directive EU 575/2013, regulatory capital was calculated as

at 31 December 2016 and 31 December 2015 as follows:

31 December 2016

31 December 2015

HRK`000 HRK`000

Regulatory capital

Regular basic capital 244,316 244,316

Legal and statutory reserves and retained earnings less

current year result 38,670 35,321

Recognised profit or loss - -

Less: Intangible assets (-) (25,769) (26,789)

Unrealised loss from impairment of available-for-sale financial assets (4,555) (12,335)

Total basic capital 252,662 240,512

Supplementary capital

Paid capital instruments and subordinated loans - -

Subordinated instruments 82,000 82,000

Hybrid instruments - -

Gross supplementary capital 82,000 82,000

Deductions -

Total deductions from supplementary capital - -

Total supplementary capital (gross supplementary capital less deductions) 82,000 82,000

Gross regulatory / guarantee capital 334,662 322,512

Risk weighted assets

Credit risk weighted exposure 1,732,369 1,728,985

Other weighted assets 202,044 207,400

Total risk weighted assets 1,934,413 1,936,385

Capital adequacy ratio 17.30% 16.66%




25. Retained earnings and reserves

Retained earnings include accumulated profits from prior years.

In accordance with the local legislation, 5% of the net profit of the Bank is required to be transferred to a non-

distributable legal reserve to equal 5% of the share capital of the Bank. The legal reserve, in the amount of up

to 5% of the issued share capital, can be used for covering losses from the current and prior years.

On 27 June 2016, the General Assembly decided to allocate the profit realised in 2015 to retained earnings

and legal reserves.

26. Earnings per share

Basic

For the purposes of calculating earnings per share, earnings are calculated as the profit (after tax) for the year

attributable to equity holders of ordinary shares after deducting amounts relating to preference dividends. For

the reconciliation of profit after tax which is distributed to ordinary shareholders please see below:

2016 2015

Profit for the year in HRK 13,574,704 8,348,895

Weighted average number of ordinary shares in issue 1,937,753 1,885,516

Earnings per ordinary share in HRK 7.01 4.43




27. Contingent liabilities and commitments

a) Legal disputes in progress

There are several outstanding legal disputes against the Bank. The Bank records provisions in accordance with

the decision of the Croatian National Bank on the provisions for legal disputes outstanding against the Bank in

the total amount of HRK 176 thousand as at 31 December 2016 (31/12/2015: HRK 149 thousand). No material

losses are expected from ongoing proceedings.

b) Guarantees and credit commitments

The total amount of guarantees, letters of credit and unused lines of credit was as follows:

31 December

2016 31 December

2015

Guarantees in HRK 93,769 77,600

Guarantees in foreign currency 6,643 21,027

Letters of credit 65 2,760

Unused lines of credit 91,816 110,266

Total guarantees and credit commitments 192,293 211,653

c) Movement in provisions

2016 2015

At 1 January 2,150 5,316

Additional provisions (Note 9) 4,390 5,346

Decrease (Note 9) (4,589) (8,512)

At 31 December 1,951 2,150




28. Managed funds

The Bank manages funds for and on behalf of legal entities and citizens with respect to custodian activities.

The related income and expense are charged to the customer, and the Bank does not bear any liabilities.

Net assets and liabilities from operations in the name and on behalf of third parties are as follows:

31 December

2016 31 December

2015

Assets




Total assets 96,739 171,383

Sources




Total sources 96,739 171,383

29. Cash and cash equivalents

For the purposes of the statement of cash flows, cash and cash equivalents comprise the following balances

with less than 90 days maturity:

31 December

2016 31 December

2015

Cash account at Croatian National Bank (Note 11) 167,562 264,387

Cash on hand (Note 11) 55,530 47,192

Instruments in the course of collection (Note 11) - -

Total placements with other banks (Note 12) 123,181 208,871

Total cash and cash equivalents 346,274 520,449

The Bank has significant reserves of primary and secondary liquidity.




30. Risk management

This note provides details of the Bank’s exposure to risk and describes the methods used by management to

control risk. The most significant types of financial risk to which the Bank is exposed are credit risk, liquidity

risk, market risk and operational risk. Market risk includes currency risk, interest rate risk and debt and equity

quoted securities price risk.

