nlb montenegrobanka ad, podgorica consolidated …

NLB MONTENEGROBANKA AD, PODGORICA Consolidated financial statements for the year ended 31 December 2012 prepared in accordance with International Financial Reporting Standards

CONTENTS Page

Independent Auditor’s report

Consolidated Statement of comprehensive income 3

Consolidated Statement of financial position 4

Consolidated Statement of changes in equity 5

Consolidated Statement of Cash Flows 7

Notes to financial statements 8-75

NLB MONTENEGROBANKA A.D. PODGORICA Consolidated financial statements for the year ended 31 December 2012

(All amounts in thousand EUR unless otherwise stated)

3

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2012

Note 2012 2011

Interest income 7 34,924 41,068

Interest expenses 7 (16,099) (18,019)

Net interest income 18,825 23,049

Dividend income - 5

Fee and commission income 8 8,660 8,700

Fee and commission expense 8 (4,166) (3,913)

Net fee and commission income 4,494 4,787

Gains less losses from financial instruments held for trading 9 1,125 901 Foreign exchange translation gains less losses 10 (446) (12) Other operating income 11 322 500

Personnel expenses 12 (7,983) (7,636)

Operating lease expenses (1,460) (1,511)

Depreciation and amortisation 13 (1,455) (1,584)

Other operating expenses 14 (3,639) (3,707)

Provision for other liabilities and charges 15 (162) 1,115

Impairment charge 16 (27,833) (14,606)

(Loss)/Profit before income tax (18,212) 1,301

Income tax expenses 17 (2,835) (133)

(Loss)/Profit for the year (21,047) 1,168

Other comprehensive income, net of income tax

Fair value reserve (available-for-sale investments)

Net change in fair value 20, 33 79 (40) Other comprehensive income for the period, net of income tax 79 (40)

Total comprehensive (loss)/income for the period (20,968) 1,128

(Loss)/Profit attributable to:

Owners of the parent (21,053) 1,161 Non-controlling interest 6 7

Loss for the period (21,047) 1,168

Total comprehensive (loss)/income attributable to:

Owners of the parent (20,975) 1,121

Non-controlling interest 6 7

Total comprehensive (loss)/income for the period (20,968) 1,128

Basic and diluted earnings per share (in EUR) 18 (6.558) 0,500

Notes on pages 8 to 75 are an integral part of these consolidated financial statements.



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CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2012

Note 2012 2011

Assets

Cash and balances with Central bank 19 51,741 54,497

Financial assets available for sale 20 36,235 18,880

Loans and advances to banks 21 50,660 32,485

Loans and advances to customers 22 364,598 415,072

Property and equipment 23 4,358 5,269

Intangible assets 24 1,007 1,093

Other assets 25 2,065 1,288

Total assets 510,664 528,584

Liabilities

Derivatives – hedge accounting 26 200 441

Deposits from banks 27 1,226 753

Due to customers 27 356,528 378,085

Borrowings from banks 27 48,628 61,406

Borrowings from other customers 27 14,399 22,185

Debt securities issued 28 4,025 4,021

Subordinated liabilities 29 14,199 9,938

Provisions 30 2,103 1,934

Deferred tax liabilities 31 3,478 634

Current tax liability - 76

Other liabilities 32 14,970 3,451

Total liabilities 459,756 482,924

Capital and reserves attributable to owners of parent

Share capital 33 39,425 12,925

Share premium 33 7,146 7,146

(Accummulated) retained earnings 33 (1,269) 19,784

Reserves 33 5,582 5,664

50,884 45,519

Non-controlling interest 33 24 141

Total equity 50,908 45,660

Total equity and liabilities 510,664 528,584

Podgorica 05 August, 2013 On behalf of the Bank: Svetlana Ivanović Robert Kleindienst Anton Ribnikar Director of Finance and Accounting Executive Director Chief Executive Officer




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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Share

capital Share

premium Revaluation

reserves Profit

reserves Retained earnings Total

Non-controlling

interest Total

equity

Balance as at 1 January 2012 12,925 7,146 5 5,659 19,784 45,519 141 45,660

Total comprehensive income of the period

Loss for the period - - - - (21,053) (21,053) 6 (21,047)

Other comprehensive income, net of income tax Net change in fair value of available-for-sale investments - - 79 - - 79 - 79

Total comprehensive income for the period - - 79 - (21,053) (20,974) 6 (20,968)

Transactions with owners, recorded directly in equity Contributions by and contributions to owners

Increase of share capital 26,500 - - (161) 26,339 - 26,339 Total contributions by and distributions to owners 26,500 - - (161) - 26,339 - 26,339 Disposal of non-controlling interest in subsidiary - - - - - - (123) (123)

Balance as at 31 December 2012 39,425 7,146 84 5,498 (1,269) 50,884 24 50,908




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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)

Share

capital Share

premium Revaluation

reserves Profit

reserves Retained earnings Total

Non-controlling

interest Total

equity

Balance as at 1 January 2011 12,925 7,146 45 5,659 18,623 44,398 134 44,532

Total comprehensive income of the period

Profit - - - - 1,161 1,161 7 1,168

Other comprehensive income, net of income tax Net change in fair value of available-for-sale investments - - (40) - - (40) (40)

Total other comprehensive income - - (40) - - (40) - (40)

Total comprehensive income for the period - - (40) - 1,161 1,121 7 1,128

Transactions with owners, recorded directly in equity Contributions by and contributions to owners - - - - - - - - Total contributions by and distributions to owners - - - - - - - -

Balance as at 31 December 2011 12,925 7,146 5 5,659 19,784 45,519 141 45,660




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CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2012


2012 2011

CASH FLOWS FROM OPERATING ACTIVITIES

Interest received 34,286 41,301

Interest paid (15,877) (17,166)

Commission received 8,684 8,868

Commission paid (1,194) (3,882)

Net trading income 1,086 930

Payments to employees and suppliers (12,828) (12,569)

Other income 309 269

Other expenses (174) (154)

Dividends received - 5 Cash flows from operating activities before changes in operating assets and liabilities 11,292 17,602

Decrease/(increase) in operating assets 8,589 (5,237)

Net decrease/(increase) of obligatory reserve 3,767 (667)

Net increase in financial assets available for sale (16,316) (1,443)

Net decrease/(increase) in loans and advances 21,591 (3,329)

Net decrease/(increase) in other assets (453) 202

Increase in operating liabilities (30,273) 821

Net increase in deposits and borrowings at amortized cost (41,712) 1,772

Net increase/(decrease) in other liabilities 11,439 (951)

Cash flow from operating activities (10,392) 13,186

Income tax paid (76) (27)

Net cash flow from operating activities (10,466) 13,159

CASH FLOWS FROM INVESTING ACTIVITIES

Receipts from investing activities 202 74

Proceeds from sale of property and equipment 74 74

Proceeds from equity investments 128 -

Payments from investing activities (466) (1,083)

Purchase of property and equipment (298) (581)

Purchase of intangible asset (168) (502)

Net cash flow from investing activities (264) (1,009)

CASH FLOW FROM FINANCING ACTIVITIES

Proceeds from financing activities 30,500 -

Proceeds from subordinated liabilities 4,000 -

Proceeds from share issue 26,500 -

Net cash flow from financing activities 30,500 -

Effects of exchange rate changes on cash and cash equivalents (584) 834

Net (decrease) /increase of cash and cash equivalents 19,770 12,150

Cash and cash equivalents at beginning of year 78,270 65,286

Cash and Cash equivalents at end of year (Note 19) 97,456 78,270

NLB MONTENEGROBANKA A.D. PODGORICA Notes to the consolidated financial statements for the year ended 31 December 2012


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1. General information NLB Montenegrobanka AD, Podgorica (hereinafter: the Bank) and its subsidiary (together “the Group”) is providing universal banking services. NLB Montenegrobanka AD, Podgorica was founded in 1990 as a joint stock company. In 1995 the Bank was registered with the Commercial Court in Podgorica as a joint stock company. In 2002, following the harmonization process with the Company Law, the Bank was registered with the Central Registry of the Commercial Court in Podgorica — Registry number 4- 0006161/001. The Bank was registered with the Security Issuers Register of the Securities Commission under No. 275 (Decision No. 02/3-282/2-02). The Bank has its primary listing on the Montenegro stock exchange. The Bank is controlled by Nova Ljubljanska banka d.d. Ljubljana incorporated in Slovenia (Parent), which owns 96.70% of the ordinary shares as at 31 December 2012 (31 December 2011: 89.95% ordinary shares). The largest shareholders of Nova Ljubljanska banka d.d. Ljubljana are the Republic of Slovenia, owning 40.21 % of shares, and KBC Bank N.V. Brussels (hereinafter: KBC), owning 22.04 %. The Bank’s gyro account number with the Central Bank of Montenegro is 907-53001-03 — Payment operations. Pursuant to the Banking Law, Memorandum of Association, Articles of Association and Decision of the Central Bank of Montenegro, the Bank’s operations are permitted to include the following: • Accepting deposits and other funds from citizens and legal entities and granting loans and other placements from funds received wholly or partially on its own behalf; • Issuing guarantees and taking over other responsibilities; • Buying and collecting receivables; • Issuing, processing and recording payment instruments (including credit cards, traveller’s and banker’s checks); • Payment transfers with foreign banks: • Financial lease; • Trading in foreign currency on its own or Client’s behalf and account through currency and interest instruments, including foreign currency transactions; • Collecting data, performing analyses and providing information and advice on creditworthiness of legal entities and entrepreneurs, as well as other business issues; • Depot operations; • Safe custody • Securities’ transaction in accordance with the Law, with the Central Bank’s preapproval. The Bank operates through its Head Office in Podgorica and a network of branches (19) and cash desks (3) in the towns of: Podgorica, Ulcinj, Bar, Budva, Cetinje, Bijelo Polje, Rožaje, Mojkovac, Herceg Novi, Kotor, Nikšić, Tivat, Pijevlja, Berane and Tuzi. As of 31 December 2012 the Bank had 330 employees (2011: 338 employees). According to the Law and Articles of Association the Bank is managed by shareholders, depending on the amount of their equity. The managing bodies of the Bank are: Shareholders’ Assembly, which consists of all shareholders of the Bank and the Board of Directors, whose members are appointed by the Shareholders’ Assembly. The Board of Directors has five members, the majority of which are not employed with the Bank. The General Manager is the member of Board of Directors and the chief executive of the Bank. Management of the Bank consists of Chief executive (CEO) and executive directors (members of management). The Bank is represented by Chief executive who coordinates the work of executives and monitors the execution of activities within the Bank on daily basis. Permanent body of the Board of Directors is Audit committee. The Management of the Bank has administrative bodies: -Assets and Liabilities Committee (ALCO) -Credit Committees -Other Committees established by management for specific issues. These consolidated financial statements have been approved for issue by the Management Board on 05 August 2013.



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2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1. Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB). The Bank prepares consolidated financial statements which include the Bank and its subsidiary. The subsidiary, over which the Bank has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights, is fully consolidated. 2.2. Basis of preparation The consolidated financial statements have been prepared under the historical cost convention as modified by the valuation of available-for-sale financial assets, except for those with no reliable measurement of fair value, financial assets and financial liabilities designated at fair value through profit and loss including derivative financial instruments. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates and assumptions that affect the amounts of assets and liabilities presented, disclosure of contingent assets and liabilities at balance sheet date and the reported amounts of income and expenses incurred in the accounting period. Estimates and related assumptions are based on historical experience and the information available at the date of preparation of financial statements, which constitutes the basis for estimation of fair value of assets and liabilities which cannot be designated using other sources. The actual results may differ from these estimates. Critical accounting estimates, including the factors considered by management in making their judgement that the Bank is a going concern, are disclosed in note 4. Estimates and assumptions are subject to regular review. Modifications of accounting estimates are recognized as incurred if related exclusively to that particular period, i.e. in periods in which they incurred and future periods, if related to current and future period. 2.2.1 Implementation of new and revised International Financial Reporting Standards

During the current year, the NLB Group adopted all new and revised standards and interpretations issued by the International Accounting Standards Board (hereinafter: the IASB) and the International Financial Reporting Interpretations Committee (hereinafter: the IFRIC) and endorsed by the EU that are effective for accounting periods beginning on January 1, 2012.

a) Accounting standards and amendments to existing standards effective for annual periods beginning on January 1, 2012 that were endorsed by EU and adopted by us

- IFRS 7 (amendment) - Disclosures, Transfers of Financial Assets (effective for annual periods beginning on or after July 1, 2011). The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. The amendment includes a requirement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party yet remain on the entity's statement of financial position. Disclosures are also required to enable a user to understand the amount of any associated liabilities, and the relationship between the financial assets and associated liabilities. Where financial assets have been derecognized but the entity is still exposed to certain risks and rewards associated with the transferred asset, additional disclosure is required to enable the effects of those risks to be understood. The amendment impacts presentation aspects.

- Other revised standards and interpretations: amendments to IFRS 1 - Fist time Adoption of IFRS, relating to severe hyperinflation and removal of fixed dates for first-time adopters and amendment to IAS 12 - Income Taxes, relating to the recovery of underlying assets – investment property measured at fair value. The amendments do not have an impact on financial statements on the NLB Group.



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2. Summary of significant accounting policies (continued)

b) Accounting standards and amendments to existing standards issued that were endorsed by EU but not early adopted by the NLB Group:

- IAS 19 (amendment) - Employee Benefits (effective for annual periods beginning on or after January 1, 2013, with earlier application permitted). Amendment to standard relates to the recognition and measurement of defined benefit obligations and to the disclosure to all employee benefits. The amendment will not have an impact on financial statements on the NLB Group.

- IAS 1 (amendment) - Presentation of Financial Statements (effective for annual periods beginning on or after July 1, 2012, with earlier application permitted). The amendments retain the option to present profit or loss and other comprehensive income in either a single statement or in two separate but consecutive statements. However, the amendments require additional disclosures to be made in the other comprehensive income section, such that items of other comprehensive income are grouped into two categories: items that will not be reclassified subsequently to profit or loss; and items that will be reclassified subsequently to profit or loss when specific conditions are met. Income tax on items of other comprehensive income must be allocated on the same basis. The amendment impacts presentation aspects.

- IFRS 7 (amendments) - Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after January 1, 2013). The amendment requires disclosures that will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off. The amendment will have an impact on disclosures of financial instruments on the NLB Group.

- IAS 32 (amendments) - Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after January 1, 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the meaning of ‘currently has a legally enforceable right of set-off’ and that some gross settlement systems may be considered equivalent to net settlement.

- IFRS 10 - Consolidated Financial Statements, IFRS 11 - Joint Arrangements, IFRS 12 - Disclosures of Interests in Other Entities, a revised version of IAS 27 - Separate Financial Statements, which has been amended for the issuance of IFRS 10 but retains the current guidance for separate financial statements, and a revised version of IAS 28 - Investments in Associates and Joint Ventures, which has been amended for conforming changes based on the issuance of IFRS 10 and IFRS 11. Standards are effective for annual periods beginning on or after January 1, 2014, with earlier application permitted as long as each of the other standards is also applied early. However, entities are permitted to include any of the disclosure requirements in IFRS 12 into their consolidated financial statements without the early adoption of IFRS 12. The NLB Group is currently evaluating the potential impact that the adoption of the standards will have on its consolidated financial statements.

- IFRS 10 (new standard). The new standard replaces the parts of IAS 27 - Consolidated and Separate Financial Statements that deal with consolidated financial statements. SIC 12 Consolidation - Special Purpose Entities has been withdrawn upon the issuance of IFRS 10. Under IFRS 10, there is only one basis for consolidation, that being control. In addition, IFRS 10 includes a new definition of control that contains three elements: control over an investee, exposure, or rights to variable returns from its involvement with the investee, and the ability to use its control over the investee to affect the amount of the investor's returns. Extensive guidance has been added in IFRS 10 to deal with complex scenarios.

