KREDITNA BANKA ZAGREB d.d. Financial statements for the year ended 31 December 2015 together with the Independent Auditor's Report

Kreditna banka Zagreb d.d.

31 December 2015

Contents Page Responsibility for the financial statements Independent Auditor’s Report

1 2-3

Financial statements Statement of comprehensive income for the year ended 31 December 2015

4

Statement of financial position as at 31 December 2015

5

Statement of changes in equity for the year ended 31 December 2015

6

Statement of cash flows for the year ended 31 December 2015

7

Notes to the financial statements

8-67

Appendix 1 – Supplementary statements for the Croatian National Bank

68-73

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

74-79

Responsibility for the financial statements

Pursuant to the Croatian Accounting Act (Official Gazette 109/07, 54/13 and 121/14), the Management Board is responsible for ensuring that the financial statements are prepared for each financial year in accordance with statutory accounting regulations applicable to banks in Croatia in order to give a true and fair view of the financial position and results of the Bank for that period.

The Management Board has a reasonable expectation that the Bank has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Management Board continues to adopt the going concern basis in preparing the financial statements.

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

suitable accounting policies are selected and then applied consistently;



judgements and estimates are reasonable and prudent;



applicable accounting standards are followed, subject to any material departures disclosed and explained in the financial statements; and



the financial statements are prepared on the going concern basis unless it is inappropriate to presume that the Bank will continue in business.

The Management Board is responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Bank and must also ensure that the financial statements comply with the Croatian Accounting Act (Official Gazette 190/07, 54/13 and 121/14). The Management Board is also responsible for safeguarding the assets of the Bank and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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

Boris Zadro

Nataša Jakić Felić

President of the Management Board

Member of the Management Board

Kreditna banka Zagreb d.d. Ulica grada Vukovara 74 10000 Zagreb Republic of Croatia

30 March 2016

1

Independent Auditor’s Report To the Shareholders and Management of Kreditna banka Zagreb d.d. We have audited the accompanying financial statements of Kreditna banka Zagreb d.d. (the “Bank”), which comprise the statement of financial position as at 31 December 2015 and the statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting regulations applicable to banks in Croatia as set out in Note 2 – ‘Basis of preparation’ to the financial statements and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

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

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

Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2015, its financial performance and cash flows for the year then ended in accordance with accounting regulations applicable to banks in Croatia as set out in Note 2 – ‘Basis of preparation’ to the financial statements.

PricewaterhouseCoopers d.o.o. Zagreb, 31 March 2016

This version of our report is a translation from the original, which was prepared in Croatian language. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation.

Statement of comprehensive income For the year ended 31 December 2015 (all amounts are expressed in thousands of HRK)

Note

2015

2014

Interest and similar income

4

167,335

215,280

Interest and similar expense

5

(103,243)

(132,092)

64,092

83,188

Net interest income Fee and commission income

6

27,300

28,308

Fee and commission expense

6

(8,615)

(8,806)

18,685

19,501

Net fee and commission income Net gains from dealing in foreign currencies Gain/loss from financial assets at fair value through profit or loss

7

9,776

8,242

7

156

137

Gain/loss from available-for-sale financial assets Gain/loss from held-to-maturity financial assets (in case of sale before maturity)

7

2,492

15,740

7

-

-

Other operating income

7

1,296

6,696

96,497

133,505

Operating income Operating expenses

8

(76,254)

(85,768)

Impairment losses and provisions

9

(10,093)

(87,452)

(86,347)

(173,220)

10,150

(39,716)

(1,801)

1,624

8,349

(38,092)

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

(7,840)

3,152

Other comprehensive income

(7,840)

3,152

Total comprehensive income

509

(34,940)

4.43

(20.42)

Operating expenses Profit before tax Income tax

10

Net profit for the year Net other comprehensive income reclassified in the future to profit or loss Available-for-sale financial assets:

Earnings/(loss) per share in HRK

26

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

4

Statement of financial position as at 31 December 2015 (all amounts are expressed in thousands of HRK)