The Bank has established an integrated system of risk management by introducing a set of policies and

procedures and establishing the limits of risk levels acceptable to the Bank. The methodology and models for

managing operational risk have been developed.

a) Credit risk

The Bank takes on exposure to credit risk which is the risk upon that the counter party will be unable to pay

amounts in full when due. The Bank structures the levels of credit risk it undertakes by placing limits on the

amount of risk accepted in relation to one borrower, or groups of borrowers, and to industry segments. Such

risks are monitored on a revolving basis and subject to an annual or more frequent review.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers

to meet interest and principal repayment obligations and by changing these lending limits where appropriate.

Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees.

In accordance with the legal provisions governing the internal control system, when approving loans the Bank

has established decision-making levels governed by the principle that when the loan approval decision is not

made by the Bank's Management Board and the amount of client exposure exceeds the internally specified

amounts of client exposure, at least two persons should participate, whereby the person with the sales function

makes a decision which is approved by the person in charge of the risk control function. Also, prior to making a

decision in case when the client's exposure exceeds certain internally established exposure amounts, the draft

decision of the sales function is subject to a review by the risk control function.

In addition the Bank monitors and analyses the structure and quality of its loan portfolio through different

indicators pointing to the improvement or deterioration in asset quality of the Bank, thus enabling the Bank a

better credit risk management as well as timely actions in order to reduce credit risk. Also, the Bank monitors

and analyses the degree of concentration of loans by sector and the largest client exposures using the HHI

index methodology.

Credit related commitments

The primary purpose of these instruments is to ensure that funds are available to a customer as required.

Guarantees and standby letters of credit represent irrevocable assurance that the Bank will make payments in

the event that customer cannot meet its obligations to third parties and carry the same credit risks as loans

given. Documentary and commercial letters of credit are written undertakings on behalf of a customer

authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and

conditions.

Letters of credit are secured by collateral in the form of goods to which they relate.




30. Risk management (continued)

a) Credit risk (continued)

Loans are classified into the following three main groupings, in accordance with the regulations of the CNB:

fully recoverable loans – A Risk Group – measured on the collective basis

partially recoverable loans – B Risk Group – measured on an individual basis, or on the collective

basis for a "small loans portfolio" that are not sued, or secured by adequate collateral according to the

CNB Decision on Classification of Placements and Off-Balance-Sheet Liabilities of Credit Institutions

fully irrecoverable loans – C Risk Group – measured on an individual basis, or on the collective basis

for a "small loans portfolio" that are not sued, or secured by adequate collateral according to the CNB

Decision on Classification of Placements and Off-Balance-Sheet Liabilities of Credit Institutions

All three levels contain sub-categories, which are mandatory for partially recoverable loans. The Bank's policy

is to require suitable collateral to be provided by certain customers prior to the disbursement of approved loans.

Collateral for loans, guarantees and letters of credit is usually in the form of deposits, pledges, investments,

housing or commercial mortgages, bills of exchange, promissory notes or other types of assets.

Commitments to lend represent unused portions of authorizations to extend credit in the form of loans,

guarantees or letters of credit. With respect to credit risk on commitments to lend, the Bank is potentially

exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is

less than the total unused commitments, as most commitments to lend are contingent upon customers

maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because

long-term commitments generally have a greater degree of credit risk than short-term commitments.

b) Liquidity risk

The Bank is exposed to daily calls which it settles through available cash resources, which include overnight

deposits, current account funds, maturing deposits and loan drawdowns.

The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is

fundamental to the management of the Bank. It is unusual for banks ever to be completely matched since

business transacted is often of uncertain term and of different types. An unmatched position potentially

enhances profitability, but can also increase the risk of losses.

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing

liabilities as they mature, are important factors in assessing the liquidity of the Bank and its exposure to

changes in interest rates and exchange rates. Liquidity requirements to support guarantee payments and

standby letters of credit are considerably less than the amount of the commitment because the Bank does not

generally expect the third party to draw funds under the agreement.





The Bank carries out its liquidity risk management through a gap analysis in which the maturity of assets and

liabilities are divided into several time categories and differences are observed in certain time categories in

order to timely harmonise its assets and liabilities. In addition, the Bank monitors and analyses the movement

of the minimum liquidity ratio (weekly and monthly) in terms of legislation and established internal limits. In the

event that an indicator of the minimum liquidity ratio falls below the internally prescribed limits the Control and

Risk Management Department shall inform the Assets and Liabilities Commission as well as the Bank’s

Management Board in order to take measures.