- IFRS 11 (new standard). The new standard replaces IAS 31 - Interests in Joint Ventures. IFRS 11 deals with how a joint arrangement, over which two or more parties have joint control, should be classified. SIC 13 Jointly Controlled Entities - Non-monetary Contributions by Venturers has been withdrawn upon the issuance of IFRS 11. Under IFRS 11, joint arrangements are classified as joint operations or joint ventures, depending on the rights and obligations of the parties to the arrangements. In contrast, under IAS 31, there are three types of joint arrangements: jointly controlled entities, jointly controlled assets and jointly controlled operations. In addition, joint ventures under IFRS 11 must be accounted for using the equity method of accounting, whereas jointly controlled entities under IAS 31 may be accounted for using the equity method of accounting or proportionate accounting.



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- IFRS 12 (new standard). The new standard is a disclosure standard and is applicable to entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. In general, the disclosure requirements in IFRS 12 are more extensive than those in the current standards.

- IFRS 13 (new standard) - Fair Value Measurement (effective for annual periods beginning on or after January 1, 2013, with earlier application permitted). The standard establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The standard defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. The scope of the standard is broad; it applies to both financial instruments and non-financial instruments for which other standards require or permit fair value measurements and disclosures about fair value measurements, except in specified circumstances. In general, the disclosure requirements in IFRS 13 are more extensive than those required in the current standards. For example, quantitative and qualitative disclosures based on the three-level fair value hierarchy, currently required for financial instruments only under IFRS 7 Financial Instruments: Disclosures, will be extended by IFRS 13 to cover all assets and liabilities within its scope. The NLB Group is currently evaluating the potential impact that the adoption of the standard will have on its consolidated financial statements.

- Other revised standards and interpretations: amendment to IFRIC 20 - Stripping Costs in the Production Phase of a Surface Mine. The amendment will not have an impact on financial instruments on the NLB Group.

c) Accounting standards and amendments to existing standards issued but not endorsed by EU:

- IFRS 9 - Financial Instruments IFRS 9 issued in November 2009 replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities. Key features of the standard are as follows:

- Financial assets are required to be classified into two measurement categories: those to be measured

subsequently at fair value, and those to be measured subsequently at amortized cost. The decision is to be made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument.

- An instrument is subsequently measured at amortized cost only if it is a debt instrument and both (i) the objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset’s contractual cash flows represent only payments of principal and interest (i.e. it bears only “basic loan features”). All other debt instruments are to be measured at fair value through profit or loss.

- All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognize unrealized and realized fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment.

- Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated as at fair value through profit or loss in other comprehensive income.

- Adoption of IFRS 9 is mandatory from January 1, 2015, while earlier adoption is permitted, but the EU has not yet endorsed it. The NLB Group is considering the implications of the standard, the impact on the NLB Group and the timing of its adoption.



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- Amendments to IFRS 10 - Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosures of Interests in Other Entities - Transition Guidance (effective for annual periods beginning on or after January 1, 2014, with earlier application permitted). Amendments were issued to ease transition to new standards by restrictions of requirements regarding assurance of adjusted comparable data for comparable period.

- Amendments to IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosures of Interests in Other Entities – Investment Entities (effective for annual periods beginning on or after January 1, 2014, with earlier application permitted). Amendments include the creation of a definition of an investment entity, the requirement that such entities measure investment in subsidiaries at fair value through profit and loss instead of consolidating them, new disclosure requirements for investment entities and requirement for an investment entity’s separate financial statements.

- Annual improvements to IFRS 2009-2011 cycle. The improvements consist of a mixture of substantive changes and clarifications and are effective for annual periods beginning on or after January 1, 2013. Amendments to IFRS 1 Fist time Adoption of IFRS include explanations of additional comparative information disclosures. If additional comparative information is provided, the information should include disclosure of comparative information for any additional statements included beyond the minimum comparative financial statement requirements. Presenting additional comparative information voluntarily would not trigger a requirement to provide a complete set of financial statements. Amendments to IAS 16 Property, plant and equipment classifies spare parts, stand-by equipment and servicing equipment as property, plant and equipment when they meet the definition of property, plant and equipment in IAS 16 and as inventory otherwise. Amendments to IAS 32 Financial instruments: Presentation require that income tax relating to distributions to holders of an equity instrument and to transaction costs of an equity transaction should be accounted for in accordance with IAS 12 Income Taxes. Amendments to IAS 34 Interim Financial Reporting require separate disclosure of total assets and total liabilities for a particular reportable segment in interim financial reporting only when the amounts are regularly provided to the chief operating decision maker and there has been a material change from the amounts disclosed in the last annual financial statements for that reportable segment. Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards require that borrowing costs incurred on or after the date of transition to IFRSs that relate to qualifying assets under construction at the date of transition should be accounted for in accordance with IAS 23 Borrowing Costs.

- Other revised standards and interpretations: IFRS 1 - Fist time Adoption of IFRS, relating to prospective application related to government loans are not expected to affect the NLB Group’s financial statements.

2.3. Consolidation

The subsidiary, over which the Bank has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights, is fully consolidated. The subsidiary is consolidated from the date on which control is transferred to the Bank, and is de-consolidated from the date on which control ceases. Where necessary, the accounting policies of the subsidiary have been amended to ensure consistency with the policies adopted by the Bank. The financial statements of consolidated subsidiaries were prepared as of the parent entity’s reporting date. Non-controlling interests are disclosed in the consolidated statement of changes in equity. Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Bank. The Bank measures non-controlling interest on a transaction on a transaction basis, either at fair value, or the non-controlling interest's proportionate share of net assets of the acquired. Non controlling interest is included in balance sheet. Inter-company transactions, balances and unrealized gains on transactions between the Bank and its subsidiary are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. The Bank applies a policy of treating transactions with non-controlling interests as transactions with equity owners of the Bank.



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2.4. Segment reporting Operating segments are reported in a manner consistent with internal reporting to the executive body, i.e. ALCO committee, which makes decisions regarding the allocation of resources and assesses the performance of a specific segment. All transactions between operating segments are conducted on an arm’s length basis. Income and expenses directly associated with each segment are included in determining each segment’s performance. In accordance with IFRS 8, the Bank has the following reportable segments: Retail banking, Corporate banking and Financial markets. 2.5. Foreign currency translation

a) Functional and presentation currency

Items included in the financial statements are measured by using the currency of the primary economic environment in which the Bank operates (functional currency). The consolidated financial statements are presented in EUR, which is the Bank’s functional and presentation currency.

b) Transactions and balances

Foreign currency transactions are translated into EUR using the exchange rate prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currency at balance sheet date are translated into EUR using the year-end exchange rates. Non-monetary items measured at historical cost in foreign currency are translated into EUR using the exchange rate prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the profit and loss. Translation differences resulting from changes in the amortized cost of monetary items denominated in foreign currency and classified as available-for-sale financial assets are recognized in the profit and loss. Translation differences on non-monetary items, such as equities classified as available-for-sale, are included together with valuation reserves in the valuation (losses)/gains taken to other comprehensive income and accumulated in revaluation reserve in equity. Gains and losses resulting from foreign currencies purchases and sale for trading purposes are included in the profit and loss as gains less losses from financial instruments held for trading. Official exchange rates for major currencies used in the translation of the consolidated statement of financial position items denominated in foreign currencies were as follows: In EUR 2012 2011 USD 0.7586 0.7729 CHF 0.8278 0.8226



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2. Summary of significant accounting policies (continued) 2.6 Financial assets

2.6.1. Classification The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables and available-for-sale financial assets. Management determines the classification of its investments at initial recognition. (a) Financial assets at fair value through profit or loss

This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified as held for trading if it is acquired or incurred principally for the purpose of selling in the near term or if there is evidence of an actual pattern of short-term profit-taking or if it is decided by the Management. Derivatives are always categorized as held for trading unless they are designated as hedging instruments. (b) 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 are 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. (c) Available-for-sale financial assets

Financial instruments are classified as available-for-sale financial assets if they cannot be classified as one of the remaining three categories of financial assets – held to maturity financial assets, financial assets at fair value through profit and loss or loans. Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. These financial instruments include investments in equity and debt securities. 2.6.2. Measurement and Recognition

Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit and loss are initially recognized at fair value, and transaction costs are recorded in profit and loss. Financial assets at fair value through profit or loss and available-for-sale financial assets are subsequently measured at fair value. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are included in the profit and loss in the period in which they arise. Gains/losses arising from changes in the fair value of available-for-sale financial assets are recognized in other comprehensive income, until the financial asset is derecognized or impaired, when the cumulative gain or loss previously recognized in other comprehensive income is recognized in the profit and loss. The fair values of quoted investments in active markets are based on current bid prices. If there is no active market for a financial asset, the Bank establishes fair value using valuation techniques. These include the use of recent arm’s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants.



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2. Summary of significant accounting policies (continued) Interest calculated using effective interest rate method and translation differences on monetary securities classified as available for sale are directly recognized in profit or loss, while translation differences on non-monetary securities available for sale are recognized in other comprehensive income, along with the change in its fair value.

Dividends on available-for-sale equity instruments are recognized in the profit and loss when the Bank’s right to receive payment is established.

Loans and advances are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost, using effective interest method. 2.6.3. De-recognition

Financial assets are derecognised when the contractual rights to the cash flows from the financial assets has expired or where the Bank has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognised when they are extinguished − that is, when the obligation is discharged, cancelled or expires. Carrying value of financial liabilities derecognized based on debt to equity swap, is extinguished with equivalent value of share capital issued based on market value per share recorded in the Montenegrin stock exchange for the Bank. 2.6.4. Fair value of financial instruments The fair values of quoted investments in active markets are based on their market price at balance sheet date, i.e. current bid prices. If there is no active market for a financial asset, the Bank establishes fair value using valuation techniques. These include the use of recent arm’s length transactions, discounted cash flow techniques or pricing models. If discounted cash flow techniques are used, estimated future cash flows are based on Management’s best estimates, and the discount rate is a market based rate at the reporting date for an instrument with similar terms and conditions. If pricing models are used, inputs are based on market based measurements at the reporting date. 2.7 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 offset the recognised amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. 2.8 Derivative financial instruments and hedge accounting Derivative financial instruments are initially recognised at fair value. At the balance sheet date derivatives are re-measured at fair value within assets when favorable to the Bank and within liabilities when unfavorable to the Bank.

The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Changes in the fair value of derivative instruments not qualified for hedge accounting are recognized immediately in the profit and loss in Gains less losses from financial instruments held for trading. Derivative financial instruments are classified as financial instruments held for trading, unless designated as hedge accounting instruments, when specific rules used in hedge accounting are applied for their recognition. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in the profit and loss, together with any changes in the fair value of the hedged items attributable to the hedged risks. Effective changes in fair value of hedging instruments and related hedged items are reflected in ‘fair value adjustments in hedge accounting’.



16

2. Summary of significant accounting policies (continued) 2.9. Interest income and expenses

Interest income and expenses for all interest-bearing financial instruments are recognised in the profit and loss on an accruals basis using the effective interest rate method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Interest income includes interest from investments with fixed return and securities designated at fair value through profit and loss, as well as accrued discounts and premiums on securities. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. 2.10. Fee and commission The fee and commission income and expenses arisen from providing, i.e. using of banking services are recorded in the profit and loss as incurred, i.e. at the moment the services are provided, i.e. used. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan. Fee and commission income and expenses also include fees from letters of guarantees and letters of credit issued by the Bank in favour of the clients, fees arising from domestic and international bank charges, agent services and other services provided by the Bank. 2.11. Impairment of financial assets a) Financial assets carried at amortised cost

The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired only if there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the asset and if those events have a reliable impact on the estimated future cash flows. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include:

significant financial difficulties experienced by the borrower,

breach of contracts/loan covenants or conditions, default or delinquency in contractual payments of principal or interest,

Initiation of bankruptcy proceedings,

deterioration in the fair value of collateral,

Deterioration of the borrower’s competitive position. The process of impairment testing is as follows: - significant loans and advances are individually reviewed, - other loans and advances are assessed collectively, - individually reviewed loans and advances showing no evidence of impairment are included in the group of loans and

advances with similar credit risk characteristics and collectively assessed for impairment,

- loans and advances that are individually assessed for impairment and for which an impairment loss is or continues to

be recognized are not included in a collective assessment of impairment,



17


For the purpose of collective assessment of impairment the following is considered:

- future cash flows for the group of loans and advances are assessed with regard to historical loss statistics for assets with similar credit risk characteristics,

- the discount factor used for discounting cash flows represents the specific average effective interest rate of the group of loans and advances,

- the appropriateness of methodology and assumptions used with determining future cash flows are subject to regular review.

For the purposes of a collective evaluation of impairment, the Bank uses migration matrices, which show expected migration of customers between internal rating classes. The probability of migration is assessed on the basis of past years’ experience, that is annual migration matrices for different types of customers. Exposures to individuals are additionally analyzed with regard to type of products. Based on the migration matrices and assessment of average repayment rate for D and E rated customers, the Bank recognizes impairment losses also for clients that currently show no signs of impairment, but on the basis of past experience the Bank justifiably estimates that some losses have already been incurred. If it is determined that, with regard to loans and advances and formed groups, objective evidence of impairment loss exists, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the profit and loss. If financial assets have a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. Loans and receivables are eventually written off when all possibilities for their collection are exhausted, in accordance with internal Bank regulations, against the related allowance account for impairment. Subsequent recoveries of previously written off loans are recognised as decrease of loss from impairment of assets in the profit and loss. b) Financial assets classified as available for sale The Bank assesses at each balance sheet date whether there is objective evidence that financial assets available for sale are impaired. In case of equity investments classified as available for sale, significant or prolonged decline in the fair value of the security below its cost is considered an objective evidence of impairment. If any such evidence exists, the cumulative loss is removed from other comprehensive income and recognised in the profit and loss. Impairment losses recognised in the profit and loss on equity instruments are not reversed through the profit and loss; subsequent increases in fair value after impairment are recognized in other comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the profit and loss, the impairment loss is reversed through the profit and loss. The following factors are considered in determining impairment losses on debt instruments:

- Default or delinquency in interest or principal payments; - Liquidity difficulties of the issuer; - Breach of contract covenants or conditions; - Bankruptcy of the issuer; - Deterioration of economic and market conditions and - Deterioration in the credit rating of the issuer below the acceptable level.

Impairment losses recognized in the profit and loss are measured as the difference between the carrying amount of the financial asset and its current fair value. The current fair value of the instrument is its market price or discounted future cash flows, when the market price is not obtainable.



18

2. Summary of significant accounting policies (continued) c) Renegotiated loan Loans for which, due to deterioration of the debtor’s credit rating, new payment terms have been renegotiated, are no longer considered to be past due, but are treated as new loans. d) Repossessed assets In certain circumstances, assets are repossessed following the foreclosure on loans that are in default. These assets are except where otherwise stated, included in “Other Assets”. Repossessed Assets are held temporarily for disposal and are valued at the lower of cost and net realisable value. Any gains or losses on disposal are included in “Other operating income”. 2.12 Intangible assets Licenses

Separately acquired licenses are shown at historical cost. Licenses have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost of licenses over their estimated useful life of five years. Computer software Computer software costs are capitalized in the amount of costs incurred to bring software to use. These costs are amortized over their estimated useful lives of ten years. The depreciation period for intangible assets begins when they become available for use. 2.13 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any impairment loss. Cost includes expenditure that is directly attributable to the acquisition of the fixed asset. The assets’ residual values and useful lives are reviewed and adjusted if appropriate at each balance sheet date. The Bank assesses whether there is objective evidence that assets may be impaired. If any such evidence exists, the recoverable amount is estimated. The recoverable amount is the higher of fair value less costs to sell and value in use. If value in use is higher than carrying value, the asset should not be subject to impairment.

