CRNOGORSKA KOMERCIJALNA BANKA AD, PODGORICA … izvestaji... · CRNOGORSKA KOMERCIJALNA BANKA AD, PODGORICA NOTES TO THE FINANCIAL STATEMENTS December 31, 2016 8 1. GENERAL INFORMATION

CRNOGORSKA KOMERCIJALNA BANKA

AD, PODGORICA

Financial Statements For the Year Ended December 31, 2016

and Independent Auditors’ Report

CRNOGORSKA KOMERCIJALNA BANKA AD, PODGORICA

CONTENTS

Page

Responsibility for the financial statements 1 Independent Auditors’ Report 2 Financial Statements: Statement of Comprehensive Income 3 Statement of Financial Position 4

Statement of Changes in Equity 5

Statement of Cash Flows 6

Notes to the Financial Statements 7 - 54

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as "Deloitte Global") does not provide services to clients. Please see www.deloitte.com/me to learn more about our global network of member firms. © 2017. For information, contact Deloitte d.o.o. Podgorica.

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Deloitte d.o.o. Podgorica

Bulevar Svetog Petra Cetinjskog bb

81000 Podgorica

Montenegro

Tax Identification Number: 02310783

Registration Number: 5-0103354/19

Tel: +382 (0)20 228 324

Fax: +382 (0)20 228 327

www.deloitte.com/me

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Owner of Crnogorska komercijalna banka AD, Podgorica

We have audited the accompanying financial statements (pages 3 to 54) of Crnogorska komercijalna banka AD, Podgorica (hereinafter: “the Bank”) which comprise the statement of financial position as of December 31, 2016, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of these separate financial statements in accordance with the International Financial Reporting Standards, as well as for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Law on Auditing of Montenegro, Law on Accounting of Montenegro and standards on auditing applicable in Montenegro. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide solid basis for our audit opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as of December 31, 2016, and its financial performance and its cash flows for the year then ended, in accordance with International Financial Reporting Standards.

Deloitte d.o.o. Podgorica March 21, 2017


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NOTES TO THE FINANCIAL STATEMENTS

December 31, 2016

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1. GENERAL INFORMATION

Crnogorska komercijalna banka AD, Podgorica (hereinafter: the “Bank”) was established as an independent bank and registered with the Commercial Court in Podgorica on January 15, 1997. OTP Bank Plc. Budapest holds 100 percent equity interest in the Bank’s equity. The Bank is registered as a shareholding company. The Bank’s registration number in the Central Register of the Commercial Court is 4-0001633/49. The Bank obtained the operating license from the Central Bank based on the Decision number 0101-72/1-2002 dated February 18, 2002. The Bank is registered with the Securities Exchange Commission and entered into the Register of Security Issuers under number 51 (Decision number 02/3-47/2-01 as of July 12, 2001). Pursuant to the Law on Banks, Founding Decision and Statute, the Bank is engaged in the business of keeping deposits and other assets of private individuals and legal entities and it approves loans and makes other advances from these funds entirely, or in part, for its own account. In addition to these operations, the Bank is also registered to perform the following activities:

• to issue guarantees and undertake other off-balance sheet commitments; • to purchase, sell and collect receivables; • to issue, process and record payment instruments; • to perform payment transactions domestically and abroad; • to perform finance lease operations; • to trade in its own name for its own account or for the account of a customer with

foreign payment instruments and financial derivatives; • to prepare analysis and provide information and advice on the company and

entrepreneur creditworthiness; • depositary operations; • safekeeping of assets and securities and • other operations as in accordance with the approval of the Central Bank of

Montenegro.

The Bank is headquartered at Moskovska Street, no number. During 2016, the Bank opened the branch for Private banking. The basic idea is that the clients can perform all their transactions with the Bank in an efficient and simple way, at one place, with their own personal banker. On December 31, 2016, the Bank consisted of its Head Office in Podgorica and fifteen branches, ten sub-branch offices and five counters located on the territory of Montenegro.

As of December 31, 2016, the Bank had 441 employees (December 31, 2015: 436 employees). The members of the Board of Directors of the Bank are as follows:

First name and surname Position

Mr. Barna Zsolt President Mr. Szabolcs Horvath Member Mr. Nyitrai Győző Member Mr. Szabolcs Korba, PhD Member Mr. Attila Kozsik Member Mr. Miklos Nemeth Member Mr. Milan Sztepanov Member



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1. GENERAL INFORMATION (Continued)

The members of the Audit Committee of the Bank are as follows:

First name and surname Position

Mr. Attila Kozsik President Mr. Fritz Laszlo Member Mr. Andreas Szalay Member Executive directors of the Bank as of 31 December 2016 were:

Name and surname Key area

Mr. Szabolch Horvath Chief Executive Officer Mrs. Maja Krstić Executive Director for Finance and Bank Operations

Mr. Nebojsa Nedić Executive Director for Retail Banking Mr. Gabor Jandacsik Executive Director for Corporate Banking Mr. Balazs Balog Executive Director for Credit Approval and Risk managment

Mr. Milan Sztepanov Executive Director for Compliance and Security

As of December 31, 2016, Head of Compliance Department was Srđan Knežević. As of December 31, 2016, Internal Auditor was Irena Mašović.

2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS

These financial statements are general purpose financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). The Bank also prepares financial statements according to statutory accounting rules that differ materially from IFRS.

(a) Statement on Compliance

These financial statements have been prepared in accordance with IFRS adopted by the International Accounting Standards Board (IASB). The preparation of financial statements in conformity with IFRS requires from the Bank’s management to use certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Bank’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2 (d). The IFRS accounting policies provided below have been consistently applied by the Bank to all periods presented in these financial statements. (b) Basis of Preparation These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and financial liabilities (included derivate financial instruments) held at fair value through profit or loss, under the going concern assumption. (c) Functional and Reporting Currency

The financial statements are stated in EUR, which is the Bank’s functional currency. Unless otherwise is stated, all financial information is presented in EUR rounded to the nearest thousand.



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2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Continued)

(d) Use of Estimates and Judgments

The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Information about significant areas of estimation uncertainty and critical estimates in applying accounting policies that have the most significant effect on the amount recognized in the financial statements are described in Note 5 to the financial statements.

A summary of the principal accounting policies applied in preparing the IFRS financial statements are set out within Note 3 to the financial statements.

(e) Standards and Interpretations Issued that Came into Effect in the Current

Period In the current year, the Bank applied the following amendments and revisions to IFRS issued by the International Accounting Standards Board (“IASB”) mandatorily effective for the accounting periods beginning on or after January 1, 2016:

• Amendments to IFRS 11 “Joint Arrangements” – Accounting for Acquisition of an

Interest in a Joint Operation (effective for annual periods beginning on or after January 1, 2016).

• IFRS 14 “Regulatory Deferral Accounts” (effective for annual periods beginning on or

after January 1, 2016)

• Amendments to IAS 16 “Property, Plant and Equipment” and IAS 38 “Intangible Assets” – Clarification of Acceptable Methods of Depreciation and Amortization (effective for annual periods beginning on or after January 1, 2016).

• Amendments to IAS 16 “Property, Plant and Equipment” and IAS 41 “Agriculture” –

Agriculture: Bearer Plants (effective for annual periods beginning on or after January 1, 2016).

• Amendments to IAS 27 “Separate Financial Statements” - Equity Method in Separate

Financial Statements (effective for annual periods beginning on or after January 1, 2016).

• Amendments to IFRS 10, IFRS 12 and IFRS 28 “Investment Entities: Applying the

Consolidation Exception”. These amendments clarify that the exemption from preparing consolidated financial statements is available to a parent entity that is a subsidiary of an investment entity, even if the investment entity measures all its subsidiaries at fair value in accordance with IFRS 10. Consequential amendments have also been made to IAS 28 to clarify that the exemption from applying the equity method is also applicable to an investor in an associate or joint venture if that investor is a subsidiary of an investment entity that measures all its subsidiaries at fair value. (These amendments shall be applied retrospectively for annual periods beginning on or after January 1, 2016 with early adoption permitted.)



December 31, 2016

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(e) Standards and Interpretations Issued that Came into Effect in the Current Period (continued)

• Amendments to various standards “Improvements to IFRSs (cycle 2012-2014)”

resulting from the annual improvement project of IFRS (IFRS 5, IFRS 7, IAS 19 and IAS 34) primarily with a view to removing inconsistencies and clarifying wording (amendments are to be applied for annual periods beginning on or after January 1, 2016).

• Amendments to IAS 1 “Presentation of Financial Statements” – Disclosure Inititative

(effective for annual periods beginning on or after January 1, 2016). (f) Standards and Interpretations in Issue not yet Effective

At the date of issuance of these financial statements the following standards, revisions and interpretations were in issue but not yet effective for the financial year ended December 31, 2016: • IFRS 9 “Financial Instruments” and subsequent amendments, supplanting the

requirements of IAS 39 “Financial Instruments: Recognition and Measurement,“ with regard to classification and measurement of financial assets. This standard eliminates the categories existing under IAS 39 – assets held to maturity, assets available for sale and loans and receivables. IFRS 9 shall be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted.

In accordance with IFRS 9, financial assets shall be classified in one of the following two categories upon initial recognition: financial assets at amortized cost or financial assets at fair value. A financial asset shall be measured at amortized cost if the following two criteria are met: financial assets relate to the business model whose objective is to collect the contractual cash flows and the contractual terms provide the basis for collection at certain future dates of cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets shall be measured at fair value. Gains and losses on the fair value measurement of financial assets shall be recognized in the profit and loss statement, except for investments in equity instruments which are not traded, where IFRS 9 allows at initial recognition a subsequently irreversible choice to recognize changes in fair value within other gains and losses in the statement of comprehensive income. An amount recognized in such a manner within the statement of comprehensive income cannot subsequently be recognized in profit and loss.

• IFRS 15 “Revenue from Contracts with Customers,” defining the framework for revenue recognition. IFRS 15 supplants IAS 18 “Revenue,” IAS 11 “Construction Contracts,” IFRIC 13 “Customer Loyalty Programs,” IFRIC 15 “Agreements for the Construction of Real Estate” and IFRIC 18 “Transfers of Assets from Customers.” IFRS 15 shall be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted.

• IFRS 16 “Leases” provides a comprehensive model for identification of lease arrangements and their treatment in the financial statements of both lessors and lessees. As from its effective date, January 1, 2019, this standard shall supplant the following lease standards and interpretations: IAS 17 “Leases”, IFRIC 4 “Determining whether an Arrangement Contains a Lease,” SIC 15 “Operating Leases – Incentives” and SIC 27 “Evaluating the Substance of Transactions Involving the Legal Form of a Lease.“

• Amendments to IFRS 2 “Share-Based Payment” - Classification and Measurement of

Share-Based Payment Transactions, effective for annual periods beginning on or after January 1, 2018, with early adoption permitted.



December 31, 2016

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(f) Standards and Interpretations in Issue not yet Effective (Continued)

• Amendments to IFRS 10 “Consolidated Financial Statements” and IAS 28

“Investments in Associates and Joint Ventures” - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture ought to have been effective for annual periods beginning on or after January 1, 2016; however, in December 2015 IASB deferred the effective date indefinitely, with early adoption permitted.

• Amendments to IAS 7 “Statement of Cash Flows” - Disclosure Initiative require and

entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. Amendments to IAS 7 shall be effective for annual periods beginning on or after January 1, 2017, with early adoption permitted.

• Amendments to IAS 12 “Income Taxes” - Recognition of Deferred Tax Assets for

Unrealized Losses, shall be applied retrospectively for annual periods beginning on or after January 1, 2017, with early adoption permitted.