Note

31 December 2015

31 December 2014

ASSETS Cash and balances with Croatian National Bank

11

569,390

850,867

Placements with other banks

12

205,354

455,154

Financial assets at fair value through profit or loss

13

12,156

13,841

Loans to customers

14

1,672,935

1,924,439

Held-to-maturity financial assets

15

67,621

359,458

Available-for-sale financial assets

16

781,022

495,298

Intangible assets

17

26,789

28,117

Tangible assets

18

71,013

72,381

Other assets

19

63,399

66,546

3,469,679

4,266,101

Total assets

LIABILITIES Deposits from other banks

20

Deposits from customers

20

2,905,692

3,596,388

Borrowings

21

126,500

258,521

Issued subordinated instruments

23

82,000

73,000

Other liabilities

22

72,502

65,550

Provisions for contingent liabilities

27

2,150

5,316

3,188,844

3,998,775

Total liabilities

-

SHAREHOLDERS' EQUITY Share capital

24

193,775

186,553

Share premium

24

50,541

44,763

(7,150)

690

35,320

73,412

8,349

(38,092)

280,835

267,326

3,469,679

4,266,101

Unrealised (loss)/gains on available-for-sale financial assets Retained earnings and reserves Profit/(loss) for the year Total shareholders’ equity

Total liabilities and shareholders’ equity

25

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

5

Statement of changes in equity For the year ended 31 December 2015 (all amounts are expressed in thousands of HRK)

Share capital

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

Share premium

Retained earnings and reserves

Profit/loss for the year

Total

186,553

44,763

(2,462)

68,906

4,506

302,266

Transfer to reserves

-

-

-

225

(225)

-

Transfer of profit to retained earnings

-

-

-

4,281

(4,281)

-

Total transactions with owners

-

-

-

4,506

(4,506)

-

Net loss for the year

-

-

-

-

(38,092)

(38,092)

Unrealised gains on available-for-sale financial assets

-

-

3,152

-

-

3,152

Total comprehensive loss

-

-

3,152

-

(38,092)

(34,940)

186,553

44,763

690

73,412

(38,092)

267,326

7,222

5,778

-

-

-

13,000

Transfer to reserves

-

-

-

-

-

-

Transfer of profit to retained earnings

-

-

-

(38,092)

38,092

-

7,222

5,778

-

(38,092)

38,092

13,000

Net profit for the year

-

-

-

-

8,349

8,349

Unrealised loss from available-for-sale financial assets

-

-

(7,840)

-

-

(7,840)

-

-

(7,840)

-

8,349

509

193,775

50,541

(7,150)

35,320

8,349

280,835

Balance at 31 December 2013

Balance at 31 December 2014 New paid shares

Total transactions with owners

Total comprehensive income Balance at 31 December 2015

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

6

Statement of cash flows For the year ended 31 December 2015 (all amounts are expressed in thousands of HRK)

Note

2015

2014

10,150

(39,716)

6,599

36,352

(6,362)

10,259

CASH FLOW FROM OPERATING ACTIVITIES Profit before tax Adjustments: Depreciation and amortisation and impairment Impairment of other assets Impairment of loans given

21,983

47,051

Impairment of investments available-for-sale

(2,948)

(1,956)

(Decrease)/increase in contingent liabilities

(3,156)

3,239

1,801

(1,624)

(24,032)

(48,847)

4,035

4,758

Income tax Other gains/losses Cash flows from operating activities before working capital changes Decrease/(increase) in receivables from CNB and other banks

38,206

28,799

(Increase)/decrease in loans and advances to customers

251,504

(204,862)

6,766

-

(690,696)

241,916

Decrease in deposits from other banks (Decrease)/increase in deposits from customers Increase in other assets

3,197

3,059

Increase/(decrease) in other liabilities

6,952

(8,778)

(50)

(4,221)

(384,121)

55,913

Income tax paid Net cash flow from / (used in) operating activities CASH FLOW FROM INVESTING ACTIVITIES Purchase of tangible and intangible assets Increase/decrease in available-for-sale securities Increase/decrease in assets at fair value through profit or loss

(3,997)

(22,027)

(285,724)

(63,179)

1,685

(12,042)

291,837

193,680

3,801

96,432

(132,020)

(32,056)

13,000

-

9,000

-

Net cash flow (used in)/from financing activities

(110,020)

(32,056)

Net (decrease)/increase in cash and cash equivalents

(486,305)

125,046

Increase/decrease in held-to-maturity assets Net cash flow from investing activities CASH FLOW FROM FINANCING ACTIVITIES Net proceeds from/(repayment of) borrowings Share capital increase Issued/returned subordinated/hybrid instruments

Cash and cash equivalents at beginning of year

29

1,006,754

881,708

Cash and cash equivalents at end of year

29

520,449

1,006,754

The notes to the financial statements are an integral part of the Statement of cash flows.