Subsequent costs are included in the asset’s purchase cost or are recognised as a separate asset, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to other operating expenses during the financial period in which they are incurred. Depreciation of assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives. The following are approximations of the annual rates used:

%

Buildings 3

Computers and computer equipment 20

Furniture and equipment 10

Vehicles 20

Leasehold improvements 20

The depreciation period for fixed assets begins when they become available for use. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in other operating income/expenses in the profit and loss.



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2. Summary of significant accounting policies (continued) 2.14 Non-current assets held for sale Non-current assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. The condition is met only when the sale is highly probable and the asset is available for immediate sale in its present condition. The sale should be finished within one year from the date of classification, or in an extensive period if the sale process had already begun. Non-current assets held for sale are measured at the lower of the assets’ previous carrying amount and fair value less cost of sale. 2.15 Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the profit and loss on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payments required to be made to the lessor by way of penalty are recognized as expenses in the period in which termination takes place. 2.16 Cash and balances with Central bank Cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition, including cash and non-restricted balances with the Central bank of Montenegro (except for 50 % of obligatory reserves), and amounts held with domestic and foreign banks. Obligatory reserves Decision on Obligatory Reserves of Banks with the Central Bank of Montenegro stipulates the calculation, setting aside and usage of obligatory reserve funds with the Central Bank of Montenegro. The new Decision of the Central Bank of Montenegro on Obligatory Reserves of Banks with the Central Bank of Montenegro has been enacted in 2011, (“Official gazette of Montenegro”, no. 35/11) and it prescribes that obligatory reserve is to be calculated at the rate of 9.5% on the part of the base consisting of call and termed deposit contracted with maturity up to one year, i.e. 365 days; at the rate of 8.5% on the part of the base consisting of termed deposits with contractual maturity over one year, i.e. over 365 days. On the termed deposits with maturity over one year, i.e. over 365 days, with the clause concerning possibility of re-depositing within the period less than one year, i.e. less than 365 days, obligatory reserves are made by applying a rate of 9.5 %.

According to the Decision Amending Decision on Obligatory Reserves of Banks with the Central Bank of Montenegro (“Official gazette of Montenegro”, no. 35/11, 22/12) the banks have been given the possibility to keep up to 35% of obligatory reserves in the form of Treasury bills issued by Montenegro, as well as the possibility to use up to 50% of obligatory reserve funds when necessary for maintenance of daily liquidity. The Bank used the possibility to invest 35% of obligatory reserves into Treasury bills of Montenegro, whereas it did not use the obligatory reserve funds for maintenance of daily liquidity.

The Central Bank pays monthly interest to the Bank, which is calculated at the rate of 1% per annum on 25%, of the obligatory reserve set aside, i.e. on 15% according to the amended Decision on Obligatory Reserves f Banks with Central Bank of Montenegro. A bank that miscalculates the obligatory reserves or fails to set aside obligatory reserves within defined time period, is obliged to pay monthly interest on the determined amount of the lower obligatory reserves at the rate of 12% per annum.



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2. Summary of significant accounting policies (continued) 2.17. Provisions Provisions are recognised when: - the Bank has a present legal or constructive obligation as a result of past events; - it is more likely than not that an outflow of resources will be required to settle the obligation and - The amount can be reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation. Provisions are reviewed at each balance sheet date and adjusted so as to reflect the best current estimate. If it is no longer likely that an outflow of funds which generates economic benefits will be required for settlement of the liability, the provision is derecognised through the profit and loss. 2.18. 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 facilities. Financial guarantees at the date of issue are recognised at fair value which is equal to the amount of the fee received. The fee is amortized to the profit and loss during the contract period using the straight-line method. The Bank’s liabilities under guarantees are subsequently measured at the greater of:

the initial measurement, less amortization calculated to recognize fee income over the period of guarantee; or

the best estimate of the expenditure required to settle the obligation. 2.19. Borrowings Borrowings are recognised initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds net of transaction costs and the redemption value is recognised in the profit and loss over the period of the borrowings using the effective interest method. 2.20. Debt securities in issue Issued debt securities are recognized at their fair value plus transaction costs that are directly attributable to the issue of the debt securities. Issued debt securities are subsequently measured at amortised cost. Interests, discounts and premiums are recognized in the profit and loss as interest expenses deferred over their maturity period. 2.21. Employee benefits a) Pension obligations Short-term employee benefits include salaries and all contributions. Short-term employee benefits are recognized as expenses in the period in which they were incurred. The Bank and its employees are obliged to make payments to the pension fund of the Republic of Montenegro in accordance with the defined contribution plan. The Bank has no legal or constructive obligation to pay further contributions that are the obligation of the Fund. Taxes and contributions relating to contribution plans are recognized as expenses in period to which they relate to.



21

2. Summary of significant accounting policies (continued) 2.21. Employee benefits (continued) b) Retirement indemnity bonuses Total expenses for long term provisions related to the future outflows regarding retirement of employees are assessed based on actuarial calculations. For the purposes of the assessment, the Bank engages a certified actuary who performs the calculation of the present value of future liabilities by using the applicable discount rate. These obligations are measured at the present value of future cash outflows considering future salary increases and then apportioned to past and future employee service based on benefit plan terms and conditions. All gains and losses arising from changes in assumptions and experience adjustments are recognized immediately in the profit and loss. c) Termination benefits and jubilee awards Termination benefits are payable when employment is terminated, before the regular retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Bank pays jubilee awards in periods of 10, 20 and 30 years. The most important assumptions used in the actuarial calculation are: adequate discounting factor, number of employees that have right for retirement benefits, increase in salaries in accordance with inflation, promotions and salaries increase in accordance with past service. 2.22. Taxation Current income tax Income tax is calculated in accordance with the Law on Income Tax by applying the prescribed rate on the taxable income as disclosed in the Tax return. The taxable income is determined by reconciling the income disclosed in the profit and loss for certain incomes and expenses, in a manner defined by the tax regulations. The income tax expense is calculated by applying a rate of 9% on taxable income (2011: 9%). Deferred income tax Deferred income taxes are provided on temporary differences between the tax base of assets and liabilities and their carrying amounts in the financial statements of the Bank. Deferred income tax is calculated, using the balance sheet liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are recognized if it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred tax related to fair value re-measurement of available-for-sale investments is charged or credited directly to other comprehensive income, and simultaneously recognised in the profit and loss together with the deferred gain or loss. Deferred taxes are calculated based on the 9% rate. 2.23. Share Capital Paid in share capital of the Bank is the monetary amount paid by the shareholders. The share capital of the Bank comprises ordinary shares and is recorded as a separate position within the balance sheet.

Dividends on shares are recognised in equity in the period in which their payment was approved. 2.24. Fiduciary activities The Bank manages a significant amount of assets on behalf of legal entities and individuals and charges fees for such services. These assets are not shown in the Bank’s balance sheet but details on fiduciary activities are given in note 35.



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3. Financial risk management

The Bank has exposure to the following risks: • Credit risk, • liquidity risk, • market risks, • operational risks and • country risk. This note presents information about the Bank’s exposure to each of the above risks, the Bank’s objectives, policies and processes for measuring and managing risk, and the Bank’s management of capital. Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework. The Board has established the Asset and Liability Committee (ALCO), Credit Committees and Audit Committee. The Bank’s risk management policies are established to identify and analyze the risk faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Bank’s Audit Committee is responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risk faced by the Bank. The Bank’s Audit Committee is assisted in by Internal Audit. Internal Audit undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. Financial risk management is based on organisational independence, high quality procedures, an appropriate system of internal controls, and is aimed at minimising risks in terms of achieving projected business and financial performance and the optimal use of capital. Risk management process in the Bank is mainly regulated by the Law on banks and other regulations of the Central bank of Montenegro. In addition, the risk management process is regulated by the internal regulations defining the aim of management, methodology and monitoring specific types of risk. Those internal regulations are adopted by the Board of Directors. Year 2012 is characterized by the extended effects of the global financial crisis. This is especially shown in the increase of insolvency, and, consequently, growth of overdue loans and non-quality assets in banks. Under these conditions the Bank continued to prepare more frequent credit analyses of materially significant clients and various types of stress scenarios. As for market risk management, the Bank had low risk exposure. In the structural liquidity segment, in accordance with the strategy of investing in debt securities, the Bank commences generating secondary liquidity reserves through investment in state bonds of the countries with the highest rating and in domestic treasury bills.



23

3. Financial risk management (continued) 3.1 Credit risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Bank’s loans and advances to customers and other banks and investment debt securities. For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk). The credit portfolio of the Bank comprises the loans, securities, interest, fees, deposits and advances as well as guarantees, letters of credit, commitments and contingencies and derivatives towards corporate entities, banks, state, private entrepreneurs, individuals and other customers. Prior to granting, each placement is classified and its top limit is determined. In classification, the Bank uses internal methodology which implies a debtor’s ability to make regular payments to the Bank and other creditors. It is necessary to account for both managerial and financial abilities of debtors, quality as well as quantity information. In addition, the classification takes into consideration the previous client relationship with the Bank, the ability to provide cash flows to meet future obligations, and other relevant factors such as information on the general economic cycle, condition and prospects of the industry and debtor’s position within the industry, and the reconciliation of the purpose of the loan to a debtor’s industry. In addition to monitoring individual placements, credit risk is monitored at the level of the entire portfolio. Thus, the structure and movement of portfolio is monitored in terms of structure by types of credit, credit rating groups, by types of products, industries, and amounts of placements. Special attention is paid to transfer matrices, monitoring of overdue payments, low quality assets and monitoring of major debtors, i.e. all clients and group of associated clients with a total exposure above 10% of risk capital. The Bank calculates impairment provisions in accordance with the International Financial Reporting Standards. The provisions are calculated with regard to the risk of individual placement and existence of objective evidence of impairment, taking into consideration quality, value, and market quality of collaterals. Impairment provisions are created on a group and individual basis. Individually significant placements are assessed for impairment on an individual basis, while the remainder of the credit portfolio is assessed collectively. Individually significant placements are placements with: • Banks • All placements in A, B and C category whose exposure is over EUR 200,000 • All placements in D and E category whose exposure is over EUR 10,000 • Retail clients with exposure exceeding EUR 500,000 a) Derivatives The Bank maintains strict control limits on net open derivative positions, i.e. the difference between purchase and sale contracts, both by amount and term. The Bank mainly concludes currency and interest rate derivative contracts for the purposes of hedging the positions within the Bank’s book. The amount subject to credit risk is limited to the recoverable credit value of instruments, defined by the statute. This credit risk exposure is monitored and managed as part of the overall lending limits with customers, together with potential exposures from market movements. b) Credit-related commitments Credit-related commitments are instruments which ensure that funds are available to a customer as required. Guarantees and commercial letters of credit – which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount in case of default of the Client - carry the same credit risk as loans. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because a longer term period generally implies a greater degree of credit risk.



24

3. Financial risk management (continued) 3.1 Credit risk (continued) c) Internal rating system

31 December 2012 31 December 2011

Loans and advances %

Impairment provisions%

Loans and advances %

Impairment provisions%

A 38.72% 0.97% 40.96% 2.62% B 18.26% 2.49% 27.63% 7.52% C 13.28% 11.37% 16.36% 31.39% D+E 29.74% 85.17% 15.05% 58.48% Total 100.00% 100.00% 100.00% 100.00%

A credit rating reflects the credit quality of a customer, whose exposure derives from a financial instrument. An “A” credit rating is given to first-class customers, who are not expected to encounter difficulties in repaying their obligations. A credit rating of “B” indicates customers with a slightly worse financial position, which is temporary in nature and does not indicate difficulties in repaying obligations. A credit rating of “C” indicates customers who are undercapitalized and highly indebted, or those customers that generally do not generate sufficient cash flows to repay their obligations, and so thus may pay their obligations in arrears. Credit ratings of “D” and “E” indicate customers with evident financial difficulties, or those who are in the process of compulsory settlement or bankruptcy. It is expected that these clients will not be able to repay most or even any of their obligations from their operating cash-flow. Customers with a “C” credit rating or worse must provide additional collateral to cover their exposure in the amount of credit replacement value. Maximum credit risk exposure

31. December 2012

Gross maximum

exposure Impairment

provision

Net maximum

exposure Loans and advances to banks 50,660 - 50,660

Loans and advances to clients

Loans to government 7,903 (343) 7,560

Loans to financial organisations 1,667 (16) 1,651 Loans to individuals 175,961 (18,656) 157,305 Credit line 1,098 (426) 672 Credit cards 8,781 (1,668) 7,113 Housing loans 114,971 (10,845) 104,126 Consumer loans 50,534 (5,624) 44,910 Other loans to individuals 577 (93) 484 Loans to legal entities 251,100 (53,018) 198,082 Loans to small and medium entities 243,317 (51,499) 191,818 Loans to large entities 7,783 (1,519) 6,264

Total loans and advances to clients 436,631 (72,033) 364,598

Government securities 35,864 - 35,864 Other assets 1,801 (959) 842 Contingent liabilities 60,657 (1,311) 59,346 Letters of credit 5,531 - 5,531 Short-term guarantees 41,904 (1,311) Long-term guarantees 6,552 47,145 Other commitments and contingencies 6,670 - 6,670 TOTAL 585,613 (74,303) 511,310



25

3. Financial risk management (continued) 3.1 Credit risk (continued)

31. December 2011

Gross maximum

exposure Impairment

provision

Net maximum

exposure Loans and advances to banks 32,485 - 32,485


Loans to government 8,116 (224) 7,892 Loans to individuals 182,528 (15,547) 166,981 Credit line 1,242 (338) 904 Credit cards 9,141 (1,181) 7,960 Housing loans 119,450 (8,866) 110,584 Consumer loans 51,983 (5,066) 46,917 Other loans to individuals 712 (96) 616 Loans to legal entities 269,022 (28,823) 240,199 Loans to small and medium entities 260,868 (28,769) 232,099 Loans to large entities 237 (1) 236 Loans to financial organisations 7,917 (53) 7,864 Total loans and advances to clients 459,666 (44,594) 415,072

Government securities 18,625 - 18,625 Other assets 1,496 (896) 600 Contingent liabilities 85,756 (1,149) 84,607 Letters of credit 4,400 (6) 4,394 Short-term guarantees 33,708 (494) 33,214 Long-term guarantees 30,797 (641) 30,156 Other commitments and contingencies 16,851 (8) 16,843 TOTAL 598,028 (46,639) 551,389

The maximum exposure represents a worst case scenario of credit risk exposure, which is the maximum possible loss without taking account of any collateral held. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the balance sheet and on nominal amounts of receivables for off-balance sheet items.