IFRS 9 “Financial Instruments”

IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in July 2014 mainly to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by introducing a ‘fair value through other comprehensive income’ (FVTOCI) measurement category for certain simple debt instruments. The Bank believes that IFRS 9 will have an impact on the financial statements of the Bank, however, the Bank is currently unable to estimate the effects of IFRS 9 introduction. The Key requirements of IFRS 9 are:

• All recognized financial assets that are within the scope of IAS 39 “Financial Instruments: Recognition and Measurement” are required to be subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. Debt instruments that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and that have contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are generally measured at fair value through other comprehensive income. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election upon initial recognition to measure an equity investment (that is not held for trading) at fair value through other comprehensive income, with only dividend income generally recognized in profit or loss.



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IFRS 9 “Financial Instruments” (continued)

• With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss.

• In relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognized.

• The new general hedge accounting requirements retain the three types of hedge accounting mechanisms currently available in IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is also no longer required.

On the initiative of the OTP Group, the Bank in 2017 initiated the IFRS 9 project, and hired consultants for this purpose. The project provides for the following phases: • Testing and training of classification tool • Pilot classification on sample products/contracts • Grouping of products/contracts (individual or grouped classification) • Classification of stock • Preparation of Fair Value models • IT development In the context of the classification and measurement, the Bank considers the possibility of defining business models and other requirements of IFRS 9 for the classification of financial assets that will be subsequently carried at amortized cost, at fair value through the comprehensive income or at fair value through profit or loss. In the area of impairment, the Bank together with OTP Bank is working on defining the methodology for calculating the expected credit losses and modelling of risk parameters, which include all the parameters necessary for the design of future impacts.

IFRS 15 “Revenue from Contracts with Customers”

In May 2014, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 “Revenue”, IAS 11 “Construction Contracts” and the related Interpretations when it becomes effective.

The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition:



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IFRS 15 “Revenue from Contracts with Customers” (continued)

• Step 1: Identify the contract(s) with a customer, • Step 2: Identify the performance obligations in the contract, • Step 3: Determine the transaction price, • Step 4: Allocate the transaction price to the performance obligations in the

contract, and • Step 5: Recognize revenue when (or as) the entity satisfies a performance

obligation.

Under IFRS 15, an entity recognizes revenue when (or as) a performance obligation is satisfied, i.e. when ‘control’ of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15.

Management of the Bank is currently considering the impact of the above listed standards and interpretation in the Bank’s financial statements as well as their effective dates. The accounting policies and estimates used in preparation of these financial statements are consistent with the those applied upon preparation of the Bank's annual financial statements for 2015, except for newly adopted IFRS, their amendments and interpretations, the application of which had no effect on the Bank's financial position or performance. Preparation of the financial statements in accordance with IFRS requires the Bank’s management to make certain key accounting estimates. It also requires management to use their judgement in applying the Bank’s accounting policies.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3.1. Income and Expense Recognition

Interest income and expense are recognized in the statement of comprehensive income for all instruments measured at amortized cost using the effective interest rate method.

The effective interest rate method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts over the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying value of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and commissions paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Fees and commissions are generally recognized on an accrual basis once the service is rendered. Loan approval fees are charged as onetime fee, deferred and recognized in income as an adjustment of the effective interest rate on the loan. Fee and commission income, also, includes transfer payments in foreign currency, domestic payments transactions, loan administration, guarantee, letter of credit business and other banking services.

3.2. Foreign Exchange Translation

Transactions denominated in foreign currencies are translated into Euros at the official middle exchange rates, at the date of each transaction.

Assets and liabilities denominated in foreign currencies are translated into Euros by applying the official middle exchange rates, prevailing at the statement of financial position date. Net foreign exchange gains or losses arising upon the translation of transactions, and the assets and liabilities denominated in foreign currencies are credited or charged to the statement of comprehensive income.

Commitments and contingent liabilities denominated in foreign currencies are translated into Euros by applying the official middle exchange rates, at the statement of financial position date.

3.3. Leasing

Leases undertaken by the Bank are classified as operating leases. The payments made under operating leases are charged to operating expenses in the statement of comprehensive income on a straight-line basis over the period of the lease.

3.4. Taxes and Contributions

Income Taxes

Current Income Taxes

Income taxes are calculated and paid in conformity with the income tax regulations defined under the Montenegro Corporate Income Tax Law, Article 28 (Official Gazette of Montenegro, no. 65/01, 80/04, 40/08, 86/09, 14/12, 61/13 and 55/16) as per the effective proportional tax rate of 9 percent on taxable income.

A taxpaying entity’s taxable income is determined based upon the income stated in its statutory statement of comprehensive income following certain adjustments to its income and expenses performed in accordance with the Montenegro Corporate Income Tax Law.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.4. Taxes and Contributions (continued)

Income Taxes (continued)

Current Income Taxes (continued)

The capital gain is considered as income generated by the sale of land, buildings, property rights and securities. Capital losses may be offset against capital gains realized in the same period. If after such offsetting capital loss is incurred, the taxpayer may carry forward the capital loss to the future periods against capital gains within the ensuing five years.

Montenegro tax regulations do not envisage that any tax losses of the current period be used to recover taxes paid within a specific carry back period. However, any current year losses reported in the annual corporate income tax returns may be carried forward and used to reduce or eliminate taxes to be paid in future accounting periods, but only for an ensuing period of a maximum of five years.

Deferred Income Taxes

Deferred income tax is determined using the statement of financial position liability method, for the temporary differences arising between the tax bases of assets and liabilities, and their carrying values in the financial statements. The currently enacted tax rates at the statement of financial position date are used to determine the deferred income tax amount. Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for the deductible temporary differences, and the tax effects of income tax losses and credits available for carry forward, to the extent that it is probable that future taxable profit will be available against which deferred tax assets may be utilized.

Taxes, contributions and other duties not related to operating results

Taxes, contributions and other duties that are not related to the bank’s operating result, include property taxes and other various taxes and contributions paid pursuant to state and municipal regulations.

3.5. Cash and Cash Equivalents

For the purposes of the statement of cash flows, cash and cash equivalents comprise balances with less than a three month maturity from the date of acquisition including: cash on hand, non-restricted balances with the Central Bank of Montenegro and other banks.

3.6. Financial Assets

The Bank classifies its financial assets in the following categories: loans and receivables; held-to-maturity investments; available-for-sale financial assets and financial assets at fair value through profit or loss. Management determines the classification of its investments at initial recognition.

(a) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Bank does not intend to sell immediately or in the near term. They arise when the Bank provides money or services directly to a debtor with no intention of trading the receivable. Loans and receivables comprise loans and receivables to banks and customers. Loans and receivables are initially measured at fair value plus direct transaction costs, and subsequently measured at their amortized cost using the effective interest method.



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3.6. Financial Assets (Continued)

(b) Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank’s management has the positive intention and ability to hold to maturity. Held-to-maturity investments are carried at amortized cost using the effective interest method. Any sale or reclassification of a more than insignificant amount of held-to-maturity investments would result in the reclassification of all held-to-maturity investments as available-for-sale, and prevent the Bank from classifying investment securities as held-to-maturity for the current and the following two financial years.

(c) Available-for-sale investments

Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as another category of financial asset. 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.

(d) Investments Carried at Fair Value through Profit or Loss

This category comprises two sub-categories: financial assets classified as held for trading, and financial assets designated by the Bank as at fair value through profit or loss upon initial recognition. A financial asset is classified as held for trading if it is acquired principally for the purpose of selling in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.

The Bank designates certain financial assets upon initial recognition as at fair value through profit or loss (fair value option). Financial assets designated upon initial recognition as at fair value through profit or loss consists of shares of corporate entities. Financial assets, for which the fair value option is applied, are recognized in the statement of financial position as “Financial assets designated at fair value through profit or loss”. Realized and unrealized fair value changes relating to financial assets designated at fair value through profit or loss are recognized in “Net gains/ (losses) on financial instruments designated at fair value through profit or loss”. Dividends on financial assets designated at fair value through profit or loss equity instruments are recognized in the statement of comprehensive income when the entity’s right to receive payment is established.

(e) Initial recognition and subsequent measurement of financial assets

Purchases and sales of held-to-maturity and available-for-sale financial assets are recognized on trade-date – the date on which the Bank commits to purchase or sell the asset. Loans are recognized when cash is advanced to borrowers. Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss.

Available-for-sale financial assets are subsequently carried at fair value. Loans, receivables, and held-to-maturity investments are carried at amortized cost using the effective interest method. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognized directly in equity, until the financial asset is derecognized or impaired at which time the cumulative gain or loss previously recognized in equity should be recognized in profit or loss. However, interest calculated using the effective interest rate method is recognized in the statement of comprehensive income. Dividends on available-for-sale equity instruments are recognized in the statement of comprehensive income when the entity’s right to receive payment is established. Foreign exchange gains or losses on available-for-sale assets are recognized in profit or loss.

The fair value of quoted investments in active markets is based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Bank establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, discounted cash flow analysis and other valuation techniques commonly used by market participants.



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(f) Impairment of financial assets

i) Assets carried at amortized cost

The Bank assesses at each statement of financial position date whether there is objective evidence that a financial asset or group of financial assets has been impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Bank about the following loss events:

• Payment delinquency; • Restructuring of the contract; • Termination of the risk assumption contract; • Bankruptcy proceedings, liquidation proceedings debt settlement procedures with

local governments; • Litigations; • Cross default.

The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets 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. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, 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 (excluding future credit losses that have not been incurred) discounted at the financial asset’s contracted 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 recognized in the statement of comprehensive income. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from executing the collateral less costs for obtaining and selling the collateral, whether or not the execution of collateral is probable. The calculation of the present value of the estimated future cash flows is based on an effective interest rate.

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.



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(f) Impairment of financial assets (Continued)

i) Assets carried at amortized cost (continued)

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Bank and historical loss experience for assets with credit risk characteristics similar to those in the Bank. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Loan loss provision is calculated at a level of group of financial assets. The loan loss percentage is determined by the assessment of probability of default, based on historical loss experience for the group of financial assets. Estimates of changes in future cash flows for group of assets should reflect and be directly consistent with changes in related observable data from period to period. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously provided for, decrease the amount of provisions for impairment losses and are recognized in the statement of comprehensive income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed by adjusting the allowance account.

(ii) Assets carried at fair value

The Bank assesses at each statement of financial position date whether there is objective evidence that a financial asset or a group of financial assets has been impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available - for - sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss – is removed from equity and recognized in the statement of 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 recognized in profit or loss, the impairment loss is reversed through the statement of comprehensive income.

(g) Borrowings

Borrowings are recognized initially at fair value (fair value of consideration received), net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between proceeds net of transaction costs and the redemption value is recognized in the statement of comprehensive income over the maturity period of the borrowings using the effective interest method.



December 31, 2016

19


3.7. Intangible Assets

Costs associated with maintaining computer software programs are recognized as an expense when they incur. Costs that are directly associated with identifiable and unique software products controlled by the Bank and will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. If the agreed period of using is less than eight years, depreciation is calculated in accordance with the period of use agreed in the contract. If the agreed period of use is longer than eight years, depreciation is calculated using the straight-line method, at a rate of 12,50%, in order to distribute the cost of licenses over their estimated useful lives use. Costs include external software company development costs. Amortization of intangible assets is charged on a straight-line basis over their estimated useful lives, which are as follows: Intangible Assets Useful Life (in Years)

License

8

Software 8 There were no changes in estimated useful lives of intangible assets compared to prior year.