7

Notes to the financial statements For the year ended 31 December 2015

1.

General information

Kreditna banka Zagreb d.d. (the Bank) was incorporated as a public limited liability company in accordance with applicable laws of the Republic of Croatia. It was registered at the Commercial Court in Zagreb in 1994. The Bank's registered office is in Zagreb, Ulica grada Vukovara 74.

The principal activities of the Bank include all types of corporate and retail deposit and lending operations, domestic and foreign payment transactions, issuance of guarantees, bills of exchange and other forms of guarantees, securities trading and other banking services. The Bank operates only in the banking sector through 26 branch offices on the Croatian market.

The Bank performs insurance agency operations in accordance with the insurance laws, in the part that relates to bank insurance activities, based on the license dated 14 February 2007.

Management Board Boris Zadro Nataša Jakić Felić Pero Bolotin

President of the Management Board from 19 February 2015, Member of the Management Board from 19 February 2013 to 18 February 2015 Member of the Management Board from 19 February 2015 Member of the Management Board from 19 February 2015 to 11 August 2015

Mirjana Bartoš

President of the Management Board from 1 October 2014 to 18 February 2015

Supervisory Board Nadira Eror

President of the Supervisory Board from 1 October 2014

Ankica Čeko

Vice President of the Supervisory Board from 13 February 2015

Irena Severin

Member of the Supervisory Board from 13 February 2015 to 31 August 2015

Ivan Penić

Member of the Supervisory Board from 13 February 2015

Audit Committee

Nadira Eror

President of the Supervisory Board from 1 October 2014

Ankica Čeko

Vice President of the Supervisory Board from 13 February 2015

Ivan Penić

Member of the Supervisory Board from 13 February 2015

Kreditna banka Zagreb d.d.

8

Notes to the financial statements (continued) For the year ended 31 December 2015

2.

Basis of preparation

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

The financial statements have been prepared in accordance with statutory accounting requirements for banks in Croatia. The Bank's operations in Croatia are subject to the Credit Institutions Act, in accordance with which the Bank’s financial reporting is regulated by the Croatian National Bank (the CNB) which is the central monitoring institution of the banking system in Croatia. These financial statements have been prepared in accordance with these banking regulations.

The accounting regulations for banks in the Republic of Croatia are based on International Financial Reporting Standards (IFRS) as adopted in the European Union, modified for specific accounting rules issued by the CNB. The main differences between the requirements of the International Financial Reporting Standards (IFRS) and the accounting regulations of the CNB relate to the recognition of impairment losses of financial assets calculated on a portfolio basis. In accordance with CNB regulations, banks domiciled in Croatia should recognise provisions on the portfolio basis by the prescribed rates (except for financial assets carried at fair value) on balance sheet and off-balance sheet exposure to credit risk of counterparties for which impairment on individual basis is not determined, while IFRS requires that the provisions on the portfolio basis should be determined for existing but unidentified losses on the basis of valuation models taking into account individual characteristics of the Bank and the counterparty in the portfolio (e.g. collateral, type and rating of a debtor, etc.).

Additionally, the CNB prescribes minimum levels of impairment losses against certain specifically identified impaired exposures, which may be different from the impairment loss required to be recognised in accordance with IFRS.

2.2. Basis of preparation of the financial statements

The financial statements have been prepared in Croatian kuna (HRK), which is the primary currency of the economic environment in which the Bank operates (the functional currency) and are rounded to the nearest thousand.

The financial statements have been prepared on the historical cost basis except for financial assets and liabilities carried at fair value in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

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

Kreditna banka Zagreb d.d.

9

Notes to the financial statements (continued) For the year ended 31 December 2015

2.

Basis of preparation (continued)

2.2.

Basis of preparation of the financial statements (continued)

The Bank has adopted the following new and amended IFRS and IFRIC interpretations during the year which were endorsed by the EU. When the adoption of the standard or interpretation is deemed to have an impact on the financial statements or performance of the Bank, its impact is described below.