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3. Financial risk management (continued) 3.1 Credit risk (continued) Loans and other financial assets that are neither past due nor impaired and group net impaired loans and other financial assets for A and B clients who are not past due

2012

A B C D + E Total

Loans to banks 50,629 31

50,660

Loans to clients

Loans to financial organisations 856 74

930

Loans to government

2,332

2,332

Loans to individuals 107,518 6,269

2 113,789

Credit line 559 11

570

Credit cards 6,281 175

6,456

Housing loans 69,450 4,713

74,163

Consumer loans 30,926 1,371

2 32,298

Other loans to individuals 302

302

Loans to legal entities 10,550 45,360 527 29 56,466

Loans to small and medium entities 10,550 45,358 527 29 56,464

Loans to large entities

2

2

Total loans and advances to clients 118,924 54,035 527 31 173,517

Other assets 655 39

704

Total 170,208 54,105 527 31 224,881

2011

A B C D + E Total

Loans to banks 32,212 273

32,485

Loans to clients

Loans to government 0 1,768 13 0 1,781

Loans to individuals 115,614 6,976 21 53 122,664

Credit line 742 25 3 49 819

Credit cards 6,802 250 17 4 7,073

Housing loans 74,477 4,010 -

-

78,487

Consumer loans 33,209 2,691 1

35,901

Other loans to individuals 384

384

Loans to legal entities 27,732 56,660 1,182 142 85,716

Loans to small and medium entities 20,732 55,756 1,182 142 77,812


2

2

Loans to financial organisations 7,000 902

-

- 7,902

Total loans and advances to clients 143,346 65,404 1,216 195 210,161

Financial instruments available for sale 18,625

18,625

Other assets 545 18 2 8 573

Total 194,728 65,695 1,218 203 261,844



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3. Financial risk management (continued) 3.1 Credit risk (continued) Loans and other financial assets that are past due and not impaired and group net impaired loans and other financial assets for A and B clients who are past due

31. December 2012 Up to 30 days Up to 90 days Over 90 days Total

Loans to banks - - - -

Loans to government 3 - - 3

Loans to financial organisations -

692 -

692

Loans to individuals 20,517 10,675 173 31,365

Credit line 33 13 47 93

Credit cards - 343 101 444

Housing loans 15,070 8,362 - 23,432

Consumer loans 5,414 1,957 25 7,396

Other loans to individuals - - - -

Loans to legal entities 12,739 7,249 - 19,988

Loans to small and medium entities 11,620 6,389 - 18,009

Loans to large entities 1,119 860 - 1,979

Total loans and advances to clients 33,259 18,616 173 52,048

Other assets 10 1 43 54

Total 33,269 18,617 216 52,102

31. December 2011 Up to 30 days

Up to 90 days

Over 90 days Total

Loans to banks 0 0 0 0

Loans to government 3,234 462 0 3,696

Loans to individuals 24,907 11,995 1,086 37,988

Credit line 55 28 157 240

Credit cards 0 423 558 981

Housing loans 18,438 8,374 104 26,916

Consumer loans 6,259 3,094 267 9,620

Other loans to individuals 155 76 - 231

Loans to legal entities 41,452 19,646 1,001 62,099

Loans to small and medium entities 41,217 19,646 1,001 61,864

Loans to large entities 235 -

- 235

Loans to financial organisations -

-

- -

Total loans and advances to clients 69,593 32,103 2,087 103,783

Other assets 23 7 3 33

Total 69,616 32,110 2,090 103,816



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Impaired financial instruments

31. December 2012 Individually impaired loans and advances Collectively impaired loans and advances for

C, D and E clients

Gross value

Impairment provision

Net maximum

exposure Gross value Impairment

provision

Net maximum

exposure

Loans to banks - - - -

-

-

Loans to government 5,452 (288) 5,164 77 16 61

Loans to financial organizations 44 15 29 - - -

Loans to individuals 7,314 (1,207) 6,107 - - -

Credit line 9 (9) - 420 411 9

Credit cards 20 (20) - 1,804 1,591 213

Housing loans 3,867 (1,144) 2,732 12,525 8,717 3,808

Consumer loans 3,418 (34) 3,384 7,109 5,277 1,832

Other loans to individuals - - - 285 103 182

Loans to legal entities 168,735 (50,972) 117,763 4,995 1,130 3,865

Loans to small and medium entities 162,963 (49,483) 113,480 4,995 1,130 3,865


5,772

(1,489)

4,283 - - -

Total loans and advances to clients 181,545 (52,482) 129,063 27,215 17,245 9,970

Other assets 932 (906) 26 102 44 58

Total 182,477 (53,388) 129,089 27,317 17,289 10,028



29


31. December 2011.

Individually impaired loans and advances

Collectively impaired loans and advances for C, D and E clients

Gross value

Impairment provision

Net maximum

exposure Gross value

Impairment

provision

Net maximum

exposure

Loans to Banks - - -

- -

-

Loans to government 1,100 (110) 990 1,538 (30) 1,508

Loans to individuals 5,055 (1,441) 3,614 16,804 (11,624) 5,180

Credit line 8 (4) 4 175 (170) 5

Credit cards 25 (25) 0 1,062 (939) 123

Housing loans 4,450 (1,103) 3,347 9,586 (6,311) 3,275

Consumer loans 572 (309) 263 5,883 (4,120) 1,763

Other loans to individuals - - - 98 (84) 14

Loans to legal entities 116,101 (25,911) 90,190 4,841 (461) 4,381

Loans to small and medium entities 116,086 (25,896) 90,190 4,841 (461) 4.381

Loans to large entities - - - 11 0 11

Loans to financial organisations 15 (15) - - - -

Total loans and advances to clients 122,256 (27,462) 94,794 23,183 (12,115) 11,069

Other assets 890 (890) - - - -

Total 122,256 (27,462) 94,794 23,183 (12,115) 11,069



30

3. Financial risk management (continued) 3.1 Credit risk (continued) Financial effect of collateral from loans and advances

31. December 2012

Fully/over collateralised loans and other

fin.assets

Under-collateralised loans and other

fin.assets

Non-collateralised

loans and other

fin.assets

TOTAL CARRYING VALUE

OF LOANS

AND OTHER

FIN.ASS.

TOTAL FAIR

VALUE OF

COLLATERAL

Net carrying value of

loans and oth.fin.ass.

Fair value of

collateral

Net carrying value of

loans and oth.fin.ass.

Fair value of

collateral

Net carrying value of loans

and oth.fin.ass.

Loans to government 7,560 34,231 - - - 7,560 34,231 Loans to financial organizations 795 2,369 - - 856 1,651 2,369

Loans to individuals 150,680 660,577 2,071 251 4,554 157,305 660,828

- granted overdrafts

672 672 - credit cards 76

1,767

5,270 7,113

- loans for houses and flats 104,071 482,512 52 24 3 104,126 482,536

- consumer loans 46,049 176,262 252 227 (1,391) 44,910 176,489

- other loans 484 1,803 - - - 484 1,803 Loans to large corporate customers 6,252 24,430 - - 12 6,264 24,430 Loans to small and medium size enterprises 189,831 539,252 1,549 2,322 438 191,818 541,574

Total 355,118 1,260,859 3,620 2,573 5,860 364,598 1,263,432



31

3. Financial risk management (continued) 3.1 Credit risk (continued) 31. December 2011

Fully/over collateralized loans and advances

Non collateralized and Under- collateralized loans and advances

Net carrying value of loans and

advances

Fair value of

collateral

Net carrying value of loans and

advances Fair value of

collateral

Loans and advances to banks - - 32,485 -


Loans to government 7,892 27,139 - -

Loans to individuals

Credit line - - 904 -

Credit cards 1 1 7,959 376

Housing loans 110,506 512,323 78 15

Consumer loans 46,708 203,987 210 178

Other loans to individuals 617 1,913 - -

Loans to legal entities

Loans to small and medium entities 226,918 914,100 5,179 6,195

Loans to large entities 234 3,800 2 -

Loans to financial organizations 7,864 9,515 - -

Other assets 4 529 552 -

Total 400,744 1,673,307 47,369 6,764

The Bank receives different types of collateral to mitigate credit risk. Decision on the type and value of collateral depends on analysis of the client and potential investment. For certain types of loans and advances to customers the Bank is well collateralized, with fair value of collateral exceeding amounts of claims that are past due. In such a manner the Bank is protected against the potential default of the client. The disclosed fair value of collateral is determined by an internally certified evaluator and represents value realisable by the legal owners of the assets. Past due but not impaired financial instruments are those for which contractual interest or principal payments are past due but the Bank believes that impairment is not appropriate on the basis of the level of collateral available and/or the stage of collection of amounts owed to the Bank. The disclosed fair value of collateral is determined by local certified estimators. Management considers the loans covered by collateral on corporate loans as impaired because experience shows that a significant proportion of the collateral on corporate loans cannot be enforced due to administrative and legal difficulties such as extended administrative time necessary for collaterals to be enforced. The impairment provisions reflect the probability that management will not be able to enforce its rights and repossess collateral on defaulted loans. Despite difficulties in enforcing repossession of collateral, the Bank's management will vigorously pursue the outstanding debts with all possible means at their disposal.

Repossessed collateral Property obtained by the Bank during the year by taking possession of collateral held as security against loans and advances as at 31 December 2012 has a carrying value of EUR 807 thousand (2011: EUR 128 thousand).



32

3. Financial risk management (continued) 3.1 Credit risk (continued) Analysis of financial instruments by geographical sector

31 December 2012 Slovenia EU Croatia

Bosnia and Herzegovina Montenegro Other Total

Loans to government - - - - - 7,560 7,560 Loans to financial organizations - 856 - - - 795 1,651

Loans to banks 47,330 3,178

- 17 - 135 50,660 Loans to individuals 126 248 6 143 156,368 414 157,305 Loans to corporate entities

-

-

- - 198,082 29 198,082

Securities available for sale 22,771 -

13,093

35,864

Other assets - 19 - - 708 115 842 Other commitments - 25

- - 54,735 1 54,761

70,227 4,326 6 160 422,986 9,008 506,725

31 December 2011 Slovenia EU Croatia

Bosnia and Herzegovina Montenegro Other Total

Loans to government 0 0 0 0 8,116 0 8,116


- - 1 188 32,485 Loans to individuals 148 231 3 106 181,464 576 182,528 Loans to corporate entities

-

-

- - 268,711 29 268,740

Securities available for sale 1,777 1,995

14,853

18,625

Other assets 0 269 21 - 1,146 59 1,495 Other commitments 1,603 264

- 2,998 78,458 2,433 85,756

31,691 6,892 24 3,104 552,749 3,285 597,745



33

3. Financial risk management (continued) 3.1 Credit risk (continued) Industry sector analysis of credit risk The Bank monitors concentrations of credit risk by sector. An analysis of concentrations of credit risk as at 31 December is shown below:

31-Dec-12 31-Dec-11

Net loans % Net loans %

Banks 50,660 12.19% 32,484 7.26% Finance 1,651 0.39%

Public services 7,560 1.82% 7,893 1.76% Citizens 157,305 37.88% 166,982 37.31% Electricity, gas, water 224 0.06% 457 0.10% Construction industry 17,383 4.18% 18,327 4.09% Industry 37,579 9.04% 49,331 11.02% Agriculture 449 0.10% 837 0.19% Mining 12,509 3.01% 15,500 3.46% Private entrepreneurs 775 0.18% 1,086 0.24% Services 45,487 10.95% 44,243 9.89% Hospitality 2,237 0.53% 21,266 4.75% Transport and communications 13,057 3.14% 15,751 3.52% Trading 68,382 16.46% 73,398 16.40%

Total 415,258 100.00% 447,555 100.00%



34

3. Financial risk management (continued) 3.2 Liquidity risk Liquidity management, both operational and structural is regulated by the Policy and Strategy of liquidity management, Plan of liquidity management in unexpected situations and Guidance and Procedures for liquidity management. All the above mentioned documents are adopted by the Board of Directors as suggested by ALCO Committee. Liquidity management policy is established to identify liquidity risk, methods and procedures for adequate measurement and management of liquidity risk, roles and responsibilities of the Bank within the system of liquidity risk management, and methods for monitoring the current liquidity and future cash flows as well as measures for achievement of the optimal liquidity. In accordance with the liquidity management policy, the main related objectives are as follows: - maintaining short-term and long-term liquidity; - settling all due payments; - use of the most favourable sources for settling due payments; - adhering to legal requirements and regulations, i.e. standards on NLB Group level, as well as internal criteria and aims as defined by the Policy, or other Bank regulations governing liquidity scope. Effective liquidity management is achieved by: - determining the period of liquidity risk management; - measuring the required minimum level of liquidity; - determining and monitoring structural indicators, i.e. liquidity indicators; - monitoring and measuring the maturity matching of assets and liabilities at specific time intervals; - monitoring the stability of deposits by maturity and their concentrations to individual customers; - planning and providing cover cash outflows with cash inflows. The Bank manages liquidity risk effectively at the operational and structural level. Operating liquidity management is achieved through the following: - day-to-day monitoring of assets and liabilities, i.e. planning daily inflows and outflows; - planning cash flows by days for the following month; - planning liquidity by months for the following six month period or one year; - monitoring and measuring main liquidity indicators on daily basis; - monitoring concentration of major deposits and through the active cooperation with the most important clients aimed at due announcement of inflows/outflows. Structure liquidity management is achieved through the following: - monitoring and measuring maturity gap between assets and liabilities; - monitoring and measuring structural liquidity indicators; - monitoring and measuring the stability of a vista deposits. The Bank performs a monthly test of liquidity in different situations, using different types of stress scenarios, as follows: - in normal circumstances; - in stressful circumstances (scenario specifically for the bank, scenario specific for market and the combined scenario). Based on the test liquidity results, Bank determined measures to close the resulting mismatch of assets and liabilities. The liquidity of Bank is discussed by the Liquidity Commission on daily basis, and once a month meetings of ALCO Committee and the Board of Directors are held with a view to discussing the report on liquidity management.



35

3. Financial risk management (continued) Contingent liquidity management is achieved through the following: - Preparation of contingent liquidity management plan, - Monitoring of bank processes that could affect the methods, abilities and quality of Bank liquidity management, - Implementation of activities defined by the Contingent liquidity management plan. The liquidity of Bank is discussed by the Liquidity Commission on daily basis, and once a month (or more often, if necessary) meetings of ALCO Committee and the Board of Directors are held with a view to discussing the report on liquidity management. Non-derivative cash flow The following table presents contractual cash flows wider non-derivative financial instruments by remaining contractual maturities at year end. The amounts disclosed in the table are the contractual undiscounted cash flows.

31-Dec-12

Up to one month

1 to 3 months

3 to 12 months

1 to 5 years

Over 5 years Total

Cash and cash equivalents 51,741 - - - - 51,741 Securities 68 8,474 27,322 - 371 36,235 Loans and advances to banks 50,660 - - - - 50,660 Loans and advances to customers 91,453 21,599 77,020 170,841 88,349 449,262 Other assets 2,065 - - - - 2,065

Total financial assets 195,987 30,073 104,342 170,841 88,720 589,963

Deposits from banks 1,556 702 - - - 1,258 Borrowings from banks 951 1,561 23,344 23,746 3,473 53,075 Deposits from customers 184,123 48,231 109,114 20,883 3,683 366,034 Borrowings from customers 117 2,882 7,942 3,498 561 14,999 Debt securities (4) - 4,290 - - 4,286 Subordinated debt 85 - 1,058 7,771 11,239 20,152

Total financial liabilities 185,827 53,376 145,784 54,898 18,957 459,804 Contingent liabilities 9,043 11,468 31,229 8,907 10 60,657

Liquidity gap 1,116 (34,771) (74,163) 107,578 69,755 69,502

As of 31 December 2012 the Bank's obligations under loans from EFSE, IFC, KFW and SID have been classified as current liabilities that become due within a year, bearing in mind the breach of a contract conditions, i.e. contracted financial covenants.



36

3. Financial risk management (continued)

31-Dec-11

Up to one month

1 to 3 months

3 to 12 months

1 to 5 years

Over 5 years Total

Cash and cash equivalents 54,497 - - - - 54,497 Securities - 11,981 4,977 1,886 255 19,099 Loans and advances to banks 32,485 - - - - 32,485 Loans and advances to customers 57,864 20,653 125,531 212,665 104,503 521,216 Other assets 1,483 - - - - 1,483

Total financial assets 146,329 32,634 130,508 214,551 104,758 628,780

Deposits from banks 753 - - - - 753 Borrowings from banks 619 1,221 26,305 33,545 6,714 68,405 Deposits from customers 188,419 38,501 134,339 18,448 5,074 384,783 Borrowings from customers 335 2,959 17,313 3,960 365 24,932 Debt securities - - 262 4,282 - 4,544 Subordinated debt - - 364 7,329 6,367 14,060

Total financial liabilities 190,127 42,681 178,584 67,565 18,520 495,114 Contingent liabilities 25,396 13,817 30,908 15,619 16 85,756

Liquidity gap (69,194) (23,864) (78,984) 131,367 86,222 47,910

Derivative cash flow The following table presents contractual cash flows under derivative financial instruments by remaining contractual maturities at year end.