3.8. Property, Plant and Equipment All property, plant and equipment are stated at cost less depreciation and impairment losses, if any. The cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation on property, plant and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, remained the same as in previous years, and are as follows:

Major Categories of Property, Plant and Equipment Useful Life (in Years)

Buildings

50

Computers and computer equipment 8 Furniture and office equipment 4 - 10 Motor vehicles 8 ATM machines 8 Other equipment 8

Assets under construction are carried at cost. Depreciation of these assets, on the same basis as for other property, commences when the assets are ready for their intended use. Investments in property, plant and equipment based on current maintenance are recognized as operating expenses in the period in which they arise. There were no changes in estimated useful lives of property, plant and equipment compared to prior year.

3.9. Impairment of Tangible and Intangible Assets At each statement of financial position date, the Bank’s management reviews the carrying amounts of the Bank’s tangible and intangible assets. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying value, the carrying amount of the asset is reduced to its recoverable amount.



December 31, 2016

20


3.9. Impairment of Tangible and Intangible Assets (continued)

An impairment loss is recognized as an expense of the current period and is recorded under other operating expenses. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable value. However, this is performed so that the increased carrying amount does not exceed the carrying value that would have been determined had no impairment loss been recognized for the asset in prior years.

3.10. Acquired assets

Acquired assets are assets that became the property of the Bank based on collection of receivables that were secured by that property. The Bank records the received assets at the lower than gross carrying amount of receivables or market value of the collateral less costs of sale.

3.11. Provisions Provisions are recognized when the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.

Provisions are measured at the present value of the estimated expenditure required to settle the present obligations. Provisions are re-examined at each statement of financial position date and adjusted so as to reflect the best present estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed and credited to the income statement. The Bank does not recognize provisions against contingent liabilities until it has determined the existence of a present obligation which can result in an outflow of resources embodying economic benefits required to settle the obligation, or if a reliable estimate cannot be made of the amount of the obligation, in which case it is so disclosed.

3.12. Employee Benefits

Employee Taxes and Contributions for Social Security

In accordance with the regulations prevailing in Montenegro, the Bank has an obligation to pay contributions to various State Social Security Funds. These obligations involve the payment of contributions on behalf of the employee, by the employer in an amount calculated by applying the specific, legally prescribed rates. The Bank is also legally obligated to withhold contributions from gross salaries to employees, and on behalf of the employees, to transfer the withheld portions directly to government funds. These contributions payable on behalf of the employee and employer are charged to expenses in the period in which they arise.

Retirement Benefits and Other Long Term Employee Benefits

In accordance with the Collective Bargaining Agreement, the Bank has an obligation to disburse an employment retirement benefit to a retiree, in an amount equal to six average net salaries effective in the Bank in the month prior to the employee’s retirement. The Bank's financial statement as of December 31, 2016, include provisions calculated based on the estimated present value of retirement benefits to employees upon vesting in respective right by independent authorized actuary.



December 31, 2016

21


3.13. Transaction with related parties

The aim of International accounting standard 24 – Related-Party Disclosures", is to ensure that the financial statements of an entity include the disclosure, which will draw attention to possible impact of related parties on the financial position and profit or loss of the entity. The related parties are:

• companies that directly, or indirectly, through one or more intermediaries, control the reporting company or are under its control, or that control the reporting entity jointly with other entities

• associated companies in which the Bank has significant influence and which are not a subsidiary or joint venture of the investor;

• natural persons who have, directly or indirectly, the voting right in the Bank, which gives them significant influence over the Bank, as well as any other entity which is expected to influence, or be influenced by that related person in their dealings with the Bank

• managers on key positions, or persons that have authority and responsibilities for planning, directing and controlling the activities of the Bank, including directors and key management

When observing any related party transaction, the attention should be paid to the essence of the relationship, not merely on the legal form.



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22

4. FINANCIAL INSTRUMENTS

4.1. Risk Management

In its business operations, the Bank is exposed to various risks, the most important of which are:

• Credit risk • Market risk • Liquidity risk and • Operating risk.

The risk management procedures are designed with a view to identify and analyse risks, to define the adequate limits and controls required for risk management, as well as to keep track of the Bank's exposure to each individual risk. The risk management procedures are subject to regular control ensuring the adequate response to the changes in the market, products and services.

The Risk Management Department is responsible for monitoring the Bank's exposure to certain risks and the compliance with the risk management procedures, as well as defined limits, which is reported to the Bank's Board of Directors on monthly basis. In addition, the Supervising Committee and the Credit Risk Management Committee are in charge of monitoring the Bank's exposure to certain risks. The Bank tests the sensitivity of the Bank to certain types of risk, on an aggregate level as well, by using several types of stress scenarios. Stress scenarios include assumptions about changes in market and other factors which may have a material impact on the Bank's operations. In addition, the introduction of new services requires market and economic analyses in order to optimize the relation between income and risk.

4.2. Credit Risk

The Bank takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay its debts in full when due. Impairment losses identified as of the statement of financial position date are provided for. Significant changes in the economy, or in the health of a particular industry segment that represents a concentration in the Bank’s portfolio, could result in losses that are different from those provided for at the statement of financial position date. Management therefore carefully manages its exposure to credit risk.

4.2.1. Credit Risk Management

Exposure to credit risk is a risk of financial loss, which may occur as a consequence of a counterparty being unable to fulfil its obligations towards the Bank. The Bank manages the credit risk it undertakes by placing limits in relation to large loans, single borrowers and related persons. Such risks are monitored on a revolving basis and subject to annual or more frequent reviews. All loans above the prescribed limit have to be approved by the Credit Risk Management Committee.

In accordance with the limits prescribed by the Central Bank of Montenegro, the sector concentration is constantly monitored. The exposure to any borrower including banks and brokers is further restricted by sub-limits covering statement of financial position and off-balance sheet exposures. Actual exposures against limits are monitored regularly.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations.



December 31, 2016

23

4. FINANCIAL INSTRUMENTS (Continued)

4.2. Credit Risk (Continued)

4.2.1. Credit Risk Management (Continued)

Credit Related Commitments and Contingent Liabilities

The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit – which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw bills of exchange on the Bank up to a stipulated amount under specific terms and conditions – are collateralized by the underlying goods deliveries to which they relate and therefore carry less risk than a direct borrowing.

4.2.2. Provisions for Impairment Losses in Accordance with Requirements of IAS 39

As of the statement of financial position date, the Bank assesses whether there is any objective evidence that the financial asset or a group of financial assets has been impaired, as delineated under IAS 39. The objective evidence of such impairment involves data based on which the asset holder can infer that there has been impairment:

• Payment delinquency; • Restructuring of the contract; • Termination of the risk assumption contract; • Bankruptcy proceedings, liquidation proceedings debt settlement procedures with

local governments; • Litigations; • Cross default.

In accordance with the adopted procedures, the Bank assesses whether there is observable evidence pertaining to impairment of an individual financial asset with individual significance. The calculation of the net book value of the estimated cash flows of a collateralized financial asset reflects the cash flows contingent on exclusion as deceased by any acquisition-related costs and sale of collateral, regardless of the degree of likelihood of the exclusion. For the purpose of a collective estimate of impairment, financial assets, which do not carry individual value, are grouped based on the similar characteristics of the credit risks inherent in them.



December 31, 2016

24



4.2.3. Maximum Exposure to Credit Risk per Balance and Off-Balance Sheet Items

In thousands of EUR

2016 2015

Balance sheet items

Loans and advances to banks 43.254 97.912 Loans and advances to customers 275.140 290.612 Available-for-sale securities 213 211 Financial assets carried at fair value through profit or loss 2.686 2.609 Securities held-to-maturities 89.594 66.410 Forfeiting 1.190 1.919

412.077 459.673 Off-balance sheet items Payment guarantees 5.299 7.141 Performance bonds 9.046 11.559 Uncovered letters of credit 585 943 Undrawn credit facilities 25.226 25.230

40.156 44.873

Total credit risk exposure 452.233 504.546

The exposure to credit risk is partially controlled by obtaining collaterals and guarantees issued by legal entities and private individuals. Before approving loans and other placements, the Bank assesses the debtor's creditworthiness taking into account the criteria established by the internal regulation, and the legal validity of the appraised value of collateral. The collateral value is calculated as its net value, by which is meant the market value less any costs relating to the realization of collateral. In addition, all private individuals must receive their salaries through the account held with the Bank, with a view to draw down the credit risk. Types of collateral are as follows:

• Deposits; • Pledges placed against industrial machines, securities, inventories and vehicles; • Mortgages against property and fiduciary ownership transfer; • Bills of exchange; • Authorizations; • Administrative injunctions; • Guarantors and • Insurance policies.



December 31, 2016

25



4.2.4. Loans and Advances

Loans and advance are presented in the following tables:

In thousands of EUR

Neither

Past due

nor Impaired

Past Due

but not

Individually Impaired

Individu

ally Impaired

Total, Gross

Individual

Allowance

for

Impairment

Collective

Allowance

for

Impair-ment

Total

Allowance

for

Impairment

Total, net exposure

December 31, 2016

Housing loans 54.133 232 4.555 58.920 3.215 360 3.575 55.345

Current account overdrafts 2.588 140 43 2.771 42 90 132 2.639

Consumer loans 74.909 530 9 75.448 - 1.479 1.479 73.969

Credit cards 3.085 273 1.789 5.147 1.752 348 2.100 3.047

Special purpose loans 97 9 574 680 502 8 510 170

Other loans to individuals covered by mortgage 18.868 161 867 19.896 619 180 799 19.097

Other loans 4.011 96 6.458 10.565 4.542 146 4.688 5.877

Loans to micro and small entities 18.365 1.353 6.980 26.698 4.373 1.316 5.689 21.009

Loans to medium and large entities 55.772 98 87.231 143.101 52.809 1.114 53.923 89.178

Loans to Government and municipalities 2.080 1 2.791 4.872 22 41 63 4.809

233.908 2.893 111.297 348.098 67.876 5.082 72.958 275.140

Loans and advances to banks 43.254 - - 43.254 - - - 43.254

277.162 2.893 111.297 391.352 67.876 5.082 72.958 318.394

In thousands of EUR

Neither

Past due

nor Impaired

Past Due

but not

Individual

ly Impaired

Individua

lly Impaired

Total, Gross

Individual Allowance

for

Impairment

Collective allowance

for

Impair-ment

Total Allowance

for

Impairment

Total, net exposure

December 31, 2015 Housing loans 58.673 171 5.107 63.951 3.355 534 3.889 60.062

Current account overdrafts 3.058 137 43 3.238 41 90 131 3.107

Consumer loans 70.766 282 17 71.065 - 1.150 1.150 69.915

Credit cards 3.733 216 1.944 5.893 1.756 280 2.036 3.857

Special purpose loans 265 102 472 839 401 20 421 418

Other loans to individuals covered by mortgage 13.162 105 931 14.198 573 203 776 13.422

Other loans 5.597 152 6.502 12.251 4.242 235 4.477 7.774

Loans to micro and small entities 21.369 890 7.600 29.859 4.348 1.289 5.637 24.222

Loans to medium and large entities 68.738 697 74.104 143.539 47.636 1.370 49.006 94.533 Loans to Government and municipalities 5.049 8 8.357 13.414 32 80 112 13.302

250.410 2.760 105.077 358.247 62.384 5.251 67.635 290.612

Loans and advances to banks 97.912 - - 97.912 - - - 97.912

348.322 2.760 105.077 456.159 62.384 5.251 67.635 388.524

Loans and advances past neither due nor impaired in FY 2016 and 2015 are all ranked under the satisfactory risk category.