Standards and interpretations issued and effective: The Bank has adopted the following new and amended standards for their annual reporting period commencing 1 January 2015 which were endorsed by the European Union and which are relevant for the Bank's financial statements: 

Annual Improvements to IFRSs – 2010 – 2012 Cycle comprising changes to seven standards (IFRS 1, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 28 and IAS 24).



Annual Improvements to IFRSs – 2011 – 2013 Cycle comprising changes to four standards (IFRS 2, IFRS 3, IFRS 13 and IAS 40).



Defined Benefit Plans: Employee Contributions - Amendments to IAS 19.

The adoption of these improvements did not have any impact on the current period or any prior period and is not likely to affect future periods.

New standards and interpretations not yet adopted: Certain new standards and interpretations have been published that are not mandatory for 31 December 2015 reporting periods and have not been early adopted by the Bank. None of these is expected to have a significant effect on the Bank's financial statements, except for the following standards: 

IFRS 9 Financial instruments and associated amendments to various other standards (effective for annual periods beginning on or after 1 January 2018) The complete version of IFRS 9 replaces most of the guidance in IAS 39. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value, through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one that the Management Board actually uses for risk management purposes. Adequate documentation is still required but is different to that currently prepared under IAS 39. The Bank plans to adopt this new standard on the effective date as of and when adopted by the EU. The Bank is still assessing the impact of this standard.

Kreditna banka Zagreb d.d.

10

Notes to the financial statements (continued) For the year ended 31 December 2015

2.

Basis of preparation (continued)

2.2.

Basis of preparation of the financial statements (continued) 

IFRS 15 Revenue from contracts with customers and associated amendments to various other standards (effective for annual periods beginning on or after 1 January 2018) IASB has issued a new standard for the recognition of revenue. This will replace IAS 18 which covers contracts for goods and services and IAS 11 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards. Key changes to current practice are: •

Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements.

•

Revenue may be recognised earlier than under current standards if the consideration varies for any reasons (such as for incentives, rebates, performance fees, royalties, success of an outcome, etc.).

•

The point at which revenue is able to be recognised may shift: some revenue which is currently recognised at a point in time at the end of a contract may have to be recognised over the contract term and vice versa.

•

There are new specific rules on licenses, warranties, non-refundable upfront fees and, consignment arrangements, to name a few; and

•

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

Entities will have a choice of full retrospective application, or prospective application with additional disclosures. The Bank is currently assessing the impact of the amendments on its financial statements, but does not expect any impact. The Bank plans to adopt this amendment on its effective date. 

IFRS 16 Leases (issued in January 2016 and effective for annual periods beginning on or after 1 January 2019) The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Lessees will be required to recognize: a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value, and b) depreciation of lease assets separately from interest on lease liabilities in the income statement. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. The Bank is currently assessing the impact of the amendments on the financial statements.

Kreditna banka Zagreb d.d.

11

Notes to the financial statements (continued) For the year ended 31 December 2015

2.

2.3.

Basis of preparation (continued)

Critical accounting judgements and key sources of estimation uncertainty

In the application of the Bank’s accounting policies, the Management Board is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. While it is possible that in particular periods the Bank may sustain losses, which are substantially relative to the allowance for impairment losses, it is the judgement of Management that the allowance for impairment losses is adequate to absorb losses incurred on the risk assets. There are several legal actions against the Bank, which have arisen from the regular course of its operations. The Management Board believes that any ultimate liability of the Bank as a result of the outcome of the disputes will have no additional significant negative effects - after making provisions up to the date of this report - on the financial position or future results of the Bank's operations.

Kreditna banka Zagreb d.d.

12

Notes to the financial statements (continued) For the year ended 31 December 2015

3.

Summary of significant accounting policies

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 3.1. Interest income and expense Interest income and expense are accounted for on an accrual basis at the effective interest rate, which includes the amortisation of any discount or premium or other differences between the initial carrying amount of an interest-earning instrument and its amount at maturity, calculated on an effective interest rate basis. The effective interest method is the method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts, including all paid or received fees that form an integral part of the effective interest rate, transaction costs and other premiums or discounts, through the expected life of the financial asset, or, where appropriate, a shorter period. Loan origination fees are deferred, together with related direct costs, and recognised as an adjustment to the effective yield on the loan and as such adjust interest income or expense. When loans become impaired, they are written down to their recoverable amounts and interest income thereafter is recognised based on the rate of interest that was used to discount the future cash flows for the purpose of measuring the recoverable amount. Other fees receivable are recognised when earned. Dividend income is recognised when the right to receive payment is established. 3.2. Fee and commission income and expense Fee and commission income is comprised mainly of fees receivable from enterprises for loans and guarantees granted and other services provided by the Bank, together with commissions from managing funds on behalf of legal entities and individuals and fees for foreign and domestic payment transactions. Fees and commissions are recognised on an accrual basis. 3.3. Foreign currencies Income and expenses arising from transactions in foreign currencies are translated into HRK at the official rates of exchange on the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated into HRK at the middle exchange rate of the CNB on the last day of the accounting period. Gains and losses resulting from foreign currency translation are included in the income statement for the year.