The total outstanding contractual amount of commitments to extend credit at the balance sheet date does not

necessarily represent future cash flows, since many of these commitments will expire or be terminated without

being funded.

Liquidity risk is presented in the maturity analysis of assets and liabilities as at 31 December 2016 and 31

December 2015 (see Note 32).

c) Market risk

The majority of available-for-sale instruments are subject to market risk, the risk that future changes in market

conditions may impair the value of the instrument. The instruments are recognised at fair value, and all

changes in market conditions directly affect net trading income. The Bank manages its use of trading

instruments in response to changing market conditions.

The limits are defined following the needs and strategy of the Bank and in accordance with the senior

management risk policy provisions.

The exposure to market risk is formally managed in accordance with the risk limits approved by the senior

management and revised at least annually. The exposure figures and limit utilization are delivered to the

Treasury Division on a daily basis. In addition, limit control is performed by the Control and Risk Management

Department as a second level of control, which in the case of exceeding certain limits of market risk notifies the

Management Board.

d) Interest rate risk

The Company is exposed to various risks associated with the effect of changes in market interest rates on its

financial position and cash flows. The interest rate gap table summarises the Bank's exposure to interest rate

risks. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorized by the earlier

of contractual re-pricing or maturity dates (see Note 33).

The Bank carries out the control and analysis of interest rate risk exposure via a standard interest rate shock, a

methodology prescribed by by-laws and according to which the interest rate risk in the banking book is viewed

as a change in the value of banking book in relation to its regulatory capital. In addition to statutory limits, the

Bank prescribed internal limits that are monitored by the Control and Risk Management Department and in

case they are exceeded, it notifies the Assets and Liabilities Commission as well as the Management Board of

the Bank.





e) Foreign exchange risk

The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its

financial position and cash flows. The Bank sets limits on the level of exposure by currency and in total for both

overnight and intra-day positions.

In addition to monitoring currency risk and open foreign currency position on a daily basis, in accordance with

the by-laws, the Bank monitors and analyses the impact of the currency risk on the basis of stress tests under

certain conditions. Monitoring with the use of the VAR indicators methodology is also being introduced.

Foreign currency balance sheet and foreign exchange risk table summarizes the Bank’s exposure to foreign

currency exchange rate risk at 31 December 2016 and 31 December 2015. Included in the table are the Bank’s

assets and liabilities at carrying amounts, categorised by domestic currency and foreign currency (see Note

34).

f) Equity price risk

Equity price risk is the possibility that equity prices will fluctuate affecting the fair value of equity investments

and other derivative instruments.

The primary exposure to equity prices arises from the Bank’s holding of equity instruments available for sale.

The Bank does not actively trade in equity securities.




31. Credit risk

a) Total credit risk exposure – balance sheet and off-balance-sheet

At 31 December 2016

Gross

placements

Individually based

impairment allowance

Collectively based


Net placements ____________ ____________ ____________ ________

A. Balance sheet exposure

Cash and balances with Croatian

National Bank (Note 11) 462,851 - - 462,851

Placements with other banks (Note

12) 127,109 - 5,652 121,458


(Note 16) 787,304 - - 787,304

Financial assets at fair value through

profit or loss - - - -


(Note 15) 122,537 517 1,220 120,800

Loans to customers (Note 14) 1,978,519 166,786 16,590 1,795,143

- fully recoverable 1,633,965 - 16,590 1,642,374

- partially recoverable 262,804 85,085 - 152,720

- completely irrecoverable 81,750 81,701 - 49

Interest, fees and other assets 38,327 21,575 168 16,585

Total balance sheet exposure 3,516,647 188,877 23,629 3,304,141

B. Off-balance-sheet exposure

Customers 192,294 38 1,912 190,343

- fully recoverable 191,220 - 1,912 189,308

- partially recoverable 1,046 10 - 1,035

- completely irrecoverable 28 28 - -

Total off-balance-sheet exposure 192,294 38 1,912 190,343

TOTAL EXPOSURE (A+B) 3,708,941 188,916 25,541 3,494,484




31. Credit risk (continued)

a) Total credit risk exposure – balance sheet and off-balance-sheet (continued)