December 31, 2016

26



4.2.4. Loans and Advances (Continued)

a) Past Due but not Individually Impaired In thousands of EUR

Past due up to

30 days

Past due 31

- 60

days

Past due 61

- 90

days

Past due 91-

180

days

Past due 180- 365

days

Past due 1

to 5

years Over 5

years Total

December 31, 2016

Housing loans 94 11 5 7 19 96 - 232 Current accounts overdrafts 52 3 1 4 11 38 31 140 Consumer loans 84 19 3 20 85 319 - 530 Credit cards 100 10 3 2 15 112 32 274 Special purpose loans 1 - - - 1 7 - 9 Other loans to individuals covered by mortgage 30 12 - 9 4 105 - 160 Other loans 13 5 1 3 4 68 3 97 Loans to micro and small entities

121

24

103

68

126

810

100

1.352

Loans to medium and large entities

98

-

-

-

-

-

-

98

Loans to Government and municipalities

1

-

-

-

-

-

-

1

594 84 116 113 265 1.555 166 2.893

In thousands of EUR

Past due up to

30 days

Past

due 31- 60 days

Past

due 61- 90 days

Past

due 91- 180

days

Past due

180- 365

days

Past

due 1 to 5

years Over 5 years

Total

December 31, 2015 Housing loans 82 22 6 14 32 15 - 171 Current accounts overdrafts 60 1 4 7 16 24 25 137 Consumer loans 88 20 9 18 73 74 - 282 Credit cards 106 12 2 9 27 27 33 216 Special purpose loans 92 2 - 1 3 4 - 102 Other loans to individuals covered by mortgage 25 9 4 10 3 54 - 105 Other loans 75 15 1 5 9 47 - 152 Loans to micro and small entities 145 104 11 82 230 295 23 890 Loans to medium and large entities 697 - - - - - - 697 Loans to Government and municipalities 8 - - - - - - 8

1.378 185 37 146 393 540 81 2.760



December 31, 2016

27

4. FINANCIAL INSTRUMENTS (Continued) 4.2. Credit Risk (Continued) 4.2.4. Loans and Advances (Continued)

b) Fair Value of Collateral up to the amount of collateralized exposure

In thousands of EUR

December 31, 2016

December 31, 2015

Deposits 7.065 7.482 Securities 71 104 Pledge 4.991 1.872 Mortgages 205.795 210.661 Total 217.922 220.119

In thousands of EUR

Not individually impaired

up to the value of receivables December 31,

2016

December 31,

2015

Deposits 3.721 5.988 Securities 70 103 Pledge 2.906 702 Mortgages 127.758 140.174

Total 134.455 146.967

In thousands of EUR

Individually impaired up to the value of

receivables

December 31,

2016

December 31,

2015

Deposits 3.344 1.494 Securities 1 1 Pledge 2.085 1.170 Mortgages 78.037 70.487 Total 83.467 73.152 As collateral, the Bank accepts mortgages against immovable, the fair value of which, pursuant to the certified appraiser’s valuations, exceeds the minimum of 30 percent of LTV ratio. Properties used as collateral are housing premises, apartment buildings, business buildings and premises, as well as land depending on its location and future use. When accepting pledge over securities as collateral, the Bank monitors the price of the security used as collateral on a daily basis. The market value of the pledge must exceed 50 percent of the placement’s worth. a) Restructured Loans and Advances

The Bank restructured a loan to the borrower due to a decline in the borrower’s creditworthiness, if it has:

a. Extended the principal and interest maturity, b. Decreased the interest rate on the loan approved, c. Reduced the amount of debt, principal or interest or d. Took over the debt, e. Performed capitalization of interest; f. Replaced the existing loan with a new loan; g. Made other concessions which place the borrower in a better financial position

Upon restructuring of the loan, the Bank performs financial analysis of the borrower and assesses its capacitates to realize cash flows necessary for the repayment of the loan principal, as well as the corresponding interest once the loan is restructured. During 2016, the Bank restructured loans in the amount of EUR 40.330 thousand (2015: EUR 57.015 thousand).



December 31, 2016

28




d) Geographic Concentration

Geographic concentration of the Bank’s exposure to the credit risk, exclusive of the

allowance for impairment is as follows:

In thousands of EUR

European USA and

Montenegro Union Canada Other Total

Loans and advances to banks -

33.980

8.546

728 43.254

Loans and advances to customers 337.912

268

126

9.792 348.098

Available-for-sale securities 174 39 - - 213 Financial assets carried at fair value through profit or loss 180

-

2.506

- 2.686 Securities held to maturity 89.594 - - - 89.594 Forfeiting 2.828 - - - 2.828

December 31, 2016 430.688 34.287 11.178 10.520 486.673

December 31, 2015 421.028 97.217 9.718 1.984 529.947

With the aim of identifying, measuring, assessing and monitoring country risk the Bank uses the methodology and experience of the OTP Group as well as the Decision of the Central Bank of Montenegro.

The Bank measures the exposure to country risk for all countries in which the head office or residence of the Bank’s debtors is. The Bank's exposure to country risk is measured based on individual placement, defined in the document which implies the control of the debtor’s country rating, taking into account the political, economic and social conditions in the country of the debtor. The Bank ranks all debtors’ counties in the following risk categories: 1) risk-free countries; 2) low-risk countries; 3) medium-risk countries; 4) high-risk countries. Ranking of debtors’ countries serves the Bank for determining the required capital for country risk and for limiting the bank's exposure to certain debtors’ countries, groups of countries or regions.



December 31, 2016

29

4 FINANCIAL INSTRUMENTS (Continued)



e) Industry Concentration

Industry concentration of the Bank’s exposure to the credit risk, exclusive of the allowance for impairment is as follows:

In thousands of EUR

Finance

Transportation,

Traffic and Tele-

communication

Services, Tourism,

Hotel

Management

Trading

Civil Engineeri

ng

Electrical power

industry

Mining

Administration

Real Estate

Agriculture

Hunting

and Fishing

Manufacturing

Other

Retail Custom

ers

Total

Loans and advances to banks 43.254

-

-

-

-

- - - - - -

43.254

Loans and advances to customers 4.638 3.436 10.903 85.958 17.934 1.143 1.436 5.463 12.026 2.887 22.250 8.004 172.020 348.098 Available for sale securities 213

-

-

-

-

-

-

- - - - - -

213

Financial assets at fair value through profit or loss 2.506

-

-

-

-

163

-

- - - - 17 -

2.686 Securities held to maturity 10.000

-

-

-

-

-

-

79.594 - - - - -

89.594

Forfeiting - 91 98 2.450 - - 119 - - - 70 - - 2.828

December 31, 2016 60.611 3.527 11.001 88.408 17.934 1.306 1.555 85.057 12.026 2.887 22.320 8.021 172.020 486.673

December 31, 2015 119.905

6.405

18.718

92.700

12.745

1.914

1.593

62.637 1.695 4.988 26.233 10.889 169.525

529.947



December 31, 2016

30



4.2.5. Off-Balance Sheet Items

The maturities of off-balance sheet items exposing the Bank to credit risk are as follows:

In thousands of EUR

Undrawn Loan Facilities Guarantees

Uncovered

Letters of Credit Total

December 31, 2016 Up to one year 23.094 5.910 226 29.230 From 1 to 5 years 2.132 8.435 359 10.926

25.226 14.345 585 40.156

In thousands of EUR

Undrawn Loan

Facilities Guarantees

Uncovered Letters of

Credit Total

December 31, 2015 Up to one year 25.219 4.378 390 29.987 From 1 to 5 years 11 14.322 553 14.886

25.230 18.700 943 44.873

4.3. Market Risk

The Bank takes on exposure to market risks. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements. Limits for the exposure to market risks are internally prescribed, and in compliance with the prescribed limits by the Central Bank of Montenegro.

4.3.1. Foreign Exchange Risk

The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The exposure to currency risk is regularly monitored by harmonizing them with the limits prescribed by the Central Bank of Montenegro. The exposure to foreign currency risk as of December 31, 2016 is presented in the following table.

In thousands of EUR Total Local

Other Currencies

Foreign Currency USD Currencies (EUR) Total

ASSETS Cash and balances with the Central Bank 669 451 1.120 172.712 173.832 Loans and advances to banks 20.845 2.411 23.256 19.998 43.254 Loans and advances to customers - - - 275.140 275.140 Available for sale securities - - - 213 213 Financial asset at fair value through profit or loss 2.506 - 2.506 180 2.686 Securities held to maturity - - - 89.594 89.594 Forfeiting - - - 1.190 1.190 Total assets 24.020 2.862 26.882 559.027 585.909

LIABILITIES Deposits from banks - - - 3.897 3.897 Due to customers 24.034 2.810 26.844 460.124 486.968 Other borrowed funds - - - 3.018 3.018 Other liabilities 12 - 12 2.018 2.030 Total liabilities 24.046 2.810 26.856 469.057 495.913

Net Open Position: - December 31, 2016 (26) 52 26 89.970 89.996

- December 31, 2015 (18) 71 53 84.815 84.868



December 31, 2016

31

4. FINANCIAL INSTRUMENTS (Continued) 4.3. Market Risk (Continued) 4.3.2. Operational risk

Operational risk is the risk of possible occurrence of negative effects on financial result and equity of the Bank due to failure (unintentional and intentional) of employees, inadequate internal procedures and processes, inadequate information system management and other systems management in the Bank, as well as due to the occurrence of unforeseen external events, including events with a low probability of occurring. Exposure to operational risk is regularly monitored by harmonizing them with the limits prescribed by the Central Bank of Montenegro. The aim of operational risk management is to ensure that the level of operational risk exposure is in line with the Risk Management Strategy and policies of the Bank, i.e. minimizing losses from operational risk Proactive identification and risk assessment is carried out on annual basis, and thus the exposure to operational risk is assessed, taking into account the possibility or the frequency of occurrence and their potential impact on the Bank. In addition, at least annually, the analysis scenario is prepared, which relates to less likely events with far more serious potential impact on the Bank, such as natural disasters, attacks on IT systems, failure of payment operations system, a significant withdrawal of deposits, etc. Scenarios are harmonized at the level of OTP Group.

4.3.3. Interest Rate Risk

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The interest rates are based on market rates and the Bank regularly performs repricing. The following table presents the Bank’s interest bearing and non-interest bearing assets and liabilities as of December 31, 2016: In thousands of EUR

Interest

Bearing

Non-Interest

Bearing Total

ASSETS Cash and balances with the Central Bank 11.140 162.692 173.832 Loans and advances to banks 43.254 - 43.254 Loans and advances to customers 275.140 - 275.140 Available for sale securities - 213 213 Financial asset at fair value through profit or loss - 2.686 2.686 Securities held to maturity 89.594 - 89.594 Forfeiting 1.190 - 1.190 Total assets 420.318 165.591 585.909

LIABILITIES Deposits from banks 2.525 1.372 3.897 Due to customers 364.587 122.381 486.968 Other borrowed funds 3.016 2 3.018 Other liabilities - 2.030 2.030 Total liabilities 370.128 125.785 495.913 Interest Sensitive Gap: - December 31, 2016 50.190 39.806 89.996

- December 31, 2015 66.274 18.594 84.868



December 31, 2016

32

4. FINANCIAL INSTRUMENTS (Continued) 4.4. Liquidity Risk

Liquidity risk includes both the risk of being unable to provide cash to settle liabilities at appropriate maturities and the risk of being unable to liquidate an asset at a reasonable price and in an appropriate time frame.

4.4.1. Liquidity Risk Management

The matching and controlled mismatching between the maturities and interest rates of assets and of liabilities is fundamental to the management of the Bank. It is unusual for banks ever to be completely matched since business transacted is often of uncertain term and of different types. An unmatched position potentially enhances profitability, but also increases the risk of losses. The maturities of assets and liabilities and the ability of the Bank to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Bank and its exposure to changes in interest rates and exchange rates. Liquidity requirements to support calls under guarantees and standby letters of credit are considerably less than the amount of the commitment because the Bank does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements, since many of these commitments will expire or terminate without being funded.