Interest derivatives

31 December 2012

Swaps Up to 1 month

1 to 3 months

3 to 12 months

1 to 5 years Over 5 years Total

Outflows - 103 104 - - 207 Inflows

- 5 5 - - 10

Interest derivatives

31 December 2011

Swaps Up to 1 month

1 to 3 months

3 to 12 months

1 to 5 years Over 5 years Total

Outflows - 104 315 208 - 627 Inflows

- 36 68 45 - 149



37

3. Financial risk management (continued) 3.3 Market risk Exposure to market risks is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of volatility of market rates or prices such as interest rates, foreign exchange rates and equity prices. Market risk management is the process of monitoring and measuring the exposure with a view to minimising the adverse effects caused by volatility of market prices. a) Interest rate risk Interest rate risk management in the Bank’s book is carried out based on Gap analysis versus Basis Point Value methodology. Gap analysis relates to an interest rate risk measurement technique by means of which asset, liabilities and off-balance sheet assets are categorized into corresponding time frames by the earlier of contractual re-pricing (for instruments with floating interest rate) or maturity date (for instruments with fixed interest rate). Assets and liabilities with no maturity date (e. g. on-call deposits) or with maturity dates which may be different from the original maturity dates defined by the contracts are categorised into corresponding time frames by the Bank’s estimate and previous experience. With a view to more adequate interest rate risk management and measurement, BPV (Basis Point Value) methodology is used, measuring the financial instruments’ sensitivity to change of market interest rate. Based on this method, it is estimated how the position value will change if the market interest rates change by +/- 100 and 200 basis points. The main tool for management of interest rate exposure is bank balances management, i.e. interest bearing assets and liabilities. The Balance and capital management board, based on the proposal suggested by expert services, adopts the strategy of adjusting the assets and liabilities items through the estimated changes in market interest rates. The Bank manages the financial position through the following: - Debt security portfolio management, - Debt securities issue, - Introduction of new and special treatment of existing banking products, - Management of existing balance items maturity. The debt securities portfolio must meet criteria, i.e. limits set by the internal Management policy and Strategy of investing into debt securities of the Bank’s book. Their purpose is to provide additional liquidity and limit exposure to interest rate risk. In addition to the above mentioned method of management of assets and liabilities positions, the exposure to interest rate risk is minimised by concluding interest related derivatives. With regard to that, in 2006 the Bank concluded three interest swaps, thus hedging certain asset items. The following table summarises the Bank’s exposure to interest rate risks, using the interest gaps. They include the Bank’s financial instruments at carrying amounts, categorized by the earlier of contractual re-pricing or maturity dates.



38


31 December 2012 Up to 1 month

1 to 3 month

s 3 to 12

months 1 to 5 years

Over 5 years

Non- interest bearing Total

Cash and cash equivalents

3,213 - - - - 48,528 51,741

Securities - 8,475 27,321 - - 439 36,235 Loans and advances to bank banks banks

- - - - - 50,660 50,660

Loans and advances to clients 155,524 39,736 82,172 69,302 17,750 115 364,598

Total loans 155,524 39,736 82,172 69,302 17,750 50,775 415,258

Total financial assets 158,737 48,211 109,493 69,302 17,750 100,584 504,076

Deposits from banks 258 645 - - - 323 1,226

Borrowings from banks 1,389 4,603 26,912 12,308 3,384 32 48,628

Deposits from customers 191,090 43,374 95,929 18,233 3,412 4,490 356,528

Borrowings from customers 135 7,809 2,475 3,364 560 56 14,399 Debt securities issued - - 4000 - - 25 4,025

Subordinated liabilities - - 14,000 - - 199 14,199

Total financial lialiabilities

Liabilities 192.872 56,431 143,316 33,905 7,356 5,125 439,005

Exposure to change in interest rates (34,135) (8,220) (33,823) 35,397 10,394 - (30,387)



39


31 December 2011 Up to 1 month

1 to 3 months

3 to 12 months

1 to 5 years

Over 5 years

Non- interest bearing Total

Cash and cash equivalents 6,532 - - - - 47,965 54,497

Securities - 11,915 4,933 1,777 - 255 18,880 Loans and advances to banks banks

- - - - - 32,485 32,485

Loans and advances to clients 123,503 32,314 146,895 91,302 20,509 549 415,072

Total loans 123,503 32,314 146,895 91,302 20,509 33,034 447,557

Total financial assets 130,035 44,229 151,828 93,079 20,509 81,254 520,934

Deposits from banks 253 - - - - 500 753

Borrowings from banks 1,818 6,214 34,551 12,307 6,462 54 61,406

Deposits from customers 192,374 45,106 114,790 14,617 5,025 6,173 378,085 Borrowings from customers

122 12,527 5,813 3,261 353 109 22,185

Debt securities issued - - - 4,000 - 21 4,021

Subordinated liabilities - - 9,938 - - - 9,938

Total financial lialiabilities

liabilities 194,567 63,847 165,092 34,185 11,840 6,857 476,388

Exposure to change in interest rates (64,532) (19,618) (13,264) 58,894 8,669 - 29,851



40

3. Financial risk management (continued) Sensitivity analysis Interest rate risk management is supplemented by monitoring the sensitivity of the Banks consolidated statement of comprehensive income and equity to various floating interest rate scenarios. The interest rate sensitivity analysis has been determined based on the exposure to interest rate risk at the reporting date. The analysis assumes a parallel increase of interest rates of 100 and 200 basis points (± 1%) on the level of net profit and equity. Analysis of the sensitivity of consolidated statement of comprehensive income to changes in interest rates is as follows:

Sensitivity of the profit and loss

Interest rate sensitivity 2012 2011

Increase in basic points

+100 bps parallel shift (277) (273)

+200 bps parallel shift (544) (547)

Sensitivity of the profit and loss


Decrease in basic points

-100 bps parallel shift 277 273

-200 bps parallel shift 544 547

Analysis of the sensitivity of equity to changes in interest rates is as follows:

Sensitivity of equity


Increase in basic points

+100 bps parallel shift 358 186

+200 bps parallel shift 716 373

Sensitivity of equity


Decrease in basic points

-100 bps parallel shift (358) (186)

-200 bps parallel shift (716) (373)



41

3. Financial risk management (continued) b) Currency risk Currency risk represents the Bank’s exposure towards changes in foreign currency rates and the negative influence that these changes may have on the Bank’s result in local currency. Currency risk arises when Bank has an open currency position which may lead to loss as a result of changes in currency rates, change of EUR rate to other currencies or change in price of gold. The Bank manages foreign currency risk through managing currency structure of assets and liabilities in line with expected changes in foreign currency rates. The Bank has a program, policies and procedures for managing foreign currency risk in which are defined: terms, goals and principles in carrying out foreign exchange activities, description of foreign currency activities, minimal standards for managing foreign currency risk, authority to conduct foreign exchange activities, procedures for the management and control of foreign currency activities and foreign exchange risk and reporting. The Bank's objectives in carrying out foreign exchange activities are focused on: - Management of foreign exchange risk management and reporting in accordance with the standards of the NLB Group, - Continuous monitoring and reporting of foreign exchange risks. Foreign exchange activities that the Bank carries out and plan to carry out in the future are: establishing and maintaining relationships with the optimal number of correspondent banks, maintaining the optimal number of accounts with foreign banks, foreign exchange market operations and payment transactions, collection of foreign currency deposits, credit activities with foreign countries, documentary transactions, transactions in country related to operations with foreign currency banknotes, foreign currency assets of banks (deposits, loans, advances). Business with foreign affairs relates to foreign currency deposits and savings, conversion, money exchange and other transactions in foreign currency. Currency risk management is regulated by internal Policy on currency risk management which defines means and methods of currency risk measurement, monitoring and management. Currency risk management policy is adopted by the Bank’s Assets and Liabilities Committee.

Exposure to currency risks is monitored and managed by the Assets and Liabilities Management Department on the basis of daily data obtained from the Risk Management Department. The Assets and Liabilities Management Department manages exposure to currency risks by currency, so that they are always within the limits. Exposure to currency risks is discussed at daily liquidity meetings and monthly meetings of the Bank’s Assets and Liabilities Committee.

The Bank set limits to open foreign exchange positions, 1% and 2% of equity capital in certain currencies and 5% of equity capital for aggregate position in foreign currencies. The following table summarises concentrations of currency risk as at 31 December 2012:

EUR USD CHF Other Total

Cash and cash equivalents 50,270 603 490 378 51,741 Securities 35,870 365 - - 36,235 Loans and advances to banks and customers 403,761 9,559 1,308 630 415,258 Other assets 583 17 - - 600

TOTAL FINANCIAL ASSETS 490,484 10,545 1,798 1,008 503,834 Derivative hedging instruments 200 - - - 200 Deposits and borrowings from banks and customers

408,013 10,099 1,790 879 420,781 Debt securities issued 4,025 - - - 4,025 Subordinated liabilities 14,200 - - - 14,200

TOTAL FINANCIAL LIABILITIES 426,438 10,099 1,790 879 439,206 Net foreign exchange gap 64,046 446 8 129



42


The following table summarises concentrations of currency risk as at 31 December 2011:

EUR USD CHF Other Total Cash and cash equivalents 52,363 974 755 405 54,497 Securities 18,630 250 - - 18,880 Loans and advances to banks and customers 433,664 9,804 3,264 825 447,557 Other assets 573 9 - 8 590 TOTAL FINANCIAL ASSETS 505,230 11,037 4,019 1,238 521,524 Derivative hedging instruments 441 - - - 441 Deposits and borrowings from banks and customers 446,479 11,000 4,010 940 462,429 Debt securities issued 4,021 - - - 4,021 Subordinated liabilities 9,938 - - - 9,938 TOTAL FINANCIAL LIABILITIES 460,879 11,000 4,010 940 476,829 Net foreign exchange gap 44,351 37 9 298 44,695

3.4 Operational risks Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputation risk. This includes errors, omissions, systems breakdown, natural disasters, terrorist attacks and fraudulent activity, causing an impact in terms of unavailability of services, financial loss, and/or increased costs. It includes legal risk, but excludes strategic and reputation risk. The goal of operational risk management is to balance cost and risk within the constraints of the risk appetite of the Bank, but to be consistent with the prudent management required of a financial organization. Risk Management priorities are identified through a combination of experience and observation, internal audit assessment and knowledge, internal controls, detailed risk assessment work, change management procedures, incident reports and common sense. Risk management activities are aimed at identifying the existing sources of operational risk, as well as potential sources of such risk that may arise due to the introduction of new business products, systems or activities. Identification of sources of risk includes:

• Internal errors and abuse • Breach of regulations by outsiders, • Omissions in the recruitment and work safety systems, • Problems in customer relations management, product launching and business procedures - if they are

inadequate •Damage incurred to the Bank’s property due to natural disasters and other events • Disruptions in the Bank’s organization and errors in the functioning of existing systems • Implementation of business procedures and decisions,

The Bank monitors sources of operational risk determined in line with the Bank’s organization and activity, primarily comprising: transactions with economic entities, transactions with financial sector entities as provided for by the Law on Banks, retail operations, commercial transactions, payment system operations, agency transactions, asset management operations and broker - dealer operations.



43

3. Financial risk management (continued) 3.5 Fair value of financial instruments (a) Fair values of financial instruments carried at amortised cost


Carrying amount Fair value Carrying amount Fair value

Loans to banks 50,660 50,660 32,485 32,485

Loans to customers 364,602 384,584 415,072 428,975

Deposits from banks 1,226 1,258 753 753

Deposits from customers 356,526 363,309 378,085 384,893

Borrowings from banks 48,628 47,159 61,406 59,251

Borrowing from other customers

14,399 14,328 22,185 22,081

Debt securities in issue 4,024 4,160 4,021 4,151

Subordinated debt 14,200 11,708 9,938 10,837

Loans to banks The estimated fair value is based on discounted cash flows, taking into consideration market interest rates for clients with similar credit risk and remaining maturity. Loans to customers Loans to customers in the balance sheet are presented in net amount, i.e. net of allowances for impairment. For the purpose of calculating the fair value, the Bank used discounted cash flow method. Thus, the calculation is based on contractual cash flows. Credit risk of individual clients is taken into consideration through the expected impairment. Deposits and borrowings The estimated fair value of deposits and borrowings is based on discounted contractual cash flows, taking into consideration market interest rates, which would have been payable by the Bank in need of replacing the old sources with the new ones of equal remaining maturity. Debt securities in issue Fair value of debt securities in issue is based on published market prices, i.e. calculation by using discounted cash flows techniques. Other financial assets and liabilities The carrying amount of other financial assets and liabilities is the amount approximate to their fair value since most of them relate to short-term liabilities and receivables.



44

3. Financial risk management (continued) (b) Analysis by fair value hierarchy of financial instruments carried at fair value The Bank accounting policy on fair value measurement is disclosed in accounting policy 2.6. The Bank measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements: • Level 1: Quoted market price (unadjusted) in an active market for an identical instrument • Level 2: Valuation techniques based on observable inputs other than quoted prices, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. • Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

Note Level 1 Level 2 Level 3 Total

2012

Securities available for sale

Treasuru bills AFS 20 14,699 13.093 - 27,792

Bonds of B&SB AFS 20 8.072 - - 8,072

Equity instruments 20 366 5 371

23,137 13,093 5 36,235

Derivative hedging financial instruments 26 - 200 - 200

Total 23,137 13,293 5 36,435

2011

Securities available for sale

Treasuru bills AFS 20 3,772 14,853 - 18,625

Equity instruments 20 250 - 5 255

4,022 14,853 5 18,880

Derivative hedging financial instruments - 441 - 441

Total 4,022 15,294 5 19.321

The availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with determination of fair values. The availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the future markets.



45

3. Financial risk management (continued) 3.6 Capital management Capital adequacy and capital are monitored in conformity with the guidelines developed by the Central Bank of Montenegro for a Bank on a standalone basis. The required information on capital adequacy is filed with the Central Bank of Montenegro on a quarterly basis. The Central Bank of Montenegro requires each bank to maintain capital adequacy ratio at or above 10%. As at 31 December 2012 the Bank did not comply with all of the requirements of capital adequacy regulation. As prescribed by the Decision on the capital adequacy ratio (Official Gazette of Montenegro no, 60/08) the Bank is obliged to determine capital adequacy based on its own funds, in the absolute amount and as a solvency coefficient as relative indicator. Own funds of the Bank represent a sum of paid in share capital and other basic and additional elements of its own funds, minus any deductible items. Amount of own funds must always be at a level equal to or greater than: a) amount of minimum monetary portion of initial capital, i.e. EUR 5 million as prescribed by Law on Banks, b) the total amount of required capital for all risks.

When calculating the supplementary capital, the Bank is required to reduce the total amount of subordinated debt by 20% at the beginning of each of the last five years prior to the agreed maturity debt.

In 2012, due to the significant increase of non-performing loans and low-quality assets and the consequent growth of reserves for loan losses and achievement of a negative result, the Bank has made an increase in capital in the amount of EUR 26.5 million l and EUR 4 million hybrid debt. Also at the session of the Assembly of Shareholders, which was held on December 27, 2012 the Bank has decided to offer the shares at a closed pre-emptive right to existing shareholders in the amount of EUR 10.5 million.