At 31 December 2015

Gross

placements

Individually based


Collectively based


Net placements ____________ ____________ ____________ ________


Cash and balances with Croatian

National Bank (Note 11) 522,199 - - 522,199

Placements with other banks (Note

12) 212,718 - 7,363 205,355


(Note 16) 763,713 - - 763,713


(Note 15) 68,821 517 683 67,621

Loans to customers (Note 14) 1,827,434 139,193 15,307 1,672,935

- fully recoverable 1,530,634 - 15,307 1,515,327

- partially recoverable 231,540 73,994 - 157,546

- completely irrecoverable 65,261 65,198 - 63

Interest, fees and other assets 45,820 23,760 220 21,840

Total balance sheet exposure 3,413,705 163,470 23,573 3,226,663

B. Off-balance-sheet exposure

Customers 211,653 63 2,087 209,503

- fully recoverable 208,691 - 2,087 206,604

- partially recoverable 2,942 43 - 2,899

- completely irrecoverable 20 20 - -

Total off-balance-sheet exposure 211,653 63 2,087 209,503

TOTAL EXPOSURE (A+B) 3,625,358 163,533 25,671 3,436,165





b) Uncollected past due receivables

Uncollected past due receivables include gross receivables based on maturity of both due and not due principal, on

an individual basis, including due but uncollected interest and other income related to the principle. Other past due

receivables include uncollected interest not past due and receivables written off whose collection is still in progress.

The total amount of individual placement is allocated to the maturity class of the oldest uncollected receivable, relating

to either principal or the interest. The financial statements do not include the impairment of loans and other

receivables.

At 31 December 2016

Past due up to 30

days

______

Past due from 31

to 90 days

______

Past due from 91

to 180 days

______

Past due from 181

to 365 days

______

Past due from 1 to

2 years

_____

Past due from 2 to

3 years ______

Past due over 3 years

______

Loans to customers 810,842 70,439 13,634 64,978 75,423 31,209 128,181


- - - - - - 517


- - - - - - -

Other past due receivables

6,729 654 353 454 452 1,438 19,205

Total uncollected past due receivables

817,571 71,093 13,987 65,432 75,875 32,647 147,903

At 31 December 2015

Past due up to 30

days

______

Past due from 31

to 90 days

______

Past due from 91

to 180 days

______

Past due from 181

to 365 days

______

Past due from 1 to

2 years

_____

Past due from 2 to

3 years ______

Past due over 3 years

______

Loans to customers 671,346 282,635 13,107 12,123 38,121 42,622 92,097


- - - - - - 517


- - - - - - -

Other past due receivables

5,312 6,574 678 250 1,776 3,724 17,489

Total uncollected past due receivables

676,658 289,208 13,785 12,373 39,897 46,346 110,102





c) Placements secured by collateral

At 31 December 2016

Deposit

_______

Housing mortgages

________

Commercial mortgages

________

Other instruments

________

No collateral

________


Cash and balances with Croatian National Bank

- - - - 462,851

Placements with other banks - - - - 127,109

Loans to customers 489,588 333,608 695,057 460,267 -

Held-to-maturity financial assets - - - 122,537 -

Other assets - - - 38,327 -

Total balance sheet exposure 489,588 333,608 695,057 621,131 589,960

B. Off-balance-sheet

exposure

Guarantees 22,393 19,532 53,272 97,031 -

Letters of credit - 65 - - -

Unused lines of credit - - - - -

Total off-balance-sheet

exposure 22,393 19,597 53,272 97,031 -

Total exposure (A+B) 511,981 353,205 748,329 718,162 589,960

At 31 December 2015 Deposit

_______

Housing mortgages

________

Commercial mortgages

________

Other instruments

________

No collateral

________


Cash and balances with Croatian National Bank

- - - - 522,199

Placements with other banks - - - - 212,718

Loans to customers 118,962 63,106 600,053 1,045,313 -

Held-to-maturity financial assets - - - 68,821 -

Other assets - - 45,820 -

Total balance sheet exposure 118,962 63,106 600,053 1,159,954 734,917

B. Off-balance-sheet

exposure

Guarantees 8,438 - 22,897 99,116 -

Letters of credit - - 769 1,990 -

Unused lines of credit - - - 78,442 -

Total off-balance-sheet

exposure 8,438 - 23,667 179,548 -

Total exposure (A+B) 127,400 63,106 623,720 1,339,502 734,917




d) Allowances ratio in loans to customers

31 December 2016 31 December 2015

Loans to customers (%)

Allowances ratio in loans (%)

Loans to customers (%)

Allowances ratio in loans (%)

Fully recoverable 82.59 1.00 83.76 1.00

Partially recoverable 13.28 51.01 12.67 53.16

Completely irrecoverable 4.13 100.00 3.57 100.00

Total 100.00 100.00

32. Liquidity risk

The amount of the total assets and liabilities was analysed according to the most conservative assumption of the

remaining maturity from the balance sheet date to the contractual maturity.