Kreditna banka Zagreb d.d.

13

Notes to the financial statements (continued) For the year ended 31 December 2015

3. Summary of significant accounting policies (continued)

3.3 Foreign currencies (continued)

The Bank has assets and liabilities originated in HRK, which are linked to foreign currencies with a one-way currency clause. Due to this clause, the Bank has an option to revalue the asset by the higher of: foreign exchange rate valid as of the due date or foreign exchange rate valid as of the date of origination of the financial instrument. In case of a liability linked to this clause, the counterparty has this option. Due to the specific conditions of the market in the Republic of Croatia, the fair value of this option cannot be calculated as the forward rates for HRK for periods over 6 months are generally not available. Accordingly, the Bank calculates its assets and liabilities related to this clause at the higher of: the middle exchange rate of the Croatian National Bank at the balance sheet date or the agreed reference rate (rate valid at origination). 3.4. Personnel contributions According to national legislation, the Bank is obliged to pay contributions to pension and health insurance funds. This obligation relates to all employees and provides for paying contributions in the amount of certain percentages determined on the basis of the gross salary as follows: 2015

2014

Pension insurance contributions

20%

20%

Health insurance contributions

15%

from 1 April 2014 15%

Contribution to the Croatian Employment Service

1.7%

1.7%

Occupational injuries

0.5%

0.5%

Contributions on behalf of employees and the employer are recognised as an expense in the period when incurred. 3.5. Income tax Income tax expense represents the sum of the tax currently payable and deferred tax. The current tax liability is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Bank’s liability for current tax is calculated using tax rates that have been enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable based on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, calculated using the liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised.

Kreditna banka Zagreb d.d.

14

Notes to the financial statements (continued) For the year ended 31 December 2015

3. Summary of significant accounting policies (continued) 3.5 Income tax (continued) The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised. Deferred tax is recognised as an expense or income in profit or loss, except when they relate to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Bank has the ability and intention to settle its current tax asset and liability on a net basis. The Bank is liable to pay various indirect taxes which have been presented under administrative expenses. 3.6. Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise cash on hand, balances with the CNB, balances with banks on giro accounts and term deposits with other banks with original maturities of three months or less from the date of acquisition.

Cash and cash equivalents exclude the obligatory reserves with the CNB as these funds are not available for the Bank’s day to day operations. The obligatory reserve with the CNB is a required reserve to be held by all commercial banks licensed in Croatia. 3.7. Financial assets and financial liabilities The Bank’s financial assets and financial liabilities recorded on the balance sheet include cash and cash equivalents, marketable securities, trade and other receivables and payables, long-term loans, deposits and investments. The accounting principles for these items are disclosed in the respective accounting policies.

The Bank recognises financial assets and liabilities on its balance sheet when, and only when, it becomes a party to the contractual provisions of the instrument. Financial assets held by the Bank are categorised into portfolios in accordance with the Bank’s intent upon acquisition of a financial asset and pursuant to the Bank’s investment strategy. Financial assets and liabilities are classified as ‘At fair value through profit or loss’, ‘Held to maturity’, ‘Assets available for sale’ or as ‘Loans and receivables’. The principal difference among the portfolios relates to the measurement of financial assets and the recognition of their fair values in the financial statements as described below.

Kreditna banka Zagreb d.d.