The total amount of the Bank’s funds is the sum of: 1. Required capital for credit risk, market risk and operational risk, calculated by applying appropriate methodologies; 2. Necessary capital for country risk, calculated in accordance with regulations of the Central Bank which sets out the methodology for calculating the required capital for country risk; 3. Necessary capital for other risks, calculated by applying the selected methodology.



46


31 December 2012

31 December 2011

Basic capital

Paid up share capital 39,425 12,925

Collected share issue premiums 7,146 7,146

Reserves created from profit after tax (obligatory, statutory and others) 5,498 5,659

Retained earnings from prior years 13,234 12,934

Total basic capital 65,303 38,664

Deductible items from the basic capital

Loss from current year (49,807) -

Intangible assets (1,007) (1,093)

Total deductible items of the basic equity (50,814) (1,093)

Basic capital 14,489 37,571

Addition elements of own funds

Subordinated liabilities 7,244 10,000

Hybrid instruments 4,000 5

Total additional elements of own funds 11,244 10,005

Deductible items of own funds

Direct or indirect investment in other bank or other loan or financing institution in amount exceeding 10% of equity of those institutions - (128)

Deductible items of own funds - (128)

Bank’s own funds 25,733 47,448 Risk weighted assets

Balance sheet 219,914 269,341

Off balance sheet 40,806 55,615

Total risk weighted assets 260,720 324,956

Necessary capital for market risks 18 112

Necessary capital for operating risk 4,937 4,493 Necessary capital for country risk 203 48 Necessary capital for other risks 123 -

Capital adequacy 8,21% 12,77%

Capital management and capital adequacy of the Bank is regulated by legal regulations, as well as internal acts: — capital management policy, the capital annual plan, and the capital management procedure. The capital management policy of the Bank is aimed at quality realization of long-term strategic goals and the strategic plan based on them, i.e. the Annual business-finance plan of the Bank. Capital management, including management of the capital position of the Bank comprises: 1. Projection of the required amount, structure, and sources of (additional) capital, 2. Preparation of the annual capital plan, 3. Procedures and conditions for supervising and monitoring capital positions and capital adequacy, 4. Preparation and continuous reviewing of methodology and processes for capital planning and calculation of the capital amount and capital adequacy.



47

4. Critical accounting estimates and judgments The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. a) Preparation of financial statements on a going concern basis Position of the NLB d.d. Ljubljana (the Parent) NLB d.d. Ljubljana has suffered significant losses in the last two years arising from the ongoing impact of loan loss provisions following a decline in the Slovenian economy. Following the contributions of additional capital by the NLB d.d. Ljubljana's (the Parent) majority shareholder (the government of Slovenia) the NLB Group is currently operating under a state aid programme. In that context the Group has certain restrictions imposed on its operations, especially concerning the payment of dividends and returns on capital instruments, commercial strategies and business expansion activities. In addition the Group had to prepare a restructuring plan that was approved by its Supervisory Board, and formally submitted, in January 2013, by the Slovene Ministry of Finance to the European Commission for approval. The aim of the restructuring plan is to ensure the long-term, sustainable operations of the restructured Group, without state aid. At a high level, the key actions anticipated in the plan include the disposal of non-core Group operations, withdrawal from market segments considered to be non-strategic, and the ongoing reduction of risk weighted assets. In the restructuring plan, the Group foresees further losses in 2013 before returning to profitability at a consolidated level in 2014. Given the further forecast losses in 2013 the Group will require an additional capital injection from its majority shareholder during 2013. The government of Slovenia has committed to support the banking sector through a combination of providing additional capital and to continue with the establishment of the Bank Asset Management Company legally set up last year to take over the non-performing assets of the state banks. In its restructuring plan the Group assumes a capital increase in 2013 of Euro 375 million. The latest IMF forecast is that the Slovene state will need to inject approximately Euro 1 billion of new capital into state owned banks during 2013. In order for this to happen, Slovenia will need to raise new funds most probably through the international debt markets. Despite volatility in the international debt markets, Slovenia has raised Euro 2.7 billion at the end of April 2013, in a bond sale with demand significantly exceeding subscribed amount. Position of the Bank The Bank has suffered significant loss in the 2012 in amount of EUR 21,047 thousands arising from the ongoing impact of loan loss provisions (note 22). Given the negative developments during 2012, the Central Bank of Montenegro performed a stress test as of 30 June 2012, as a result of which the Bank increased capital by EUR 26.5 million by the end of 2012. The Bank's shareholders have contributed additional capital during 2012 of EUR 26.5 million and EUR 4 million in form of subordinated hybrid capital in order to address the regulatory requirement that the Bank meets its minimum regulatory capital adequacy of 10%. Nevertheless, due to the loan losses, as at 31 December 2012 the Bank was not in compliance with the minimum requirements of the Central Bank of Montenegro and reported a capital adequacy ratio of 8.21% (note 3.6). In order to meet prescribed minimum of capital adequacy, the Bank’s shareholders approved on 27 December 2012 additional recapitalisation of EUR 10.5 million. The process of recapitalisation has been finalised in early 2013 (note 37). However, due to a change in the Central Bank’s regulation in 2013, the Bank reported capital adequacy ratio of 8.5% as at 31 March 2013, which is still below the regulatory minimum. In order to address the ongoing capital adequacy deficiency, the Bank has prepared an action plan aimed at meeting the prescribed capital adequacy level during 2013. The Bank intends to transfer part of its non-performing loan (“NPL”) portfolio to a special purpose vehicle (“SPV”). The sale of the first tranche has already been realised at the end of June 2013. The Bank has sold NPL’s in amount of 23.7 milion. The impact of this transaction was total neutralization of lack of reserves which was deductible from Tier I capital. Furthermore, bank has got the approval from shareholder assembley, as well as central bank for including profit from current year into Tier I capital. Bank has included amount of profits for the first four month which was recognized by the external auditor Deloitte, amounting 5.2 milion. As the result of this actions, capital adequacy ratio at the 30.06.2013 is 16%



48

4. Critical accounting estimates and judgments (continued)

a) Preparation of financial statements on a going concern basis (continued) Position of the Bank NLB d.d. Ljubljana, as majority shareholder, has provided the Bank with a letter of support, confirming that they will continue providing financial support to the Bank for at least 12 months from the date of the letter. Given the issues resulting from events affecting the Bank, there exists, at the present time, a material uncertainty that may cast significant doubt on the Bank’s ability to continue as a going concern. However, notwithstanding the conditions and uncertainties mentioned above, the Management of the Bank, assuming the successful implementation of the intended transfer of NPL portfolio and the expected ongoing support of the government of Slovenia as the Parent’s major shareholder, have a reasonable expectation that the minimum capital requirements of the Bank will be met and hence are satisfied that the financial statements of the Bank can be prepared on a going concern basis. b) Impairment losses on loans and advances The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis in determining whether an impairment loss should be recorded in the profit and loss. The Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers, or national or local economic conditions. Future cash flows of financial assets are estimated based on previous experiences and losses from credit risk assets, similar to the assets within the Bank. Individual estimates are made based on future cash flow projection taking into consideration all relevant information related to debtors’ financial position and payment ability. Lower exposures and loans to retail customers are reviewed collectively. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extent that the net present value of estimated cash flows differs by - 5%, the provision is estimated at EUR 5,224 thousand higher, and to the extent that the net present value of estimated cash flow differs by +5%, provision is estimated at EUR 2,630 lower.



49

5. Segment analysis

Operating segments are components that engage in business activities that may earn revenues or incur expenses, and generate business results. In January 2010 the Bank’s ALCO adopted a policy on profitability measurement methodology for the Bank as a whole and per operating segments, which defines three operating segments:

• Corporate banking, which includes the operations with large companies and government segment (government, municipal funds);

• Retail, which includes the operations with private clients and small and medium-sized enterprises (SMEs);

• Financial markets, which includes investment banking, interbank relations, business with international financial institutions.

Other Bank operations comprise services and activities, none of which constitutes a separately reportable segment or bears general importance. There were no changes in the reportable segments during the year.

Basis for preparation of balance sheet and income statement for defined segments are:

• The application of transfer pricing system, which performs the redistribution of income effects on individual parts (organizational units, segments);

• The allocation of costs, which allocates indirect costs (overheads), or the costs of the service sector, on defined (profit) segments.

Since all business segments deal with the financial affairs of the Bank, ie. the biggest part of their revenue becomes from interest, the analysis relies primarily on net interest revenue to assess the performance of the given segment. The revenue from external parties is measured in a manner consistent with that in the consolidated statement of comprehensive income.

Transactions between business segments are made at transfer prices that reflect market conditions, resulting in a transfer of the disclosure of funding under 'Net interest income between the segments'. There are no other materially significant item of income or expense arising from transactions between the business segments.

The information provided about each segment is based on the internal reports about segment profit or loss, assets and key performance indicators.

The segment information for the reportable segments for the year ended 31 December 2012 is as follows:



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5. Segment analysis (continued)

Corporate banking

Retail banking

Financial markets

Other Total

Net income 6,282 8,059 9,632 347 24,320

Net income from external clients 14,690 12,142 (2,859) 347 24,320

Inter-segment income (8,408) (4.083) 12,491 - -

Total net interest income 3,338 6,479 9,009 - 18,825

Net interest income from external clients

11,746 10,562 (3,483) - 18,825

Inter-segment net interest income (8,408) (4,083) 12,491 - - Loan impairment charges (25,300) (2,729) - 34 (27,995)

Administrative expenses (3,363) (8,158) (1,427) (134) (13,082)

Depreciation (250) (1,136) (69) - (1,455)

(Loss)/Profit before taxation (22,631) (3,964) 8,136 247 (18,212)

Income tax expense (2,835)

Loss for the year (21,047)

Reportable segment assets 175,887 194,929 107,946 31,902 510,664

Reportable segment liabilities 112,292 258,887 83,389 5,188 459,756

Additions to non-current assets - 144 13 309 466

The segment information for the reportable segments for the year ended 31 December 2011 is as follows:

Corporate banking

Retail banking

Financial markets

Other Total

Net income 15,061 12,406 1,380 383 29,230

Net income from external clients 18,876 13,166 (3,195) 383 29,230

Inter-segment income (3,815) (760) 4,575 - -

Total net interest income 11,884 10,636 529 - 23,049

Net interest income from external clients

15,699 11,396 (4,046) - 23,049

Inter-segment net interest income (3,815) (760) 4,575 - -

Loan impairment charges (9,562) (3,533) - (396) (13,491)

Administrative expenses (3,666) (8,232) (950) (6) (12,854)

Depreciation (396) (1,093) (95) - (1,584)

Profit before taxation 1,437 (452) 335 (19) 1,301

Income tax expense (133)

Net profit for the year 1.168

Reportable segment assets 206,455 214,826 77,247 30,056 528,584

Reportable segment liabilities 158,803 222,790 98,748 2,583 482,924

Additions to non-current assets 7 1,109 52 935 2,102



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6. Financial assets and liabilities per categories and classes Carrying values of financial assets and liabilities per categories and classes are as follows:


Carrying amount Carrying amount

Loans and advances

Cash and balances with Central bank 51,741 54,497


Loans to customers 364,598 415,072

Other assets 842 600

Financial assets available for sale

Securities measured at fair value 36,235 18,880

Total financial assets 504,076 521,534

Financial liabilities at fair value

Derivative hedging financial instruments 200 441

Financial liabilities at amortised cost

Deposits from banks 1,226 753

Deposits from customers 356,528 378,085

Borrowings from banks 48,628 61,406

Borrowing from other Customers 14,399 22,185

Debt securities issued 4,025 4,021

Subordinated liabilities(debt) 14,199 9,938

Other liabilities 14.474 1,205

Total financial liabilities 453.679 478,034



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7. Net interest income

2012 2011

Interest income

Cash and cash equivalents 64 84

Loans and advances to customers 33,849 40,263

Loans and advances to banks 57 156

Securities 954 442

Other financial assets - 123

Total 34,924 41,068

Interest expense

Deposits (11,554) (12,922)

Borrowings (2,984) (3,775)

Debt securities issued (266) (269)

Subordinated liabilities (936) (685)

Hedge instruments (343) (284)

Other financial liabilities (16) -

Other liabilities - (84)

Total (16,099) (18,019)

Net interest income 18,825 23,049

Interest income accrued on impaired financial assets is EUR 1,137 thousand (2011: EUR 801 thousand). 8. Net fee and commission income

2012 2011

Fee and commission income

Payment transfer operations with corporate entities 3,882 4,233

Agency services 3,168 2,811

Payment transfer operations with citizens 564 623

Fees on issued guarantees 991 985

Other fees 55 48

Total 8,660 8,700

Fees and commissions

Fees for received guarantees on deposits (1,417) (1,219)

Fees for received guarantees (155) (160)

Agency services (1,912) (1,702)

Payment transfer operations (509) (522)

Other services (173) (310)

Total (4,166) (3,913)

Net fee and commission income 4,494 4,787



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9. Gains less losses from financial instruments held for trading

2012 2011

Gains from trading of foreign exchanges 617 963

Derivatives 508 (62)

Total 1,125 901

Gains from derivatives are related to foreign currency derivatives used for hedging currency risk exposure and interest rate derivatives used for hedging interest rate risk exposure.

In these financial statements, foreign currency derivatives are recognized as instruments held for trading and amounted to EUR 469 thousand (2011: loss of EUR 34 thousand). Interest rate derivatives (IRS) are classified as instruments for fair value adjustments in hedge accounting. From a business perspective, these derivatives represent effective hedging instruments and are accounted by applying the principles of hedge accounting (HA). Realised fair value adjustments in hedge accounting are positive and amounted to EUR 38 thousand (2011: loss 29 thousand).

2012 2011

Change in the fair value of hedged item (203) (200)

Change in the fair value of derivatives 241 171 Total 38 (29)

10. Foreign exchange translation gains less losses

2012 2011

Foreign exchange translation gains 17,395 50,297

Foreign exchange translation losses (17,841) (50,309) Total (446) (12)

11. Other operating income

2012 2011

Income from written-off receivables and liabilities - 270 Refunds 95 127

Income from valuation and other services to third parties 74 43

Gains and losses on disposals 85 22

Other 68 38

Total 322 500

Majority of Other operating income relates to the income from written-off claims from bankruptcy estate and write-off outdated obligations, refunds for sick leave, employment of trainees and insurance premiums. 12. Personnel expenses

2012 2011

Gross salaries (6,679) (6,508)

Pensions (302) (292)

Social security (369) (357)

Other personal costs (151) (113)

Other costs of temporary service agreement (259) (96)

Provision for retirement benefits and unused holidays (note 30) (223) (270)

Total (7,983) (7,636)



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13. Depreciation and amortisation

2012 2011

Property and equipment (Note 23) (1,200) (1,381)

Intangible assets (Note 24) (255) (203)

Total (1,455) (1,584)

14. Other operating expenses

2012 2011

Material (186) (240)

Electricity (211) (213)

Maintenance (662) (608)

Advertising (573) (643)

Insurance (177) (179)

Business trips (110) (127)

Other services (1,117) (1,128)

Consulting, accounting and other services (319) (291)

Audit services (78) (59)

Taxes and other contributions (62) (80)

Membership fees (35) (41)

Other expenses (109) (98)

Total (3,639) (3,707)

15.Provisions for other liabilities and charges

2012 2011

Provisions for commitments and contingencies (9,980) (3,145)

Release of provisions for commitments and contingencies 9,818 4,260

Total (162) 1,115

16. Impairment charge

2012 2011

Loans and advances to banks - -

Loans and advances to customers (27,750) (14,216)

Loans to Government (120) (34)

Loans to individuals (3,156) (3,239) Loans to legal entities

(24,474) (10,943)

Other assets (83) (390)

Total (27,833) (14,606)



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17. Income tax

2012 2011

Current tax - (76)

Deferred tax (2,835) (57)

Total (2,835) (133)

Profit before taxation (18,224) 1,301

Non taxable income (31.591) (937)

Expenses not recognised for tax purposes 319 469

Taxable income - 833

Current tax - (76)

Deferred tax Depreciation 8 22

Depreciation of loans and receivables (2,843) (79)

Deferred tax income / expense (2,835) (57)

Total tax (2,835) (133)

2012 2012 2011 2011

Income before tax (18,224) 1,301

Tax, calculated at 9% tax rate - - 9.1% 118

Non taxable income -15,60 (2,843) -6.5% (84)

Expenses not recognised for tax purposes - - 3.2% 42

Effects of deferred taxation 0,04 8 4.4% 57

Income tax -15,56% (2,835) 10.2% 133

The benefit of the tax losses has not been recognised in these financial statements due to uncertainty of their recoverability.