At 31 December 2016 0 - 30 days

1-3 months

3-12 months

1 - 2 years

2 - 3 years

Over 3 years Total

Assets Cash and balances with Croatian National Bank 342,413 29,431 101,434 19,867 20,711 4,525 518,381

Placements with other banks 121,458 - - - - - 121,458

Financial assets at FVTPL - - - - - 12,277 12,277

Loans to customers 208,674 68,483 310,908 214,183 174,856 818,038 1,795,143 Held-to-maturity financial assets 752 1,691 118,358 - - - 120,800 Available-for-sale financial assets - 31,619 253,829 17,232 15,742 515,582 834,004

Intangible assets - - - - - 25,772 25,772

Tangible assets - - - - - 71,019 71,019

Other assets 28,035 - - - - 23,703 51,738

Total assets 701,332 131,224 784,529 251,283 211,308 1,470,916 3,550,592

Liabilities

Deposits from banks 15,116 - - - - - 15,116

Deposits from customers 622,527 330,401 1,138,734 223,039 232,504 50,797 2,598,001

Borrowings 59,819 - 15,700 15,505 937 388,516 480,478

Other liabilities 65,126 - 23 - - - 65,150

Subordinated instruments - - - - - 82,000 82,000

Provisions for other liabilities 1,038 360 306 159 65 23 1,951

Total liabilities 763,627 330,762 1,154,763 238,702 233,505 521,336 3,242,696

Maturity gap (62,295) (199,538) (370,233) 12,581 (22,197) 949,580 307,896




32. Liquidity risk (continued)

At 31 December 2015 0 - 30 days

1-3 months

3-12 months

1 - 2 years

2 - 3 years

Over 3 years Total

Assets Cash and balances with Croatian National Bank 358,452 27,639 119,579 40,180 13,703 9,838 569,390

Placements with other banks 191,582 6,772 7,000 - - - 205,354

Financial assets at FVTPL - - - - - 12,156 12,156

Loans to customers 252,867 98,475 187,156 261,156 185,896 686,655 1,672,935 Held-to-maturity financial assets - - - 67,621 - - 67,621 Available-for-sale financial assets - 749 142,625 213,473 43,261 380,913 781,022

Intangible assets - - - - - 26,789 26,789

Tangible assets - - - - - 71,013 71,013

Other assets 35,132 - - - - 28,262 63,395

Total assets 838,033 133,634 456,359 583,161 242,860 1,215,628 3,469,675

Liabilities

Deposits from customers 528,300 311,506 1,347,720 452,852 154,436 110,877 2,905,692

Borrowings 2,802 - 15,050 16,419 24,976 67,252 126,500

Other liabilities 72,324 - 178 - - - 72,502

Subordinated instruments - - - - - 82,000 82,000

Provisions for other liabilities 1,197 246 336 312 19 40 2,150

Total liabilities 604,622 311,752 1,363,285 469,585 179,431 260,169 3,188,844

Maturity gap 233,415 (178,118) (906,925) 113,576 63,429 955,458 280,835




33. Interest rate risk

The following table is the Management Board’s estimate of the interest rate risk for the Bank at 31 December 2016

and 31 December 2015. The table provides some indication of the sensitivity of the Bank’s earnings to movements in

interest rates. Earnings will also be affected by the currency of the assets and liabilities.