15

Notes to the financial statements (continued) For the year ended 31 December 2015

3. Summary of significant accounting policies (continued)

3.7. Financial assets and financial liabilities (continued)

Financial assets and liabilities are offset and the net amount is recognised in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. All routine financial instrument transactions are recognised at the date when the instruments are transferred (settlement date). Under the settlement date accounting, the underlying asset or liability is not recognised until the settlement date, with the changes in fair value of the underlying asset or liability being recognised starting from the trade date. When a financial asset or financial liability is recognised initially, the Bank measures it at its fair value plus transaction costs, in the case of financial assets, that are directly attributable to the acquisition or issue of the financial asset or financial liability. Financial assets at fair value through profit or loss Upon initial recognition designated by the Bank as at fair value through profit or loss in accordance with the Bank’s investment policy, any financial asset within the scope of IAS 39 can be classified as designated at fair value through profit or loss except for investments in equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured.

Measurement: Subsequent to initial recognition, financial assets at fair value through profit or loss are accounted for and stated at fair value which approximates the price quoted on recognised stock exchanges or acceptable valuation models. The Bank includes unrealised gains and losses in ‘Net profit/(loss) from financing activities’. Interest earned on assets at fair value through profit or loss is accrued on a daily basis and reported as ‘Interest income’ in the income statement.

Held-to-maturity financial assets

Investments held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity. This portfolio comprises debt securities. Held-to-maturity investments are carried at amortised cost using the effective interest method, less any allowance for impairment. The Bank assess on a regular basis whether there is an objective evidence that an investment held to maturity may be impaired. The amount of the impairment loss for assets carried at amortised cost is calculated as the difference between the asset’s carrying amount and the present value of the expected future cash flows discounted at the financial instrument’s original effective interest rate. When an impairment of assets is identified, the Bank recognises allowances through the income statement under “Allowance for impairment losses on securities”.

Kreditna banka Zagreb d.d.

16

Notes to the financial statements (continued) For the year ended 31 December 2015

3. Summary of significant accounting policies (continued) 3.7. Financial assets and financial liabilities (continued)

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. This portfolio comprises equity securities, as well as receivables under factoring and forfeiting arrangements. Subsequent to initial recognition, equity securities as part of available-for-sale financial assets are re-measured at fair value based on quoted prices. The fair value of unquoted equity instruments is estimated using the present value of expected cash flows and/or comparative assessment methods based on indicators of market capitalisation. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership.

For available-for-sale assets, gains and losses arising from changes in fair value are recognised directly in equity until the financial asset is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the net profit or loss for the period.

Dividends on securities available for sale are recorded as declared and included as a receivable in the balance sheet line ‘Other assets’.

Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than (a) those that the Bank intends to sell immediately or in the short term, which shall be classified as held for trading, and those that the entity upon initial recognition designates as at fair value through profit or loss; (b) those that the Bank upon initial recognition designates as available for sale; or (c) those for which the Bank may not recover substantially all of its initial investment, other than because of credit deterioration, which shall be classified as available for sale. This portfolio comprises loans granted to customers. Loans originated by the Bank by providing money directly to the borrower are categorised as loans granted by the Bank and are carried at amortised cost using the effective interest method, less any allowance for impairment. Third party expenses, such as legal fees, incurred in securing a loan are treated as part of the cost of the transaction as well as fees received from customers. Loan origination fees for loans which are probable of being drawn down, are deferred (together with related direct costs) and recognised as an adjustment to the effective yield of the loan and as such adjust the interest income. All loans and advances are recognised when loans are issued, or cash is advanced to borrowers.

Kreditna banka Zagreb d.d.

17

Notes to the financial statements (continued) For the year ended 31 December 2015

3. Summary of significant accounting policies (continued) 3.7. Financial assets and financial liabilities (continued)

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

The loan loss allowance also covers losses where there is objective evidence that these losses are present in components of the loan portfolio at the balance sheet date. These have been estimated based upon historical patterns of losses in each component, the credit ratings allocated to the borrowers and reflecting the current economic climate in which the borrowers operate, in accordance with the methodologies prescribed by positive regulations in the segment of decisions/regulations of supervision of credit institutions.

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

Collateral pending sale

The Bank occasionally acquires real estate in exchange for settling certain loans and advances. Real estate is stated at the lower of net recoverable value of dependent loan and advances receivables and the current fair value of such assets. Gains or losses on disposal are recognised in the income statement. Real estate used as collateral for loans given to customers can be sold only through an enforcement procedure. Sale and repurchase agreements Securities sold under sale and repurchase agreements (repos) are retained in the financial statements and the counterparty is included in due to banks or customers as appropriate. Securities purchased under agreements to resell (reverse repo) are recorded as placements with other banks and loans to customers as appropriate. The difference between the sale and repurchase price is treated as interest and accrued on a straight-line basis over the life of the agreements at the effective interest rate.