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18. Earnings per share

Basic and diluted earnings per share are calculated by dividing net profit attributable to the ordinary shareholders by the weighted average number of ordinary shares for the period.

2012 2011

Net (loss)/ profit ( 000 EUR) (21,053) 1,161

Weighted average number of ordinary shares in thousand 3,210 2,323

Earnings per share/EUR (6,558) 0,500

Diluted earnings per share /EUR (6,505) -

The Bank, after the balance sheet date, completed capital increase, according to the decision of the General Meeting of 24th December, 2012, worth a total of EUR 10,500 thousand, emission 1,887,132 shares with a nominal value of 5.564 Euro.

The Bank does not hold any other potentially diluting ordinary shares such as convertible debt and stock options as at balance sheet date.

19. Cash and balances with Central bank


Cash in hand 12,810 13,905

Balances with Central bank, obligatory reserve excluded 17,509 14,456

Cash and cash equivalents 30,319 28,361

Obligatory reserve with CB 21,422 26,136

Cash and balances with Central Bank

51,741 54,497

According to the Decision of the Central Bank of Montenegro on the obligatory reserves of banks with the Central Bank of Montenegro, which began to apply in 2011.,(Official Gazette Montenegro 35/11, 22/12), banks are obliged to set aside obligatory reserves on the Central Bank’s account (Note 2.16). Also, the Bank is allowed to use 50% of its obligatory reserves for maintenance of liquidity. Total obligatory reserve as at 31 December 2012 amounts to EUR 32,954 thousand (2011: EUR 34,848). Cash and cash equivalents in the consolidated statement of cash flows comprise:


Cash in hand and balances with CB, excluding obligatory reserve

30,319 28,361 Obligatory reserve allowed to be used for maintenance of daily liquidity 50% of total obligatory reserve 16,477 17,424

Loans and advances to banks (Note 21) 50,660 32,485

Total 97,456 78,270



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20. Financial assets available for sale

a) structure by type of financial asset


-Treasury bills AFS 27,792 18,625

- Bonds of SID bank AFS 8,072 -

- Equity instruments 371 255-

Total 36,235 18,880

Based on the adopted Strategy for Investment in Highly Rated Debt Securities, in 2012 the Bank continued to strengthen its secondary liquidity reserves by using the option of investing 35% of its obligatory reserves in Montenegrin Government Treasury bills. The Bank has also invested in highly liquid Slovenian Government Treasury bills and bonds of SID bank export.

Treasury bills relate to following fair values: Montenegrin Government Treasury bills in amount EUR 13,093 thousand (2010: EUR 14,853) and Slovenian Government Treasury bills amounted to EUR 14,699 thousand.

Slovenian bills rating based on FITCH agency is at A-, while bonds of SID Bank export are unrated within the international rating agencies, but as they are guaranteed by the Republic of Slovenia, their rating is identical to the government bonds for which Fitch assigned A-.

Montenegrin Government Treasury bills are discounted short-term securities that mature within 182 days that can be traded in a secondary market. Discounted value, based on which the purchasing value is calculated, is equal to the offered rate of return. On balance date the value of securities available for sale reduced to the fair value. The fair value of the Slovenian government bills and bonds of SID bank export is the quoted price in an active market while the fair value of treasury bills of Montenegro is determined using discount factors formed on the basis of Euribor curve. On this basis, the cumulative negative effects in the net amount of EUR 27 thousand were recognized in the special item of Capital reserves - Revaluation reserves (Note 33.3).Equity instruments relate to shares in Central Depository Agency AD. Podgorica (CDA), and VISA TNT. The majority of the equity instruments relates to shares in VISA TNT in the total amount of EUR 366 thousand (2011: EUR 250) and are quoted on the stock exchange. Quoted price per share as at 31 December 2012 amounts to USD 151.58 (2011: USD 101,53). As a result a positive amount of EUR 106 thousand was reported within other comprehensive income, the Bank does not have significant influence or control in these companies. b) Movement in Financial assets available for sale


As at 1 January 18,880 17,037

Purchase 25,760 1,443

Sale (9,444) -

Net change in fair value 86 (44)

Interest 953 444

Total 36,235 18,880



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21. Loans and advances to banks


Demand deposits 50,660 32,485

Term deposits

50,660 32,485

Impairment -

Total 50,660 32,485

22. Loans and advances to customers

31 December

2012 31 December

2011

Loans to government 7,903 8,115

Loans to individuals 175,961 182,511

-Credit line 1,098 1,242

-Credit card 8,781 9,141

-Housing loans 114,971 119,439

-Consumer loans 50,534 51,976

-Other loans to individuals 577 713

Loans to small and medium entities 251,100 260,603

Loans to large entities 7,783 237

Loans to financial organization 1,667 7,917

Total gross loans and advances to customers 436,631 459,383

Impairment (72,033) (44,311)

Total 364,598 415,072



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22. Loans and advances to customers (continued)

a) Movements in allowance for impairment :

2012 2011

As at 1

January Provision Other As at 31

December As at 1

January Provision Other As at 31

December

Loans to Government (223) (120) - (343) (189) (34) - (223) Loans to retail customers

Credit line (338) (88) - (426) (268) (70) - (338)

Credit card (1,181) (487) - (1,668) (1,275) 94 - (1,181)

Housing loans (8,855) (1,990) - (10,845) (3,226) (5,629) - (8,855)

Consumer loans (5,058) (566) - (5,624) (3,548) (1,510) - (5,058)

Other loans (96) (25) 28 (93) (3,996) 3,876 24 (96) Loans to other customers

Loans to financial organizations (53) 37 - (16) - (53) - (53)

Loans to SME (28,506) (22,993) - (51,499) (17,603) (10,903) (28,506) Loans to large corporate

(1) (1,518) - (1,519) (14) 13 - (1)

Total (44,311) (27,750) 28 (72,033) (30,119) (14,216) 24

(788) (44,311)



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23. Property and equipment

Land Buildings Leasehold

improve-ments Equipment Total

Cost

1 January 2012 134 2,544 894 7,732 11,304

Additions - - 78 221 299

Transfer - - - - - Transfer from non-current assets held for trade - - - - -

Sale - - - (2) (2)

Write-off - - (341) (286) (627)

31 December 2012 134 2,544 631 7,665 10,974

Accumulated depreciation

1 January 2012 - (311) (676) (5,048) (6,035)

Depreciation - (76) (107) (1,017) (1,200)

Transfers from property and equipment - - - - -

Sale - - - 1 1

Write-off - - 334 284 618

31 December 2012 - (76) (449) (5,780) 6,616

Net book value 134 2,468 182 1,885 4,358

Cost

1 January 2011 - 1,838 1,335 7,661 10,834

Additions 134 913 3 549 1,599

Transfer - - (444) - (444)

Transfer from non-current assets held for trade - - - - -

Sale - (207) - (135) (342)

Write-off - - - (343) (343)

31 December 2011 134 2,544 894 7,732 11,304


1 January 2011 - (306) (796) (4,388) (5,490)

Depreciation - (59) (195) (1,127) (1,381) Transfers from property and equipment

- - 315 - 315

Sale - 54 - 124 178

Write-off - - - 343 343

31 December 2011 - (311) (676) (5,048) (6,035)

Net book value 134 2,233 218 2,684 5,269



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24. Intangible assets

Software Licences Total

Cost

1 January 2012 1,192 726 1,918

Additions 47 121 168

Write-off (29) (35) (64)

31 December 2012 1,211 812 2,023


1 January 2012 (523) (302) (825)

Depreciation (118) (137) (255)

Write-off 29 35 64

31 December 2012 (612) (404) (1,016)

Net carrying amount 599 408 1,007

Cost Software Licences Total

1 January 2011 875 541 1.416

Additions 317 185 502

31 December 2011 1,192 726 1,918


1 January 2011 (433) (189) (622)

Depreciation (90) (113) (203)

31 December 2011 (523) (302) (825)

Net carrying amount 669 424 1,093



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25. Other assets


Other financial assets at amortized cost

Claims from employees 600 600

Fee and commission due 116 99

Trade receivables 28 105

Cheques 37 38

Receivables from card business to banks 546 155

Other assets at amortized cost 474 455

Gross other assets at amortised cost 1,801 1,496

Impairment provision (959) (896)

Net other assets at amortised cost 842 600

Non financial other assets

Prepayments 14 13

Claims for taxes and other dues 19 31

Office stationary 14 13

Deferred expenses 408 565

Other assets 38 38

Foreclosed assets 807 128

Allowances for foreclosed assets (77) (56)

Net other non financial assets 1,223 732

Total 2,065 1,288

Impairment provision for other assets at amortised cost relates mostly to claims from employees, based on harmful event in a branch. Foreclosed assets are recognized within “Other assets” since the criteria for the recognition within non-current assets held for sale are not fully met, in accordance with MSFI 5.

a) Movements in allowances for impairment

2012 2011

As at 1 January (952) (606)

Impairment of financial assets (63) (339)

Allowances for foreclosed assets (21) (52)

Write-off - 45

As at 31 December (1,036) (952)

Write-off relates to foreclosed assets that have been assessed as non-marketable.



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26. Derivative financial instruments held for risk management

Fair value hedging Fair value

Interest rate swap Notional amount Asset Liability

As at 31 December 2012 10,000 - 200

As at 31 December 2011 10,000 - 441

The Bank hedges its interest rate exposure by using Interest Rate Swaps. The bank measures its exposure to interest rate swaps using interest rate sensitivity. The Bank hedges open positions from within individual time buckets, and since long positions are more common than short ones, fair value hedges are done for hedging fixed rate loans. Hedging is done for fair value of loan amounting to EUR 10,000 thousand. Correction of fair value was made at 31 December 2012 resulting in a positive effect of EUR 38 thousand, recognized in comprehensive income.

27. Deposits from banks, due to customers and borrowings a) Deposits from banks include:


Demand deposits 556 753

Term deposits 670 -

Total 1,226 753

As of 31 December 2012, demand deposits with banks all are deposited at monthly interest rate which ranges from 0.02%- 0.17% b) Deposits from customers include:


Demand deposits 150,097 159,768 Term deposits 206,431 218,317

As at 31 December 356,528 378,085

Deposits of EUR 22,048 thousand have a remaining maturity over 12 months (2011: EUR 19,770 thousand).



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27. Deposits from banks, due to customers and borrowings (continued)

c) Borrowings from banks Borrowings from banks relate to following borrowings:


NLB d.d. Ljubljana 15,156 22,272 SID - Slovene bank Export Ljubljana

3,069 4,606

KFW – Kreditanstalt fur Wiederaufbau 11,510 14,356

European Investment Bank 18,893 20,127

Central Bank of Montenegro - 45

Total 48,628 61,406

Maturity of borrowings with bank:


Current, matures within 12 months 24,767 24,445

Maturity 1-5 years 20,476 30,499

Maturity over 5 years 3,385 6,462

Total 48,628 61,406

Long term borrowings from parent bank Nova Ljubljanska banka d.d., Ljubljana have maturities up to 2017. The Bank pays interest for borrowings from Nova Ljubljanska banka d.d. at 6MEuribor + 2,00% to 2,70% p.a.

The Bank on November 27, 2007 signed with Slovene Export and Development Bank d.d., Ljubljana (SID) a Loan agreement in amount of EUR 10.000 thousand and maturity up to 2014. For that credit line, Bank pays interest at 6MEuribor + 1,45% p.a.The full amount of this loan obligations, Bank classified as short-term, due to breach of capital adequacy indicators (less than 10%)

On October 26, 2009 the Bank signed two loan arrangements with the German development bank (KfW) in total amount of EUR 16.000 thousand (EUR 14.000 thousand for SME’s and EUR 2.000 thousand for Energy Efficiency) with maturities up to 2016 and the following interest rates: 6MEuribor + 3,60% p.a. for SME’s, which was applied till June 29, 2012 after which the Bank agreed with KfW to apply a fixed interest rate of 5,00% p.a. and fixed interest rate of 2,40% p.a. for the loan for Energy Efficiency. The Article 11. Financial Ratios and Annex 3. Financial Ratios and Reports of the Laon Agreement defined a financial ratios and the limits for them, and since the Bank on December 31, 2012 was in breach of the limits for the five financial ratios, KfW issued the Waiver Letter with validity period from July 01, 2012. to June 30, 2013, result of which the bank is the total amount of obligations under this loan classified as a short-term loan.

The Finance Contract with European Investment Bank (EIB) in amount of EUR 20.000 thousand the Bank signed on December 21, 2009. The Bank disbursed funds in several tranches, so for all tranches separately agreed upon various conditions. Therefore, the Bank agreed the following interest rates: 2.776% p.a., 2.305% p.a., 2.987% p.a. and 3.362% p.a. with maturities up to 2018 and 2019.

Borrowings from Central Bank of Montenegro emerged from the primary issue approved by its predecessor (National Bank of Yugoslavia) with maturity date in 2013 and interest rate at 1% annually. The loan is repaid in semi-annual instalments.



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27. Deposits from banks, due to customers and borrowings (continued) d) Borrowings from other customers Borrowings from other financial institutions relate to following borrowings:


EFSE Western Balkan BV 7,668 12,468

IFC Washington 1,670 5,013

Government of Montenegro 5,061 4,704

Total 14,399 22,185

Maturity of borrowings with other financial institutions:


Current, matures within 12 months 10,474 18,574

Maturity 1-5 years 3,364 3,257

Maturity over 5 years 561 354

Total 14,399 22,185

The Bank uses credit lines granted by European Fund for South- East Europe (EFSE) which have maturities from 2013 to 2014,. For above mentioned loans the Bank pays interest rate at 6MEuribor +2,00% p.a. to 6MEuribor+4,25% p.a. The obligation to respect all the defined limits on financial indicators, otherwise the creditor retains the right to demand early repayment of these loans (in whole on in part)and to terminate the Farmework and Individual loan Agreements. The Bank has breached the limit of 5 financial indicators, the total amount of liabilities EFSE loans in the financial statements classified as short-term loan.

The Bank on June 16, 2009 signed a Loan Agreement with the International Finance Corporation (IFC) in amount of EUR 10.000 thousand maturity date June, 2013 and with interest rate at 6MEuribor + 3,25% p.a.. As the Loan Agreement defines that the amount of margin depends on the credit rating of Nova Ljubljanska banka d.d., Ljubljana, the margin is corrected, so that on December 31, 2012 amounts tof 4.25%.

Majority of the obligations to the Government of Montenegro relate to loans from Investing Development Fund with contractual fixed interest rate at 1.75% to 5.00%. 28. Debt securities issued

As at 31 December 2012 debt securities issued amount to EUR 4,025 thousand (2011: EUR 4,021 thousand). Debt securities issued relate to bonds issued in September 2010 in total amount to EUR 5,000 thousand of which EUR 4,000 was realised (II emission) with a three-year maturity and fixed interest rate of 6.50% paid in semi-annual instalments. Securities issued are listed in active market and the total balance matures in November 2013. The Bank makes regular payments with regard to debt securities issued.