At 31 December 2016

0 - 30 days

1-3 months

3-12 months

1 - 3 years

Over 3 years

Interest free

Total

Assets

Cash and balances with Croatian National Bank 462,851

-

-

-

-

55,530

518,381

Placements with other banks 121,458

-

-

-

-

-

121,458 Financial assets at FVTPL - - - - - 12,277 12,277

Loans to customers 1,670,809

52,164

72,170

-

-

-

1,795,143

Available-for-sale financial assets 775,026

-

-

-

-

58,978

834,004

Held-to-maturity financial assets 120,800

-

-

-

-

-

120,800

Tangible and intangible assets -

-

-

-

-

96,791

96,791

Other assets 36,641

-

-

-

-

15,097

51,738

Of which assets at fixed interest rate 1,655,816

1,655,816

Total assets 3,187,585

52,164

72,170

-

-

238,674

3,550,592

Liabilities

Deposits from banks 15,116

-

-

-

-

-

15,116

Deposits from customers 2,598,001

-

-

-

-

-

2,598,001

Borrowings 480,478

-

-

-

-

-

480,478

Subordinated instruments - - - - 82,000 - 82,000

Provisions for contingent liabilities -

-

-

-

-

1,951

1,951

Other liabilities 65,150

-

-

-

-

-

65,150

Of which liabilities at fixed interest rate 1,785,420

82,000

1,867,420

Total liabilities 3,158,745

-

-

-

82,000

1,951

3,242,696




33. Interest rate risk (continued)

At 31 December 2015

0 - 30 days

1-3 months

3-12 months

1 - 3 years

Over 3 years

Interest free

Total

Assets


-

-

-

-

47,192

569,930


6,772

7,000

-

-

-

205,354 Financial assets at FVTPL - - - - - 12,156 12,156


-

-

43,291

37,793

-

1,672,935

Available-for-sale financial assets 736,713

-

-

-

-

44,309

781,022

Held-to-maturity financial assets 67,621

-

-

-

-

-

67,621

Tangible and intangible assets -

-

-

-

-

97,803

97,803

Other assets -

-

-

-

-

63,395

63,395

Of which assets at fixed interest rate 1,487,337

-

-

-

-

-

1,487,337


6,772

7,000

43,291

37,793

264,854

3,469,675

Liabilities


-

-

-

-

-

2,905,692

Borrowings 126,500

-

-

-

-

-

126,500

Subordinated instruments - - - - 82,000 - 82,000


-

-

-

2,150

2,150


-

-

-

-

-

72,326

Of which liabilities at fixed interest rate 1,652,393

-

-

-

82,000

-

1,734,393


-

-

-

82,000

2,150

3,188,668

The concentration of assets as well as multiple coverage of current liabilities suggests resistance to possible shocks

from the environment as well as the possibility of recalibration of the portfolio maturity during sudden yield curve

changes.




33. Interest rate risk (continued)

The following table summarizes the effective average interest rate by major currencies for monetary financial

instruments as follows:

31 December 2016 31 December 2015

HRK Foreign currency

HRK Foreign currency

% % % %

Assets

Cash and balances with Croatian National Bank - - - -

Placements with other banks 0.52 0.01 - 0.03

Financial assets at fair value through profit or loss - - - -

Loans to customers 6.33 4.48 7.11 5.29

Available-for-sale investments 4.03 3.15 5.52 3.51

Held-to-maturity investments 6.41 5.43 8.50 5.42

Tangible and intangible assets - - - -

Other assets - - - -

Of which assets at fixed interest rate 3.70 2.83 4.30 2.66

Total assets 4.95 2.77 6.18 2.94 Liabilities

Deposits from banks 0.78 0.05 - 0.20

Deposits from customers 1.06 2.03 2.80 2.71

Borrowings 1.42 0.05 1.15 -

Provisions for contingent liabilities - - - -

Other liabilities 0.17 - 6.00 -

Of which liabilities at fixed interest rate 1.70 1.62 3.42 2.53

Total liabilities 1.15 1.96 2.84 2.71

The table below shows the sensitivity of interest-bearing assets and liabilities on changes in interest rates. For the

calculation of the interest rate sensitivity on the income statement, the Bank used the assumption of an interest rate

increase by 1% except for cash and balances at the Croatian National Bank and other assets. If the interest rates

would have decreased by the same percentage, the result would have been interest income in the same amount.