The Assets and Liquidity Department monitors the Bank's exposure to liquidity risk on daily basis. In order to determine the matching and mismatching of cash inflows and outflows, the Bank makes use of GAP analysis. The table below analyses assets and liabilities of the Bank into relevant maturities based on the remaining period at statement of financial position date to the contractual maturity date.

In thousands of EUR Up to

One Month

From One to 3 Months

From 3 to 12

Months From 1 to

5 Years

Over

5 Years

Total

ASSETS Cash and balances with the Central Bank 139.273 - - 34.559 - 173.832 Loans and advances to banks 41.969 - - - 1.285 43.254 Loans and advances to customers 5.787 11.842 40.092 121.143 96.276 275.140 Available for sale securities - - - - 213 213 Financial asset at fair value through profit or loss - - - - 2.686 2.686 Securities held to maturities - - 10.000 79.594 - 89.594 Forfeiting - - - 1.190 - 1.190

Total assets

187.029 11.842 50.092 236.486 100.460 585.909

LIABILITIES AND EQUITY Deposits from banks 575 640 2.394 287 1 3.897 Due to customers 48.622 84.515 315.889 37.806 136 486.968 Other borrowed funds 8 - 442 1.454 1.114 3.018 Other liabilities 2.030 - - - - 2.030 Total liabilities and equity 51.235 85.155 318.725 39.547 1.251 495.913 Net Open Position: - December 31, 2016 135.794 (73.313) (268.633) 196.939 99.209 89.996

- December 31, 2015 194.842 (75.921) (244.468) 145.940 64.475 84.868



December 31, 2016

33


4.4. Liquidity Risk (Continued)

4.4.1. Liquidity Risk Management (Continued)

The structure of the Bank’s financial assets and liabilities as classified into their relevant maturities as of December 31, 2016 indicates the existence of a liquidity gap in the period from one to 3 month and in the period from 3 month up to one year. The primary reason for this gap lies in the fact that the short-term sources of funds with maturities of up to one month, primarily demand deposits, have been committed for longer periods of time. The Bank did not have problem with liquidity in 2016. Liquidity ratio as of December 31, 2016 has been 1,78%.

4.4.2. Remaining Contractual Maturity Analysis for Financial Liabilities (Undiscounted

Cash Flows)

In thousands of EUR

Demand

Up to 1 Month

From 1

to 3 Months

From

3 to 12 Months

From 1

to 5 Years

Over 5 Years

Total

December 31, 2016 LIABILITIES Deposits from banks 119 457 640 2.394 287 1 3.898 Due to customers 15.863 33.294 85.445 319.364 38.222 137 492.325 Other borrowed funds - 8 - 458 1.508 1.155 3.129 Other liabilities - 2.050 - - - - 2.050

15.982 35.809 86.085 322.216 40.017 1.293 501.402

In thousands of EUR

Demand

Up to 1 Month

From 1

to 3 Months

From 3 to 12 Months

From 1

to 5 Years

Over 5 Years

Total

December 31, 2015 LIABILITIES Deposits from banks 943 708 - - - - 1.651 Due to customers 17.338 49.138 99.728 301.557 21.456 141 489.358 Other borrowed funds - 11 - 367 1.612 1.380 3.370 Other liabilities - 1.194 - - - - 1.194 18.281 51.051 99.728 301.924 23.068 1.521 495.573

4.5. Fair Value of Financial Instruments 4.5.1 Fair Value of Financial Instruments Measured at Fair value

Fair value hierarchy for financial instruments measured at fair value IFRS 13 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, unobservable inputs reflect the Bank’s market assumptions. These two types of inputs have created the following fair value hierarchy: • Level 1 – Quoted prices (unadjusted) on active markets for identical assets or

liabilities. This level includes listed equity securities.

• Level 2 – Inputs other than quoted prices included within Level 1 that are observable for an asset or a liability, either directly (that is, as prices) or indirectly (that is, as derived from prices). The Bank does not have financial instruments measured at fair value included within Level 2.

• Level3 – inputs for an asset or a liability that are not based on observable market data (unobservable inputs). This level includes equity investments with Bank’s market assumption (no observable market data available). The Bank does not have financial instruments measured at fair value included within Level 3.



December 31, 2016

34


4.5. Fair Value of Financial Instruments (Continued)

4.5.1 Fair Value of Financial Instruments Measured at Fair value (Continued)

Fair value hierarchy for financial instruments measured at fair value (Continued)

This hierarchy requires the use of observable market data when available. The Bank considers relevant and observable market prices in its valuations where possible. As at December 31, 2016, for securities measured at fair value in Bank’s portfolio, market prices were available.

December 31, 2016 Level 1 Level 2 Level 3 Total

Available for sale securities 213 - - 213 Financial assets designated at fair value: – Investment securities – equity instruments 2.686 - - 2.686

Total assets

2.899 - - 2.899 December 31, 2015 Level 1 Level 2 Level 3 Total

Available for sale securities 211 - - 211 Financial assets designated at fair value: – Investment securities – equity instruments 2.609 - - 2.609

Total assets

2.820 - - 2.820

Valuation techniques and inputs to valuation techniques for financial instruments measured at fair value

The fair value for available-for-sale securities and securities designated at fair value through profit or loss is based on market prices. Where this information is not available, fair value has been estimated using quoted market prices for securities with similar characteristics. As at December 31, 2016, for securities measured at fair value in Bank’s portfolio, market prices were available.

4.5.2 Fair Value of Financial Instruments Not Measured at Fair value

Fair value hierarchy for financial instruments not measured at fair value

Estimated fair value of financial instruments, based on fair value hierarchy is given as follows:

December 31, 2016 Level 1 Level 2 Level 3 Total Carrying

Amount

Cash and balances with the Central Bank - 173.832 - 173.832 173.832 Loans and advances to banks - - 43.254 43.254 43.254 Loans and advances to customers - - 275.140 275.140 275.140 Securities held-to-maturity - 89.594 - 89.594 89.594 Forfeiting - - 1.190 1.190 1.190 Total assets - 263.426 319.584 583.010 583.010

Deposits from banks - - 3.897 3.897 3.897 Due to customers - - 486.968 486.968 486.968 Other borrowed funds - - 3.018 3.018 3.018 Other liabilities - - 2.030 2.030 2.030

Total liabilities

- - 495.913 495.913 495.913



December 31, 2016

35

4. FINANCIAL INSTRUMENTS (Continued) 4.5. Fair Value of Financial Instruments (Continued) 4.5.2 Fair Value of Financial Instruments Not Measured at Fair value (Continued)

Fair value hierarchy for financial instruments not measured at fair value (Continued)

December 31, 2015 Level 1 Level 2 Level 3 Total

Carrying

Amount

Cash and balances with the Central Bank - 115.321 - 115.321

115.321

Loans and advances to banks - - 97.912 97.912 97.912 Loans and advances to customers - - 290.612 290.612

290.612

Securities held-to-maturity - 66.410 - 66.410 66.410 Forfeiting - - 1.919 1.919 1.919

Total assets - 181.731 390.443 572.174

572.174

Deposits from banks - - 1.648 1.648 1.648 Due to customers - - 484.034 484.034 484.034 Other borrowed funds - - 3.250 3.250 3.250 Other liabilities - - 1.194 1.194 1.194

Total liabilities

- - 490.126 490.126

490.126

Valuation techniques and inputs to valuation techniques for financial instruments not

measured at fair value For financial assets and liabilities not measured at fair value, fair values are calculated only for disclosure purposes, and do not impact the statement of financial positions or income statement. In addition, since the instruments generally do not trade, there are significant management judgments required to determine their fair values. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions regardless of whether that price is directly observable or estimated using another valuation technique. However, no readily available market prices exist for a certain portion of the Bank’s financial instruments, and those were accordingly classified into Level 2 and Level 3 based on fair value hierarchy. In this circumstances where the quoted market prices are not readily available, the fair value is estimated using discounted cash flow models or other pricing models as appropriate. Changes in underlying assumptions, including discount rates and estimated future cash flows, significantly affects the estimates. Therefore, the calculated fair market estimates cannot be realized in a current sale of the financial instrument.

The carrying amount represents a reasonable estimate of fair value for the following financial instruments which are predominately short-term:

• Cash and balances with the Central Bank; • Securities held-to-maturity (relate to treasury bonds maturing up to 6 months); • Other liabilities.

In estimating the fair value of the Bank’s financial instruments not measured at fair value and classified into Level 2 and Level 3, the following assumptions were used:

Loans and advances to banks

Loans and advances to banks include inter-bank placements and line items in the course of collection, linked with floating interest rates. Future anticipated cash flows are discounted to their present value using current interest rates. Due to the fact that floating interest rates are agreed, changes in those interest rates lead to changes in agreed interest rates, so the fair value of floating rate placements and overnight deposits approximates their carrying amount at the statement of financial position date.



December 31, 2016

36

4. FINANCIAL INSTRUMENTS (Continued) 4.5. Fair Value of Financial Instruments (Continued) 4.5.2 Fair Value of Financial Instruments Not Measured at Fair value (Continued)

Valuation techniques and inputs to valuation techniques for financial instruments not

measured at fair value (Continued)

Loans and advances to customers and Forfeiting

Fair value is determined using discounting cash flow models that include inputs for credit risk, interest rate risk, probability of default estimates, loss given default estimates, as appropriate. Given the fact that significant portion of the loan portfolio is extended at fixed interest rates, in order to determine the fair value of loans and advances to customers with fixed interest rate, the Bank has performed comparison of the Bank’s interest rate on loans and advances to customers with available information on the current market interest rates in the banking sector of Montenegro (i.e. average weighted market rates by activities), as it is summarized in the following table:

- in percentages- Annual Average Weighted Interest Rate Industry Sector

Bank

Banking Sector in Montenegro

Financial institutions 8,44 6,52 Corporate 7,08 6,93 Other nonfinancial institutions 7,19 7,93 General Government 6.22 5,21 Households 9,23 9,21 Other 9,83 7,46

According to the Bank’s management, the fair value of loans and advances to customers calculated as the present value of discounted future cash flows, using current market rates (average weighted interest rates in the banking sector), does not materially differ from the carrying amount of loans at statement of financial position date. According to the Bank’s management, carrying values as presented in the Bank’s financial statements represent values that are believed to be the most valid under the circumstances and most useful for the purposes of financial reporting.

Deposits and borrowings

The estimated fair value of demand deposits and deposits with remaining contractual maturities less than one year approximates their carrying amount.

The estimated fair value of fixed interest bearing deposits with remaining contractual maturities over one year, without a quoted market price, is based on discounted cash flows using interest rates for new debts with similar remaining maturity. According to the Bank’s management, Bank’s interest rates are harmonized with the current market rates and the amounts stated in the financial statements represent the values that are believed under the circumstances, to approximate the fair value of these financial instruments.

The carrying value of borrowings with floating interest rates approximates their fair value at the statement of financial position date.

4.6. Capital Management

The Bank’s capital management objectives are:

• To comply with the capital requirements set by the regulator; • To safeguard the Bank’s ability to continue as a going concern so that it can

continue to provide returns to shareholders and ensure benefits for other stakeholders; and

• To maintain a strong capital base to support the development of its business. The Bank’s management controls capital adequacy by applying the methodologies and limits prescribed by the Central Bank of Montenegro (Official Gazette of Montenegro number 60/08, 41/09, 38/11 and 55/12). In accordance with the regulations, the Bank submits quarterly reports on the capital condition and structure to the Central Bank of Montenegro.