Kreditna banka Zagreb d.d.

18

Notes to the financial statements (continued) For the year ended 31 December 2015

3. Summary of significant accounting policies (continued)

3.8. Tangible and intangible assets

Property and equipment are initially carried at cost less accumulated depreciation and any accumulated impairment losses. Cost includes the purchase price and all costs directly attributable to bringing the asset to working condition for its intended use. Maintenance and repairs, replacements and improvements of minor scale are expensed when incurred. Items of tangible and intangible assets with a unit value less than HRK 2,000 are expensed when put into use.

Depreciation and amortisation are computed under the straight-line method over the estimated useful life of the assets according to the following annual rates: 2015

2014

%

%

3.03 / 2.50

3.03 / 2.50

Computer hardware

15

15

Furniture and equipment

10

10

Motor vehicles

20

20

Computer software

10

10

Leasehold improvements

10

10

Description Buildings

Land is not depreciated. The Management Board periodically tests whether there are circumstances indicating the impairment of tangible and intangible assets. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down to its recoverable amount. Gains and losses on disposal of non-current assets are determined by reference to their carrying amount and are recognised in the income statement line ‘Other income/(expense)’ in the year of disposal. Repairs and maintenance are charged to the income statement when the expenditure is incurred.

Kreditna banka Zagreb d.d.

19

Notes to the financial statements (continued) For the year ended 31 December 2015

3. Summary of significant accounting policies (continued)

3.9. Foreign currency translation

The financial statements are presented in Croatian kuna (HRK) and rounded to the nearest thousand. The year-end exchange rates were as follows: 31 December 2015

EUR 1 = HRK 7.635047

USD 1 = HRK 6.991801

31 December 2014

EUR 1 = HRK 7.661471

USD 1 = HRK 6.302107

Transactions in foreign currencies are translated at the foreign exchange rate at the date of the transaction. Monetary assets and monetary liabilities in foreign currencies and linked to foreign currencies are translated at the middle exchange rates of the Croatian National Bank valid on the balance sheet date. Foreign currency differences arising on translation are recognised in the income statement.

3.10.

Off-balance-sheet financial instruments

In the ordinary course of business, the Bank disclosed in its off-balance-sheet records contingent liabilities and commitments, comprising primarily guarantees, letters of credit and undrawn loan commitments. Such financial instruments are recognised in the Bank’s balance sheet if and when they become payable.

3.11.

Provisions

The Bank recognises a provision when it has a present obligation as a result of a past event, it is probable that the Bank will have to settle the obligation and the amount of this obligation can be reliably estimated. The Management Board determines the allowance based upon reviews of individual items and past experience, considering all relevant factors.

Kreditna banka Zagreb d.d.

20

Notes to the financial statements (continued) For the year ended 31 December 2015

3. Summary of significant accounting policies (continued)

3.12.

Derivative financial instruments

Derivative financial instruments include foreign exchange rate forward contracts and are initially recognised in the balance sheet at fair value and subsequently re-measured at their fair value. Fair values are obtained from quoted market prices or pricing models as appropriate. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.

Derivative financial instruments also include contracts with one-way currency clause whose reference exchange rate, placement date and contracted value are recognised initially in off-balance-sheet records and as a loans given with a one-way currency clause in the balance sheet. They are subsequently measured at amortised cost just as all other placements that carry credit risk in the balance sheet. Increase in exchange rates (fair value of the embedded derivative) above the contracted rate is recorded in the balance sheet as an embedded derivative and recognised within profit or loss from embedded derivatives in the income statement.

The Bank's derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the income statement under net trading income. However, the gains and losses arising from changes in the fair value of derivatives that are managed in conjunction with designated financial assets or financial liabilities are included in ‘net income from financial assets designated at fair value’.

3.13.

Managed funds

The Bank manages funds for and on behalf of corporate and retail customers, for which it charges a fee. As these amounts do not represent the Bank's assets and liabilities, they are excluded from the accompanying balance sheet (Note 28).

3.14.