Assumed interest rate growth

Effect on income

statement for 2016

Effect on income

statement for 2015

Assets

Cash and balances with Croatian National Bank %

-

Deposits given 1.00% 1,011 2,107

Loans and receivables 1.00% 18,351 16,923

Other assets 1.00% 9,740 8,723 Liabilities

Liabilities arising from deposits 1.00% 22,026 26,050

Borrowings 1.00% 4,844 1,266

Other liabilities -% -

Impact on net interest income 2,232 436




34. Foreign exchange risk

As at 31 December 2016, the Bank had the following foreign exchange position:

EUR

USD

Other foreign

currencies

Total foreign

currencies HRK Total

Assets


712

1,291

110,955

407,426

518,381


6,218

28,845

101,088

20,370

121,458

Assets at fair value through P&L -

-

-

-

12,277

12,277


1,032

-

1,177,553

617,590

1,795,143

Held-to-maturity investments 52,545

29,121

-

81,666

39,134

120,800

Available-for-sale investments 329,183

73,482

-

402,665

431,339

834,004

Intangible assets -

-

-

-

25,772

25,772

Tangible assets -

-

-

-

71,019

71,019

Other assets 11,616

798

-

12,414

39,324

51,738


111,363

30,136

1,886,341

1,666,251

3,550,592

Liabilities

Deposits from banks 15,116

-

-

-

-

15,116


109,602

29,871

1,820,769

777,232

2,598,001

Borrowings 83,672

-

-

83,672

396,806

480,478

Subordinated instruments -

-

-

-

82,000

82,000


1,137

409

33,419

31,731

65,150


-

-

-

1,951

1,951


110,739

30,280

1,952,976

1,289,720

3,242,696

Net foreign exchange position (67,115)

624

(144)

(66,635)

374,531

307,896

Contingent liabilities and commitments -

-

-

-

192,293

192,293




34. Foreign exchange risk (continued)

As at 31 December 2015, the Bank had the following foreign exchange position:

EUR

USD

Other foreign

currencies

Total foreign

currencies HRK Total

Assets


1,021

1,450

43,971

525,419

569,390


26,806

35,164

205,354

-

205,354

Assets at fair value through P&L -

-

-

-

12,156

12,156


1,630

-

1,279,049

393,886

1,672,935

Held-to-maturity investments 38,728

28,893

-

67,621

-

67,621

Available-for-sale investments 392,397

96,232

-

488,629

292,393

781,022

Intangible assets -

-

-

-

26,789

26,789

Tangible assets -

-

-

-

71,013

71,013

Other assets 15,731

1,277

1

17,009

46,390

63,399


155,859

36,615

2,101,633

1,368,046

3,469,679

Liabilities


152,640

34,676

2,040,279

865,413

2,905,692

Borrowings 24,661

-

-

24,661

101,839

126,500

Subordinated instruments -

-

-

-

82,000

82,000


2,739

512

46,119

26,383

72,502


-

-

-

2,150

2,150


155,379

35,188

2,111,059

1,077,785

3,188,844

Net foreign exchange position (11,333)

480

1,427

(9,426)

290,261

280,835

Contingent liabilities and commitments 22,749

5,943

-

28,692

182,691

211,653




34. Foreign exchange risk (continued)

The table below presents the sensitivity of the Bank's net assets and profit or loss to fluctuations in the CNB's middle

exchange rate. If the same assumed percentage would have been applied to the decrease in the middle exchange

rate of the CNB, the impact on profit or loss by individual currency on a net basis would have been equal and

opposite, that is, the total impact on all currencies would have been charged to 2016. The result of the exchange rate

changes is reflected in the income statement as foreign exchange gains or losses.

Currency as at 31 December 2016

Assumed increase in

CNB's middle exchange rate

Effect on income

statement

Effect on income

statement

Effect on income

statement

Assets Liabilities Net

EUR 0.16% 2,689 3,660 (971)

USD 0.95% 1,049 1,902 (853)

Other currencies 292 600 (308)

Currency as at 31 December 2015

Assumed increase in

CNB's middle exchange rate

Effect on income

statement

Effect on income

statement

Effect on income

statement

Assets Liabilities Net

EUR 0.18% 2,882 3,760 (879)

USD 0.92% 1,419 2,136 (718)

Other currencies 317 594 (277)




35. Fair value of financial assets and liabilities

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing

parties in an arm's length transaction.

Financial assets at fair value through profit or loss and available-for-sale financial assets are measured at fair value.

The Bank categorises fair values by levels in line with the following hierarchy:

Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).

Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either

directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).

Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs)

(level 3).

The following table presents assets that are measured at fair value at:

Level 1 Level 2 Level 3 Total

31 December 2016

Assets

Financial assets at fair value through profit or

loss 12,277 - - 12,277

Available-for-sale financial assets 830,664 - 3,340 834,004

Total 842,941 - 3,340 846,281

31 December 2015

Assets

Financial assets at fair value through profit or

loss 12,156 - - 12,156

Available-for-sale financial assets 781,022 - - 781,022

Total 793,178 - - 793,178

A summary of the major methods and assumptions used in estimating the fair values of financial instruments not

measured at fair value is set out below.