December 31, 2016

37

4. FINANCIAL INSTRUMENTS (Continued) 4.6. Capital Management (Continued)

The Bank’s capital is divided into two tiers:

• Tier 1 capital (paid-in share capital, retained earnings from prior years, profit for the year decreased for current year losses); and

• Tier 2 capital (reserves from profit after taxation: Bank’s risk-weighted assets, legal reserves, subordinated loans).

• Both decreased for intangible assets, missing reserves, direct and indirect investments in other banks, credit or financial institution in amount more than 10% of capital of these institutions

Risk-weighted assets are comprised of items of assets and loan equivalents of off-balance sheet items exposed to risk. The loan equivalents of off-balance sheet assets are computed by multiplying the book value of off-balance sheet items with the prescribed conversion factors. Total risk-weighted assets are comprised of assets and loan equivalents of off-balance sheet items exposed to risk (the Bank's risk weighted assets) classified in four categories and multiplied by adequate prescribed risk weights. In accordance with the requirements of the Central Bank of Montenegro, the Bank is under obligation to maintain a minimum capital adequacy ratio of 10%. The Bank is required to maintain certain minimum or maximum ratios with respect to its activities and composition of risk assets in compliance with the Law on Banks of the Montenegro and with the Central Bank of Montenegro Regulations. The Bank's solvency ratio amounted to 20,88% as of December 31, 2016, calculated on statutory financial statements.

4.7. Risk Exposure Analysis

4.7.1. Risk Exposure Analysis (Foreign Exchange Risk) The management of foreign exchange risk, in addition to the analysis of Bank’s assets and liabilities in foreign currency, includes the analysis of risk inherent in the fluctuations in foreign currency exchange rates. The table which follows sets out the scenario for the changes in the exchange rates ranging from +10% to -10% as compared to EUR.

In thousands of EUR Amount in Change in Exchange Rate

Total foreign

currencies

10% -10%

ASSETS

Cash and balances with the Central Bank 173.832 1.120 112 (112)Loans and advances to banks 43.254 23.256 2.326 (2.326)Financial asset at fair value through profit or loss 2.686 2.506 251 (251) Total assets 219.772 26.882 2.689 (2.689)

LIABILITIES Due to customers 486.968 26.844 2.684 (2.684)Other liabilities 2.030 12 1 (1)

Total liabilities 488.998 26.856 2.685 (2.685)

Net Open Position: - December 31, 2016 (4) 4

- December 31, 2015 5 (5)

As of December 31, 2015, under the assumption that all other parameters remain the same upon the change in the EUR exchange rate, as compared to other currencies, by +10%, i.e., -10%, the Bank's profit would decrease, i.e., increase by EUR 5 thousand (December 31, 2014: decrease, i.e., increase by EUR 174 thousand). The reason why the Bank's exposure to currency risk is small is rooted in the fact that the major portion of the Bank's assets and liabilities is denominated in EUR.



December 31, 2016

38


4.7. Risk Exposure Analysis (Continued)

4.7.2. Risk Exposure Analysis (Interest Rate Risk)

In the process of interest rate risk management, the Bank analyses the exposure of Bank’s assets and liabilities to changes in interest rates. The following table shows the effect of fluctuations in interest rates on the Bank’s assets and liabilities denominated in EUR and foreign currency in the range from +0.4 b.p. to - 0.4 b.p. respectively.

In thousands of EUR

Net effect of movements in interest rates +0.4 b.p. -0.4 b.p.

2016 EUR IR/FX

IR EUR IR/FX

IR

ASSETS

Cash and balances with the Central Bank 173.832 - - Loans and advances to banks 43.254 - - Loans and advances to customers 275.140 111 (111)Available for sale securities 213 - - Financial asset at fair value through profit or loss 2.686 - - Securities held to maturity 89.594 - - Forfeiting 1.190 - -

585.909 111 (111)LIABILITIES Deposits from banks 3.897 - - Due to customers 486.968 - - Other borrowed funds 3.018 - - Other liabilities 2.030 - - 495.913 - -

Net Interest Sensitive Gap: - December 31, 2016 111 (111)

- December 31, 2015 133 (133)

Under the assumption that all other parameters remain the same, the increase, or decrease in variable interest rates applied to assets and liabilities denominated in EUR and in foreign currency, by 0.4 percentage points, the Bank's profit would increase, or decrease, respectively by EUR 111 thousand (December 31, 2015: the respective decrease would amount to EUR 133 thousand).

The reason why the Bank's exposure to interest rate is small is rooted in the fact that the major portion of the Bank's assets and liabilities are linked to a fixed interest rate.

5. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS IN APPLYING ACCOUNTING

POLICIES

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 are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

(a) Impairment losses on loans and advances

The Bank reviews its loan portfolios, to assess impairment, monthly at least. In determining whether an impairment loss should be recorded in the statement of comprehensive income, the Bank makes judgments as to whether there are any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a Bank, or national or local economic conditions that correlate with defaults on assets in the Bank. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.



December 31, 2016

39

5. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS IN APPLYING ACCOUNTING

POLICIES (Continued) (b) Impairment of available-for-sale equity investments and investments in associates The Bank determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgment. Impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance and operational and financing cash flows. (c) Retirement benefits and other long-term employee benefits

The present value of liabilities for retirement benefits and other long-term employee benefits depends on a number of factors that are determined on an actuarial basis using a number of assumptions. Any changes in these assumptions will impact the carrying amount of employee benefits obligations. Key assumptions for retirement benefits and other long-term employee benefits are disclosed in Note 28.

(d) Taxation risks

Montenegro tax legislation is subject to different interpretations and changes that occur frequently. The interpretation of tax legislation by tax authorities as applied to the transactions and activity of the Bank may not be in line with that of the management. As a result, tax authorities may challenge Bank’s transactions and the Bank may be assessed additional taxes, penalties and interest, which could be material. The Bank’s tax statements may be reviewed or audited for a period of five years from the filing date of such statements. (e) Provisions

Provisions are re-examined at each statement of financial position date and adjusted to reflect the best present estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed and credited to the income statement. The Bank does not recognize provisions against contingent liabilities until it has determined the existence of a present obligation that can result in an outflow of resources embodying economic benefits required to settle the obligation, or if a reliable estimate cannot be made of the amount of the obligation, in which case it is so disclosed.

6. INTEREST INCOME AND EXPENSE AND SIMILAR INCOME AND EXPENSE

a) Interest and Similar Income

In thousands of EUR Year Ended December 31,

2016 2015

Interest and similar income Loans and advances to customers 23.655 28.681 Placements to banks 190 446 Forfeiting 102 216 Held-to-maturity securities 2.465 802 Available for sale securities - 427

26.412 30.572



December 31, 2016

40

6. INTEREST INCOME AND EXPENSE AND SIMILAR INCOME AND EXPENSE

(Continued) b) Interest Expense and Similar Charges

In thousands of EUR

Year Ended December 31,

2016 2015

Interest and similar expenses

Deposits from customers 1.562 3.380 Deposits from banks 6 20 Borrowed funds, from banks 29 40 Borrowed funds, from government 14 15 Subordinated loans - 155

1.611 3.610

7. FEE AND COMMISSION INCOME AND EXPENSE

a) Fee and Commission Income In thousands of EUR

Year Ended December 31, 2016 2015

Fee and commission income arising from domestic and international payment transfers 7.426 7.946 Credit card related fees and commissions 5.179 4.638 Fee income from issued guarantees and other contingent liabilities 385 386 Other 585 711

13.575 13.681

b) Fee and Commission Expense


2016 2015

Fee and commission expense arising from domestic payment transfers

683

664

Fee and commission expense arising from international payment transfers

283

271

Commission expenses arising on guarantees and other contingent liabilities 50 57 Credit card related fees and commissions 3.131 2.490 Other 158 154

4.305 3.636

8. NET FOREIGN EXCHANGE GAINS

In thousands of EUR

Year Ended December 31,

2016 2015

Foreign exchange gains, realized 753 834 Foreign exchange gains/(losses), unrealized 12 (92)

765

742



December 31, 2016

41

9. OTHER OPERATING INCOME

In thousands of EUR


Income from custody operations

142

180

Gains raised from forfeiting 418 65 Gains from sale fixed assets 9 26 Income arising on breach of contractual obligations by the third party

694

-

Other 517 218

1.780

489

10. OPERATING EXPENSES


2016 2015

Staff costs

12.435

12.331

Administrative expenses 719 787 Depreciation of property, plant and equipment (Note 21) 1.852 1.960 Amortization of intangible assets (Note 20) 1.049 1.044 Rent 1.286 1.255 Software and hardware expenses 1.381 1.346 Maintenance of non IT property 301 319 Vehicle maintenance costs 59 69 Professional services 844 783 Deposit insurance premium 2.307 2.330 Insurance costs 151 128 Marketing, sponsorship, and entertainment 674 771 The cost of fuel and electricity 701 704 Telecommunications and postal services 550 591 The cost of travel and training 132 126 Other 430 777

24.871 25.321

11. LOSSES ON IMPAIRMENT AND PROVISIONS


2016 2015

Loans to customers, net (Note 15) 6.298 5.699 (Release)/Provisions for forfeiting (Note 19) (1.000) 859 Provision for other assets, net (Note 22) 349 417 Release of provision for contingent liabilities, net (Note 27) (90) (566)Provisions for potential litigation losses 163 481 Provisions for employee benefits, net (Note 28) 11 11 Provision for unused annual leaves - 15 Other provisions (28) (448)

5.703 6.468



December 31, 2016

42

12. INCOME TAXES

a) Components of income taxes

In thousands of EUR 2016

2015

Income taxes

5

(1)

b) Numerical Reconciliation between Tax Expense and the Product of Accounting

Results Multiplied by the Applicable Tax Rate In thousands of EUR


Profit before tax 6.018 6.774 Income tax (9%) 542 610 Income tax (9%) on capital losses - 6 Expenses not recognized for tax purposes 41 75 Tax losses from previous periods used for tax deduction (299) (724)Effects of the reconciliations with the taxable base with the statutory financial statements (284) 33 The difference between the present value of tangible assets and intangible assets recognized in the financial statements and tax report (5) (1)Tax included in the statement of comprehensive income (5) (1) Effective tax rate 0% 0%

c) Deferred tax assets and liabilities

Deferred tax liabilities at December 31, 2016 in the amount of EUR 346 thousand (December 31, 2015: EUR 351 thousand) are associated with the temporary differences arising between the tax bases of property and equipment and the carrying value of such assets.

Year Ended December 31, 2016

Year Ended December 31, 2015

Deferred tax assets

Deferred tax liabilities

Deferred tax

Deferred tax assets

Deferred tax liabilities a

Deferred tax

Depreciation of fixed assets -

345

(345)

-

350

(350)Change in fair value of the securities available for sale -

1

(1)

-

1

(1)Other 135

-

135

172

-

172 Deferred tax assets / (liabilities) 135

346

(211)

172

351

(179)

c) Unused tax losses carried forward

Year of Expiry Occurrence Year In thousands of EUR

2012 2017 18.034

d) Unused capital tax losses carried forward:

Year of

Occurrence Expiry Year In thousands of EUR

2015

2020 70

As of December 31, 2016, the Bank did not recognize deferred tax assets arising from tax losses incurred in previous years, due to the uncertainty that existed at the time of loss, ie. that future taxable profits against which the deferred tax assets can be utilized will be available.



December 31, 2016

43

12. INCOME TAXES (Continued)

e) Taxes, Contributions and Other Duties Not Related to Operating Results

Taxes, contributions and other duties that are not related to the Bank’s operating results, include property taxes, employer contributions on salaries, and various other taxes and contributions paid pursuant to state and municipal regulations.