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29. Subordinated liabilities As at 31 December 2012 the Bank disclosed two subordinated long-term loans and one hybrid instrument, which are according to the Decision on Capital Adequacy of Banks (Official Gazette of MN 60/2008. 41/2009), includined in additional capital. The terms of subordinated liabilities are as follows:

31 December

2012 31 December

2010

Maturity Interest rate

NLB InterFinanz AG, Zurich

29.12.2018.

6MEuribor + 4.50% until 29.12. 2014 6MEuribor + 8.50% from 30. 12. 2014 until 29.12. 2018

5,123 4,977

EFSE vestern balkan B.V. 30.06.2020.

6MEuribor +5.70% until 30.06.2015 6MEuribor +7.70% from 01.07.2015 until 30.06.2020 5,071 4,961

NLB D.D. 28.12.2017 6MEuribor+12% 4.005 -

Total 14,199 9,938

Subordinated loans do not bear the right to be converted into capital. The Bank makes regular payments with regard to its subordinated debt.

Hybrid instrument with NLB d.d. is to be converted into new shares (capital) only if:

- Own funds fall below the amount of 75% of the prescribed level,

- Bank within 90 days does not increase its own funds to the prescribed level.



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30. Provisions


Provisions for guarantees and commitments (note 35) 1,311 1,149

Employee benefits 507 516

Provisions for jubilee bonuses 24 24

Provisions for litigations (note 36) 61 61

Unused holidays 200 184

Total 2,103 1,934

a) Movement in provisions


As at 1 January

Provisions made

Used At 31 December

At 1 January

Provisions made

Used At 31 December

Provisions for guarantees and commitments 1,149 162 - 1,311 2,264 (1,115) - 1,149

Employee benefits 516 22 (31) 507 430 101 (15) 516 Provisions for jubilee bonuses 24 1 (1) 24 45 (15) (6) 24

Unresolved litigations 61 - - 61 61 - - 61

Unused holidays 184 200 (184) 200 190 184 (190) 184

Total 1,934 385 (216) 2,103 2,990 (845) (211) 1,934

Provision for guarantees and commitments relates to liabilities from issued guarantees and letters of credits. The effects of provision for guarantees and commitments are recognised in the Statement of comprehensive income within Provision for liabilities and charges and the effect of provisions for employee benefits is recognised under Personnel expenses.

31. Deferred tax liabilities


Deferred tax assets - -

Deferred tax liabilities

Impairment of loans and receivables 3,448 605

Depreciation of property, equipment and intangibles 21 29

Change in fair value of investment securities available for sale 9 -

Net deferred tax liability 3,478 634

Deferred income tax included in the result for the year (note 17)

Impairment of loans and receivables (2,843) (79)

Depreciation 8 22

Deferred tax income / (expense) in profit and loss (2,835) (57) Credited to equity in the current year (note 33.2)

Valuation of available-for sale investment securities (8) 4



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32. Other liabilities


Payments received in advance 1,465 1,761 Accrued expenses 547 708 Trade liabilities 670 191 Other taxes 82 112 Deferred income 415 373 Items in course of payment 11,418 197 Other liabilities 3745 109

Total 14,971 3,451

All other liabilities, except for taxes payable and deferred income, are financial liabilities and are measured at amortised cost. In the position “items in course of payment” the most important item - EUR 10,500 thousand relates to funds paid for issue of shares.

33. Capital and reserves attributable to owners of parent

33.1 Share capital 31 December 2012 31 December 2011

Share capital 39,425 12,925

Share premium 7,146 7,146

Revaluation reserves 84 5

Profit reserves 5,498 5,659

Retained earnings (1,269) 19,784

50,884 45,519

Non controlling interest 24 141

Total 50,908 45,660

Share capital consists of ordinary shares, issued in non-materialised form, subscripted on owners’ accounts in the Central Depository Agency. According to the law, share owners have the right to participate in management, the right to receive dividends and the right to an adequate portion of assets in liquidation or bankruptcy. Share capital ownership structure as at 31 December 2012 and 2011 is presented below:

2012 2011

000 EUR % share 000 EUR % share

Nova Ljubljanska banka d.d. Ljubljana 38,126 96.70 11,626 89.95

EBRD 883 2.24 883 6.83

Other shareholders 416 1.06 416 3.22

Total 39.425 100.00 12,925 100.00

Share premium comprises paid in premium exceeding nominal share value during capital increase. Profit reserves in the amount of EUR 5.498 thousand (December 31, 2011: EUR 5.659 thousand) comprise retained earnings that were transferred to reserves in accordance with the decision of the Bank’s Annual General Meeting and cannot be distributed in the form of dividends.



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33. Capital and reserves attributable to owners of parent (continued)

33.2 Recapitalization

At the Extraordinary General Meeting of Shareholders held on 14th September 2012, the Decision to issue shares to existing shareholders on the basis of pre-emptive rights in the amount of EUR38,910 thousand was adopted. By the Decision on determining the success of the issue of shares No.02/2e-24/6-12 of 25th October 2012, the Securities Commission of Montenegro confirmed the success of the sale of shares in the amount of EUR 26,500 thousand (4,762,761 shares, with nominal value of EUR 5.564 ), accounting for 68.10% of the approved issuance volume.

Based on that decision, issued shares were registered with the Central Depository Agency.

Costs, directly related to the issue of new shares are recognized in equity as a reduction of capital reserves, as shown in the Statement of changes in equity.

33.3 Revaluation reserves Revaluation reserves are cumulative unused gains from changes in the fair value of investment securities classified as available-for-sale, less deferred tax liabilities. Changes in revaluation reserves during 2012 and 2012 presented were as follows:


As at 1 January 5 45

Net fair value 87 (44)

Deferred tax (note 17) (8) 4

As at 31 December 84 5

33.4 Non-controlling interest Non controlling interest relates to shareholders capital in the Bank’s subsidiary — Management Company of Pension Fund NLB Nova Penzija. During 2012, in the process of voluntary liquidation, the Company is deleted from the Central Registry of the Commercial Court.

It comprises cost of capital share totalling EUR 24 thousand profit generated. The subsidiary is fully consolidated in these consolidated financial statements. 34. Related-party transactions In determination of related parties Bank applies IAS 24 requirements: — The parties which directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with the entity, — Parties in which the Bank has an interest that gives it significant influence over the entity and that are neither related parties nor joint ventures, — Private individuals who directly or indirectly have voting power in the Bank that gives them significant influence over the Bank, or any other subject which is expected to influence or be influenced by a related party to the Bank — A member of the key management personnel, i.e. individuals with authorizations and responsibilities for planning, managing and controlling the Bank’s operations, including directors and key management.



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34. Related-party transactions (continued) When taking into account each possible transaction with a related party, attention is focused on the substance of the relationship not just the legal form. The Bank is controlled by Nova Ljubljanska banka d.d. Ljubljana incorporated in Slovenia (Parent), which owns 96,70% of the ordinary shares as at 31 December 2012 (31 December 2011: 89.95%). The remaining 3,30% of the shares is held by the European Bank for Reconstruction and Development (2,24%) and other shareholders (1,06%). Other entities presented in the table below are considered as related parties since members of NLB Group. NLB Group members are related to the Bank since they are under common control or controlled by the Parent, they are Parent’s associates or joint ventures. The Bank performs a number of related party transactions in the course of its regular operations. The transactions include investments, deposits and foreign currency transactions as well as key management compensations within NLB Group. Transactions with related parties are carried out at market terms and prices. The following table summarizes the scope of related party transactions, balance of assets and liabilities at 31 December 2011 and related income and expense for the year then ended.



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34. Related-party transactions (continued) In year 2012 the Bank entered into transactions with the Parent under usual terms and market prices. Individually significant transactions are with Parent and represent loans and advances given, borrowings, subordinated debt and interest rate swaps which terms and conditions are disclosed in Note 21, 27 and 29.

NLB d.d. Lju-

bljana LHB Fra-

nkfurt

NLB Leasing Podgo-

rica

LB Interfi-

nans

Razvo-jna

banka

Tuzla-nska

banka

NLB Pristi

na NLB

Serbia

Tutu-nska

banka

Other related parties

Key manage

ment perso-

nnel Total

Receivables

Loans and advances to Banks 47,432 - - - 10 8 - 75 31 - - 47,556 Loans and advances to customers - - - - - - - - - - 706 706

Other receivables - - - 41 - - - - - - - 41

Total receivables 47,432 - - 41 10 8 - 75 31 - 706 48,303

Liabilities

Derivative hedging instruments 200 - - - - - - - - - - 200

Deposits 125 - 1,113 53 - 6 25 68 52 - 155 1,597

Borrowings 15,221 - - - - - - - - - - 15,221 Debt securities issued - - - - 1,007 - 504 - - - - 1,511 Subordinated liabilities 4,005 - - 5,140 - - - - - - - 9,145

Other liabilities 10,532 - - - 2 - - - - - - 10,534

Total liabilities 30,083 - 1,113 5,193 1,009 6 529 68 52 - 155 38,604

Net receivables / (liabilities) 17,349 - (1,113) (5,152) (999) 2 (529) 7 (21) -

551 10,095

Contingencies and commitments 12,569 - - - 1,736 - - 280 3 - - 14,588 Income

Interest income 21 1 - - - - - - - 30 52

Fees 39 - 9 - 25 - - - - - - 73

Financial income 503 - - - - - - - - - - 503

Total income 563 1 9 - 25 - - - - 30 628

Expenses

Interest expenses (1,057) - (11) (448) (66) - (33) - - - (4) (1,619)

Fee expenses (211) - - (8) (6) - - (22) - - - (247) Salaries, rent and other expenses - - (757) - - - - - - (984) (1,741)

Total expenses (1,268) - (768) (456) (72) - (33) (22) - - (988) (3,607)

Net income / (expenses) (705) 1 (759) (456) (47) - (33) (22) - - (958) (2,979)



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34. Related-party transactions (continued) The following table summarizes the scope of related party transactions, balance of assets and liabilities at 31 December 2011 and related income and expense for the year then ended:

NLB d.d. Lju-

bljana LHB Fra-

nkfurt

NLB Leasing Podgo-

rica

LB Interfi-

nans

Razvo-jna

banka

Tuzla-nska

banka

NLB Pristi

na NLB

Serbia

Tutu-nska

banka

Other related parties

Key manage

ment perso-

nnel Total

Receivables

Loans and advances to Banks 28,395 273 - - - - - 186 - 66 - 28,920 Loans and advances to customers - - - - - - - - - - 1,028 1,028

Other receivables - - - 41 - - - - - - - 41

Total receivables 28,395 273 - 41 - - - 186 - 66 1,028 29,989

Liabilities

Derivative hedging instruments 441 - - - - - - - - - - 441

Deposits 255 - 1,179 916 3 47 103 31 28 - 143 2,705

Borrowings 22,371 - - - - - - - - - - 22,371 Debt securities issued - - - - 1,007 - 504 - - - - 1,511 Subordinated liabilities - - - 4,977 - - - - - - - 4,977

Other liabilities 4 - - - 7 - - - - - - 11

Total liabilities 23,071 - 1,179 5,893 1,017 47 607 31 28 - 143 32,016

Net receivables / (liabilities) 5,324 273 (1,179) (5,852) (1,017) (47) (607) 155 (28) 66 885 (2,027)

Contingencies and commitments 35,203 264 - - 2,998 - 13 635 111 - - 39,224 Income

Interest income 136 1 - - - - - - - 38 175

Fees 28 - 13 - 38 1 - - - - - 80

Financial income (46) - - - - - - - - - - (46)

Total income 118 1 13 - 38 1 - - - 38 209

Expenses

Interest expenses (1,165) - (16) (304) (65) - (33) - - - (2) (1,585)

Fee expenses (266) (2) - (8) (11) - - (20) - - - (307) Salaries, rent and other expenses (1) - (784) - - - - - - (874) (1,659)

Total expenses (1,432) (2) (800) (312) (76) - (33) (20) - - (876) (3,551)

Net income / (expenses) (1,314) (1) (787) (312) (38) 1 (33) (20) - - (838) (3,342)

Other related parties are: associates in NLB Group (Adria Bank Vienna and Banka Celje).



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34. Related-party transactions (continued) Key management Compensation

31.December 2012

31.December 2011

Management board

Other key manageme

nt

Total Management board

Other key manageme

nt

Total

Short term benefits 367 570 937 298 385 683

Costs refund 1 3 4 1 3 4

Other services - - - 104 - 104

Long term benefits:

-post employment benefits 43 - 43 5 - 5

Bonus - - - 26 52 78

Total 411 573 984 434 440 874

Short-term benefits include: – Monetary benefits (gross wages, supplementary insurance, holiday bonus, other bonuses); and The reimbursement of cost comprises food allowance and travel expenses. Post-employment benefits include annuity savings. 35. Off- balance sheet items

a) Contractual amounts of the Bank’s off-balance sheet financial instruments:


Letters of credit 5,531 4,400

Short-term guarantees 22,886 33,708

Long-term guarantees 25,570 30,797

Loan commitments 6,670 16,851

Total 60,657 85,756

Provisions (note 30) (1,311) (1,149)

Total 59,346 84,607



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35. Off- balance sheet items (continued)

b) Structure of derivative financial instruments by notional amounts:


Hedge derivatives:

Interest rate swap 10,000 10,000

Total 10,000 10,000

The derivative financial instruments presented above are used to hedge interest rate risk. The fair values of derivative financial instruments are disclosed in note 26. c) Structure of collaterals received:


Property 806,243 888,097

Securities 2,853 2,777

Cash collateral 16,456 27,719

Other 861,953 864,315

Total 1,687,505 1,782,908

d) Fiduciary activities The Bank manages a significant amount of assets on behalf of legal entities and individuals and charges fees for such services. The Bank’s fiduciary assets amount to EUR 23,093 thousand as at 31 December 2012 (2011: EUR 13,084 thousand). Those assets are accounted for separately from those of the Bank. The income and expenses of these funds are for the account of the respective fund and no liability falls on the Bank in connection with these transactions. For agent and fiduciary services, the Bank accounted for the fee totalling EUR 19 thousand (2011: EUR 18 thousand), reported in the profit and loss under Fee and commission income from Agency services. Out of this amount EUR 5 thousand relates to insurance agency services related to securities trading on behalf of a client, while EUR 14 thousand relates to trust and fiduciary activities related to purchased securities and other similar services.



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36. Contingent liabilities and commitments a) Legal proceedings

As at 31 December 2012,the Bank has 35 ongoing litigations where it is acting as defendant to the total amount of EUR 973 thousand. Taking into account the level of materiality and assessment of risk involved, the Bank made provision at the amount of EUR 6 thousand. In addition, there are 2.493 litigations for debt collection against the Bank’s customers. The total amount of claims is EUR 6.952 thousand.

b) Operating lease commitments. Where the Bank is the lessee, the future minimum lease payments under non-cancellable operating leases are as follows:


Not later than 1 year 844 858 Later than 1 year and not later than 5 years 3,121 3,280

Later than 5 years 3,960 4,864

Total minimum lease commitments 7,925 9,002

37. Subsequent events There were no events after the period end date that could have affected the financial position and results reported in consolidated financial statements for the year ended 31 December 2012.

The Bank, after the balance sheet date, completed capital increase, according to the decision of the General Meeting of 24th December, 2012, worth a total of EUR 10,500 thousand, or 1,887,132 shares with a nominal value of EUR 5.564.

At the end of June bank has sold NPL’s amounting 23.7 milion, which totally eliminated deduction from the tier I capital. Deduction amounted 17.1 milion on 31.05.2013.

nlb montenegrobanka ad, podgorica consolidated …

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