35. Fair values of financial assets and liabilities (continued)

Loans

The fair value of loans is calculated based on discounted expected future principal and interest cash flows. Loan

repayments are assumed to occur at contractual repayment dates, where applicable. For loans that do not have fixed

repayment dates repayments are estimated based on experience from previous periods when interest rates were at

levels similar to current levels, adjusted for any differences in interest rate expectation. Expected future cash flows are

estimated considering credit risk and any indication of impairment. Expected future cash flows for homogeneous

categories of loans, such as residential mortgage loans, are estimated on a portfolio basis and discounted at current

rates offered for similar loans to new borrowers with similar credit profiles. The estimated fair values of loans reflect

changes in credit status since the loans were originated and changes in interest rates in the case of fixed rate loans.

As the Bank has a very limited portfolio of loans with fixed rates and longer-term maturity, the fair value of loans is not

significantly different from their carrying value.

Deposits from banks and customers

For demand deposits and deposits with no defined maturities, fair value is taken to be the amount payable on demand

at the balance sheet date. The estimated fair value of fixed-maturity deposits is based on discounted cash flows using

rates currently offered for deposits of similar remaining maturities. The length of relationship with depositors is not

taken into account in estimating the fair value. As most of the Bank’s deposits are given at variable rate, there is no

significant difference between the fair value of these deposits and their carrying amount.

Borrowings

As most of the Bank's long-term borrowings carry a variable interest rate, there is no significant difference between

their carrying and fair value.




36. Related party transactions

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence

over the other party in making financial or operational decisions.

Transactions and open items between related parties within the group are disclosed in the financial statements of the

entity.

Pursuant to the definition of IAS 24 and IFRS 10, the group is comprised by the parent company and its subsidiaries.

Since there is no parent company, the Company cannot disclose the name of the parent company or ultimate entity that

has control over the Company, i.e. there are no transactions that would be considered as transactions within the group.

Related party transactions are reported on the basis of the Croatian National Bank Resolution of 21 April 2015. The

Bank has fully met, within the prescribed deadlines, the measures determined by the Regulator.

The table below shows the transactions with the above related parties and the Management of the Bank:

Management Board Related parties

Type of transaction 2016 2015 2016 2015

Loans given 754 999 217,056 105,140

Material loan security and exemption from exposure - - 172,104 58,241

Deposits and loans received 54 491 178,564 148,530

Fees and other receivables 6 5 1,237 5,213

Trade and other payables - 6 4,765 3,850

Off-balance-sheet items 66 72 9,226 8,743

Total income 27 67 14,713 15,637

Total expenses 6 14 18,744 21,407

Salary and fee expenses (825) (973)

In the period from 1 January to 31 December 2016, remunerations to the Supervisory Board were paid in the amount

of HRK 371 thousand (2015: HRK 304 thousand).




37. Commitments for operating lease of vehicles and equipment

As at 31 December 2016, the Bank has 3 operating lease agreements for vehicles (2015: 3 lease agreements).

Annual commitments under operating leases are as follows:

31 December

2016 31 December

2015

Within one year 70 121

From 2 to 5 years 22 115

92 236

38. Commitments for business premises leases

As at 31 December 2016, the Bank has 22 lease agreements for business premises (31/12/2015: 24 lease

agreements). Contracted annual lease liabilities for business premises are as follows:

31 December

2016 31 December

2015

Within one year 7,762 6,499

From 2 to 5 years 31,048 25,996

From 5 to 10 years 38,810 32,495

77,620 64,990

39. Regulatory measures

In previous periods, the Bank's operations were subject to the direct supervision of the Croatian National Bank. The

Bank carried out all measures prescribed by the regulator within the prescribed deadlines.




40. Events after the balance sheet date

There were no significant changes in the current period after the balance sheet date.

41. Approval of financial statements

These financial statements were approved by the Management Board on 25 April 2017.

Signed on behalf of the Management Board:

President of the Management Board Member of the Management Board

Boris Zadro Nataša Jakić Felić

KREDITNA BANKA ZAGREB d.d. - kbz.hr banka FS_ 2016_eng.pdf · Silvije Orsag Member of the...

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