13. CASH AND BALANCES WITH THE CENTRAL BANK

In thousands of EUR December 31,

2016 December 31,

2015

Cash on hand in EUR

22.132

18.389

Cash on hand in foreign currencies 1.120 982 Cash in the course of collection 648 431 Gyro account 115.433 66.139 Included in cash and cash equivalents (Note 32) 139.333 85.941

Obligatory reserve held with the Central Bank 34.559 29.440 Less: Allowance for impairment (60) (60) 173.832 115.321

The Bank’s obligatory reserve at December 31, 2016 represents the minimum deposits set aside in accordance with the Central Bank of Montenegro Regulation with respect to “Decision on Bank Reserve Requirements To Be Held with The Central Bank of Montenegro” (“Official Gazette of the Montenegro,” no. 73/15, 33/16). In accordance with the said bank reserve requirements calculated on demand deposits and time deposits. Required reserves are calculated by applying the rate of: - 9,5 % - on the part of the base consisting of demand deposits and deposits with

agreed maturity up to one year, or up to 365: - 8,5% - on the part of the base comprised of deposits with agreed maturity over one

year, or over 365 days. - 9,5 % - on deposits with agreed maturity over 365 days, with an option clause of the

termination deposits within less than one year, or within less than 365 days. A bank may use up to 50% of its reserve requirement deposits to maintain its daily liquidity. The bank shall not be charged any fee for the use of its reserve requirement provided that it meets the prescribed level of the reserve requirement at the end of the same day. The Bank shall pay monthly fee for the amount of reserve not returned the same day, at the rate established under a separate Central Bank regulation. On 50% of funds set aside in accordance with the Decision, the Central Bank pays a monthly fee to the banks until the 8th of the month for the previous month, calculated at the rate of EONIA decreased by 10 basis points annually, whereby this rate may not be lower than zero. Banks may set aside and hold 25% of mandatory reserve in the form of T-bills issued by Montenegro; The Central Bank pays the prescribed fee on the amount of funds which represents the difference between 50% of total funds of mandatory reserve set aside and amount of funds set aside in the form of T-bills, maximum 25% of total mandatory reserve funds. The banks that set aside and keep the mandatory reserve as at December 31, 2016 in the form of T-bills may continue to keep those T-bills as a part of mandatory reserve until the date of their maturity, but no later than March 30, 2017.



December 31, 2016

44

14. LOANS AND ADVANCES TO BANKS


2016

December 31,

2015

Accounts in foreign banks 41.969 46.868 Placements with foreign banks - up to 3 months - 50.000 - from 3 months to 1 year - - Interest on term deposits - 31 41.969 96.899 Nostro-covered letters of credit and guarantees 1.285 1.013 43.254 97.912

Cash and cash equivalents (Note 32) 41.969 96.868

At December 31, 2016, nostro-covered letters of credit and guarantees with foreign banks stated in the amount of EUR 1.285 thousand primarily relate to cash placed with Barclay bank London in the amount of EUR 1.048 thousand as security for Barclay credit cards, EUR 237 thousand with Deutsche Bank Frankfurt to securitize American express credit cards.

15. LOANS AND ADVANCES TO CUSTOMERS


2016

December 31,

2015

Up to one year in EUR 150.318 159.547 Over one year in EUR 197.780 198.700

348.098 358.247 Less: Allowance for impairment (72.958) (67.635)

275.140 290.612

Short-term loans to non-financial sector (enterprises) during 2016 were primarily granted for working assets with maturity from one to twelve months, while long-term loans were granted for periods from one to ten years, and mainly refer to enterprises from trade activities. Short-term loans to large and medium enterprises are mainly granted with annual interest rate from 4,2 to 8 percent, while annual interest rate for small and medium enterprises was in range from 6,5 to 14 percent. Annual interest rate for long-term loans ranging from 4,2 to 7,8 percent for large and medium enterprises, while for small and medium enterprises ranging from 6,5 to 13 percent. Short-term loans for retail customers during 2016 were granted with annual interest rate ranging from 5,99 (cash loans) to 20,00 percent (overdraft and credit card loans). Long term loans to retail customers include loans for purchase of residential units, adaptation of residential units and business premises, financing of consumers goods and other purposes were granted on period from one to twenty-five years with variable interest rate ranging from 4,8 to 8,7 percent. Loans under the Government's project "1000+" were granted with annual interest rate of 3,99%. Geographic distribution of granted loans in Bank’s loans portfolio mainly refer to clients from Montenegrin territory. Movement in allowance for losses on loans and advances is as follows:


2016 2015

Balance at January 1 67.635 85.238 Provision charged for the year (Note 11) 6.298 5.699 Utilization of provisions due to the sale of loans to third parties /OTP factoring (706) (21.724)Write offs (269) (1.578) Balance at December 31 72.958 67.635



December 31, 2016

45

16. AVAILABLE FOR SALE SECURITIES


2016

December 31,

2015

Equity securities - at fair value - listed: - Montenegroberza 93 97 - Lovcen osiguranje 6 6 - SWIFT 39 33 - Centralna depozitarna agencija 75 75

213 211

17. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS In thousands of EUR

December 31, 2016

December 31, 2015

Equity securities - at fair value - listed: - VISA 2.507 2.404 - Electric Power Utility of Montenegro 162 188 - Lutrija Crne Gore 17 17

2.686 2.609

18. SECURITIES HELD TO MATURITY


2016

December 31,

2015

Treasury bills 9.968 19.937 Governments bonds 79.626 46.473

89.594 66.410

As of December 31, 2016 securities held-to-maturity in the amount of EUR 9.968 thousand (December 31, 2015: EUR 19.937 thousand) relate to treasury bills issued by State of Montenegro maturing end of February 2017, at an interest rate from 0,2 percent to 2,49 percent annually. During 2016, the Bank acquired Eurobonds Ministry of Finance of the Government of Montenegro in the amount of EUR 15.432 thousand and long-term bonds Ministry of Finance of the Government of Montenegro in the amount of EUR 17.210 thousand

Carrying amount

Nominal Interest rate

Value date

Treasury bills - Ministry of Finance of the Government of Montenegro

9.968 2,19 – 2,49%

Until February,2017

Eurobonds - Ministry of Finance of the Government of Montenegro

33.407 3,875% 18.03.2020

Eurobonds - Ministry of Finance of the Government of Montenegro

28.294 5.375% 20.05.2019

Long term Bonds - Ministry of Finance of the Government of Montenegro

17.925 4,00% 16.11.2010

89.594



December 31, 2016

46

19. FORFEITING


2016 December 31,

2015 Forfeiting receivables 2.829 4.558 Less: Allowance for impairment (1.639) (2.639)

1.190

1.919

As of December 31, 2016, the Bank's receivables arising from forfeiting operations totalled EUR 2.829 thousand (December 31, 2015: EUR 4.558 thousand). In the course of 2011, the Bank repurchased the receivables that had previously (during 2009, 2010 and 2011) been sold to OTP Bank Plc, Budapest. The repurchase was performed in five tranches.

Movement in allowance for forfeiting is as follows:


2016 2015

Balance at January 1 2.639 1.779 (Release)/Provision charged for the year (Note 11) (1.000) 859 Other - 1 Balance at December 31 1.639 2.639

20. INTANGIBLE ASSETS In thousands of EUR

License Software Total

Cost

Balance at January 1, 2015 2.433 8.707 11.140 Additions 1.049 286 1.335 Disposals (1.083) (97) (1.180)

Balance at January 1, 2016 2.399 8.896 11.295 Additions 1.268 247 1.515 Disposals (310) (181) (491)

Balance at December 31, 2016 3.357 8.962 12.319

Accumulated depreciation Balance at January 1, 2015 1.232 7.140 8.372 Charge for the year (Note 10) 627 417 1.044 Disposals (1.083) (97) (1.180)

Balance at January 1, 2016 776 7.460 8.236 Charge for the year (Note 10) 590 459 1.049 Disposals (310) (181) (491)

Balance at December 31, 2016 1.056 7.738 8.794

Carrying amount: - as of December 31, 2016 2.301 1.224 3.525

- as of December 31, 2015 1.623 1.436 3.059



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47

21. PROPERTY, PLANT AND EQUIPMENT

In thousands of EUR

Buildings

Equipment

and Other Assets

Total

Cost

Balance at January 1, 2015 8.169 18.844 27.013 Additions 261 1.425 1.686 Disposals - (255) (255)

Balance at January 1, 2016

8.430 20.014 28.444 Additions 14 1.325 1.339 Disposals - (37) (37) Balance at December 31, 2015 8.444 21.302 29.746

Accumulated depreciation

Balance at January 1, 2015 1.583 12.016 13.599 Charge for the year (Note 10) 163 1.797 1.960 Disposals - (219) (219) Balance at January 1, 2016 1.746 13.594 15.340 Charge for the year (Note 10) 169 1.683 1.852 Disposals - (36) (36) Balance at December 31, 2016 1.915 15.241 17.156

Carrying amount:

- as of December 31, 2016 6.529 6.061 12.590

- as of December 31, 2015 6.684 6.420 13.104

As of December 31, 2016 the Bank had no mortgages instituted over its property and equipment to securitize loan repayment.

22. OTHER ASSETS


2016

December 31,

2015

Other receivables for fees and commissions

1.165

864

Temporary accounts 766 193 Receivables from checks 2 2 Other financial receivables 193 213 Receivables from commission business 260 376 Prepayments 120 132 Receivables from buyer 37 130 Acquired assets 1.020 1.020 Deferred expenses 111 131 Other operating receivables 246 223 Deferred tax 135 172 Current tax 104 109 Receivables in respect of the disputed assets and other assets in delay 17.245 17.402

21.404 20.967

Less: Allowance for impairment (17.451) (17.277)3.953 3.690

As of December 31, 2016, the acquired assets in the amount of EUR 1.020 thousand (December 31, 2015: EUR 1.020 thousand) referred to assets acquired through foreclosure of collateral placed for the loan with the company Mješovito AD, Herceg Novi of the total surface of 772 m2 located in Herceg Novi.



December 31, 2016

48

22. OTHER ASSETS (Continued)

Receivables arising from doubtful assets and uncollectable receivables, which were fully provided for as of December 31, 2016 in the amount of EUR 17.245 thousand include the following:

• Provisions for receivables based on legal suits filed against the Bank's former employees in the amount of EUR 6.223 thousand;

• Provisions for receivables based on calculated but uncollected fees from the customer Vektra Montenegro d.o.o. Podgorica, over which bankruptcy procedure was instigated, in the amount of EUR 1.704 thousand;

• Provisions for uncollectable receivables based on payment transfer fees, commissions, bills of exchange, cheques, electronic banking, payment and credit cards, etc. in the amount of EUR 1.619 thousand;

• Provisions for other receivables recognized without grounds in the current and prior years and subsequently identified Bank's liabilities in the amount of EUR 5.528 thousand;

• Other uncollectable receivables in the amount of EUR 2.172 thousand.

Other assets mostly consist of assets received in lieu of debt collection totalling EUR 1.020 thousand as of December 31, 2016 (December 31, 2015: EUR 1.020 thousand). Assets are acquired based on the foreclosure of collaterals securing.

Movement in allowance for other assets is as follows:


2016 2015

Balance at January 1 17.277 18.011 Provision charged for the year (Note 11) 349 417 Write-off (176) (1.151)Balance at December 31 17.450 17.277

23. DEPOSITS FROM BANKS


2016

December 31,

2015

Deposits from domestic banks:

- demand deposits 3.692 941 - short-term deposits 205 - Deposits from foreign banks: - short-term deposits - 707

3.897 1.648

Demand deposits bear annual interest rates ranging between 0,10 percent to 0,15 percent annually. Short-term deposits bear annual interest of 1,5 percent annually.



December 31, 2016

49

24. DUE TO CUSTOMERS

In thousands of EUR

December 31, 2016

December 31, 2015

Demand deposits in Euro:

- Enterprises 124.867 109.604 - Governmental institutions 50.313 30.554 - Retail customers 172.828 151.688 - Other entities 4.093 1.372 Demand deposits in foreign currencies: - Enterprises 8.054 10.099 - Governmental institutions 99 163 - Retail customers 15.272 13.178 - Other entities - - Short-term deposits in Euro: - Enterprises 6.814 19.053 - Governmental institutions 175 643 - Retail customers 64.693 80.717 - Other entities - 605 Short-term deposits in foreign currencies: - Enterprises - 32 - Retail customers 3.548 4.933 Long-term deposits in Euro: - Enterprises 782 4.346 - Governmental institutions 211 277 - Retail customers 34.351 54.361 - Other entities 865 70 Long-term foreign currency deposits: - Retail customers 3 2 - Other entities - 2.337

486.968 484.034

Demand deposits of natural persons in EUR were deposited at an interest rate of 0,10% on an annual basis. Demand deposits of natural persons in foreign currency were deposited at a uniform interest rate of 0,05% per annum.

On term deposits of companies in EUR with maturity in 2016, the interest at interest rates ranging from 0,10% to 1,5% per annum was calculated, depending on the term and deposit amount. Term deposits of enterprises in EUR, which were deposited in 2016 were deposited at interest rates ranging from 0,10% to 1,5% annually (2015: from 0,10% to 1,5% per annum), depending on the term and deposit amount. Currently, the maximum interest rate at which term deposits of companies may be deposited without purpose is 1,5% for a period of 12 months or more, according to the current terms and conditions. Term deposits of natural persons in EUR were deposited at an interest rate ranging from 0,10% to 1% per annum (2015: from 0,10% to 1,5% per annum), depending on the term and deposit amount Interest rate for demand deposits of companies in 2016 ranged from 0% - 1% per annum.



December 31, 2016

50

25. OTHER BORROWED FUNDS

In thousands of EUR

Current Year Ended December

31,

Non-current Year Ended December

31, 2016 2015 2016 2015

Long-term domestic borrowings:

- Directorate for Development of Small and Medium Sized Enterprises - - 745 849 - Government of Montenegro – 1000+ housing 8 8 1.557 1.331

8 8 2.302 2.180 Long-term foreign borrowings: - Kreditanstalt fur Wiederaufbau ("KfW"), Frankfurt am Main - - 706 1.059 - guarantees for KfW borrowings 2 3 - -

2 3 706 1.059 10 11 3.008 3.239

As of December 31, 2016, the total amount of EUR 746 thousand represents long-term borrowings in domestic currency received from the Directorate for Development of Small and Medium Sized Enterprises. These borrowings were granted for periods ranging from three to eight years, at annual interest rates ranging up to 7 percent.

As of December 31, 2016, the total amount of EUR 1.557 thousand represents long term borrowings in domestic currency received from the Ministry of Finance and the Ministry of Sustainable Development and Tourism of Montenegro on the basis of the Project “1000+” for approving housing loans for social vulnerable groups. These borrowings were granted for period of 20 years with a grace period of 5 years, at annual interest rate 0,98% and 0,75%.

As of December 31, 2016, the total amount of EUR 706 thousand relates to long-term borrowings in domestic currency approved by Kreditanstalt für Wiederaufbau (“KfW”), Frankfurt am Main for a period from five to ten years and interest rate 3 percent p.a.

26. OTHER LIABILITIES


2016

December 31,

2015

Liabilities to employees 982 624 Accrued liabilities 781 682 Deferred guarantees fee 637 504 Trade payables 594 411 Temporally accounts 580 34 Other taxes and contributions 104 82 Other liabilities 60 353

3.738 2.690



December 31, 2016

51

27. PROVISIONS


2016 December 31,

2015

Provisions for retirement benefits - 549 Provisions for potential litigation losses 850 855 Provisions for losses per off-balance sheet items 559 650 Provisions for unused vacation - 612 Other provisions 426 434

1.835 3.100

28. EMPLOYEE BENEFITS In accordance with the Collective Bargaining Agreements, the Bank has an obligation to disburse an employment retirement benefit to a retiree, in an amount equal to six average net salaries effective in the Bank in the month prior to the employee’s retirement. The independent actuary carried out the most recent actuarial valuations of the defined benefit obligation at December 31, 2016. Technical bases applied for calculating the estimated present value of retirement benefits and jubilee awards include implementation of the following:

a) Discount rate – 4% b) Estimated annual salary growth rate 1%

Movements in the present value of the defined benefit obligation in the current period were as follows:

In thousands of EUR December 31, 2016 December 31, 2015

Retirement Benefits

Other Long-

Term

Employee Benefits

Retirement Benefits

Other Long-

Term

Employee Benefits

Balance at January 1 1.119 42 1.128 42 Charged during the year (Note 11) 11 - 11 - Payments made during the year (15) - (20) - Balance at December 31 1.115 42 1.119 42

29. SHARE CAPITAL

As of December 31, 2016, the Bank’s share capital is comprised of 267,705 common shares (December 31, 2014: 267,705 common shares), with an individual par value of EUR 511,29. All issued shares are fully paid. As of December 31, 2016, the sole shareholder of the Bank's shares is OTP Bank Plc., Budapest with 100 percent of equity interest.

In accordance with the regulations of the Central Bank of Montenegro, as of December 31, 2016, the Bank is obligated to maintain the minimum capital adequacy ratio of 10%. As of December 31, 2016, according to the Bank’s calculations, capital adequacy ratio was 20,88%.



December 31, 2016

52

30. OFF-BALANCE-SHEET ITEMS


2016

December 31,

2015

a) Guarantees, Other Contingent Liabilities and Commitments

Payment guarantees 5.299 7.141 Performance bonds 9.046 11.559 Uncovered letters of credit 585 943 Undrawn credit facilities 25.226 25.230

40.156 44.873 b) Other off-balance-sheet items

Written off loans 1.653 1.663 Written off interest 200 200 Other off-balance sheet items - 296

1.853 2.159

42.009 47.032

31. OPERATING LEASE ARRANGEMENTS

Cancellable operating leases relate to business premises with limited lease terms (definite duration of lease contracts). The Bank does not have an option to purchase the leased asset at the termination of contracts. Payments recognized as an expense during 2016 amounted to EUR 1.152 thousand (2015: EUR 1.120 thousand). Commitments for operating leases undertaken as of the statement of financial position date, that have not been included in the financial statements, are as follows:


2016

December 31,

2015

Up to 1 year 196 114 From 1 to 5 years 1.879 2.269 Over 5 years 1.280 1.586

3.355 3.969

32. CASH AND CASH EQUIVALENTS

For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three month maturity from the date of acquisition including: cash on hand, non-restricted balances with the Central Bank of Montenegro and other banks.


2016

December 31,

2015

Cash and balances with the Central Bank (Note 13) 139.333 85.941 Loans and advances to banks (Note 14) 41.969 96.868

181.302 182.809



December 31, 2016

53

33. RELATED PARTY TRANSACTIONS

All transactions with related parties arise in the normal course of business and their value is not materially different from the terms and conditions that would prevail in arms-length transactions. The amounts of loans and advances given to related parties are secured in accordance with Procedures of the Bank and Central Bank of Montenegro legislation. As of December 31, 2016, and December 31, 2015, the Bank did not recognize impairment provisions for the loans and advances given to related parties.

The following table summarizes receivables from and payables to related parties as of the statement of financial position date:


2016 December 31,

2015

Cash funds:

- OTP Bank Plc. Budapest 661 50.031 Loans and advances to customers:

- Bank’s employees 7.328 7.001 Other assets: - OTP Factoring Montenegro 6 15 - OTP Bank Plc. Budapest: 16 54 Total receivables 8.011 57.101

Due to customers:

- Bank’s employees 2.678 3.179 - OTP Factoring Montenegro 2.717 2.575 - Debt Management Project Montenegro d.o.o. Podgorica

1.965

1.001

- South Invest Montenegro d.o.o. Podgorica 2 2

Total liabilities 7.362 6.757

Receivables, net 649 50.344

Short and long-term loans to Bank employees were granted on period from one to twenty-five years. Loans were granted with annual interest rate ranging from 4,8 to 11,99 percent. Long-term loans to Bank employees include loans for purchase of residential units and mortgage loans, while short-term loans mainly include cash loans. Income and expenses from transactions with related parties during 2016 and 2015 were as follows:


2016 2015

Interest income: - OTP Bank Plc. Budapest 190 431 - Bank’s employees 441 456 631 887 Fee income: - OTP Bank Plc. Budapest 63 95 - OTP Factoring Montenegro 15 - - Debt Management Project Montenegro d.o.o. Podgorica 2 - Total income 711 982

Interest expense:

- Bank’s employees (16) (26) - OTP Bank Financing Netherlands B.V. Netherlands - (155) Fee expense: - OTP Bank Plc. Budapest (40) (39) - OTP Factoring d.o.o. Podgorica (8) (23)

Total expenses (64) (243) Income, net 647 739

During 2016, remunerations paid to persons with special authorizations and responsibilities in the Bank amounted to EUR 1.410 thousand (2015: EUR 1.360 thousand).



December 31, 2016

54

34. LITIGATION

As of December 31, 2016, the Bank was involved with a number of lawsuits filed against it by legal entities and private individuals. In the assessment of the Bank's Legal Affairs Department, the total value claimed in these legal proceedings, not including costs of court expenses, amounts to EUR 14.833 thousand. This amount does not include potential penalties that may be assigned after the completion of the legal proceedings, given that the Bank's management was unable to determine potential effects of penalties that might arise from the proceedings in progress until the date of issuance of these financial statements. As of December 31, 2016, the Bank recorded provisions against potential losses on litigation in the amount of EUR 850 thousand. The outcome of the proceedings in progress cannot be anticipated with certainty; however, the Bank's management and legal advisor do not expect additional negative outcomes that could have materially significant effects on the Bank's financial statements. As of December 31, 2016, the Bank was involved in lawsuits for 1.350 contracts that as a plaintiff the Bank filed against legal entities and private individuals, claiming the total value of EUR 94.533 thousand.

35. TAXATION RISKS

The tax legislation of Montenegro is subject to varying interpretations and changes occur frequently. The interpretation of tax legislation by tax authorities as applied to the transactions and activity of the Bank may not coincide with that of the management. As a result, tax authorities may challenge transactions and the Bank may be assessed additional taxes, penalties and interest. The periods remain open to review by the tax and customs authorities with respect to tax liabilities for five years. This practically means that tax authorities could determine payment of outstanding liabilities in the period of five years from the origination of the liability.

36. EVENTS AFTER THE REPORTING PERIOD

The Management believes that there are no significant events after the reporting date that would impact the financial statements for 2016, or require special disclosure.

37. EXCHANGE RATES

The official exchange rates for major currencies used in the translation of statement of financial position items denominated in foreign currencies, into euros as at December 31, 2016 and 2015 are as follows: December 31,

2016 December 31,

2015

USD 0,9487 0,9152 CHF 0,9312 0,9247 GBP 1,1679 1,3550

Documents

CRNOGORSKA KOMERCIJALNA BANKA AD, PODGORICA … izvestaji... · CRNOGORSKA KOMERCIJALNA BANKA AD, PODGORICA NOTES TO THE FINANCIAL STATEMENTS December 31, 2016 8 1. GENERAL INFORMATION