Sale and repurchase agreements

If a financial asset is sold under an agreement to repurchase it at a fixed price or at the sale price plus a lender’s return or if it is loaned under an agreement to return it to the transferor, it is not derecognised as the Bank retains substantially all the risks and rewards of ownership. Securities sold under sale and repurchase agreements (“repos”) are recorded in the balance sheet items in line with the original classification of assets or the Bank reclassifies them in its balance sheet. The liability to the counterparty is included within “Borrowings”.

Kreditna banka Zagreb d.d.

21

Notes to the financial statements (continued) For the year ended 31 December 2015

3. Summary of significant accounting policies (continued)

3.15.

Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

3.16.

Accounting for financial guarantee contracts

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking products.

Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee was given. The initial fair value is amortised over the life of the financial guarantee. The guarantee liability is subsequently carried at the higher of this amortised amount or the present value of any expected payment (when a payment under the guarantee has become probable). Financial guarantees are included within other liabilities.

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

Kreditna banka Zagreb d.d.

22

Notes to the financial statements (continued) For the year ended 31 December 2015

3. Summary of significant accounting policies (continued) 3.17.

Significant accounting estimates and judgements

Judgements In the process of applying the Bank’s accounting policies, the Management Board has made the following judgements, which have the most significant effect on the amounts recognised in the financial statements: Held-to-maturity financial assets The Bank follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held to maturity. This classification requires significant judgement. In making this judgement, the Bank evaluates its intention and ability to hold such investments to maturity. If the Bank fails to keep these investments to maturity other than in specific circumstances (such as selling an insignificant amount close to maturity), it will be required to reclassify the entire class as available for sale and measure it at fair value instead of at amortised cost. Estimation uncertainty Key estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances and information available at the date of the financial statements, the results of which form the basis for making judgements about the value of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates. Key estimates and assumptions are discussed below. Provision for impairment of loans and receivables The Bank regularly reviews the balances of loans and receivables in order to assess whether there is objective evidence of impairment. The Bank uses its experienced judgement to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and there are few available historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on the observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. The Management Board uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans and receivables. The Bank uses its experienced judgement to adjust observable data to reflect current circumstances.

Kreditna banka Zagreb d.d.

23

Notes to the financial statements (continued) For the year ended 31 December 2015

4.

Interest and similar income

2015

2014

Loans to corporate clients

94,860

101,996

Loans to retail clients

34,410

28,939

553

1,080

30,461

71,772

7,051

11,493

167,335

215,280

2015

2014

136,321

142,428

553

1,080

30,461

71,772

167,335

215,280

2015

2014

Retail clients

77,032

96,021

Corporate clients

11,473

12,360

Banks

2,601

3,581

Other companies

8,070

15,861

Non-residents

4,067

4,269

103,243

132,092

2015

2014

100,599

128,161

2,644

3,931

103,243

132,092

Placements with other banks Debt securities Other companies

a) Analysis by product

Loans to customers Placements with banks Debt securities

5.

Interest and similar expense

a) Analysis by product

Deposits Borrowings

Kreditna banka Zagreb d.d.

24

Notes to the financial statements (continued) For the year ended 31 December 2015

6.

Fee and commission income and expense 2015

2014

16,709

17,329

Commission income from retail clients

4,822

4,772

Commission income from banks

5,657

6,161

112

46

27,300

28,308

Commission for domestic payments

(5,733)

(6,088)

Other fees and commissions

(2,882)

(2,719)

(8,615)

(8,806)

2015

2014

9,231

8,242

156

137

Gain/loss from available-for-sale financial assets

2,492

15,740

Other operating income

1,841

5,792

13,720

30,815

2015

2014

Staff costs (Note 8.1)

25,301

25,641

Material and services

34,056

36,835

Depreciation and amortisation (Note 17 and 18)

6,023

7,493

Administration and marketing expenses

1,194

4,860

Insurance premiums

7,131

7,097

830

448

1,719

3,395

76,254

85,768

Fee and commission income Commission income from corporate clients

Commission income from non-residents

Fee and commission expense

7.

Net profit from financing activities

Net gains from dealing in foreign currencies Gain/loss from financial assets at fair value through profit or loss

8.

Operating expenses

Taxes and contributions Other expenses

Kreditna banka Zagreb d.d.

25

Notes to the financial statements (continued) For the year ended 31 December 2015

8.1. Staff costs

2015

2014

14,217

14,060

Taxes and contributions from salaries

6,379

6,875

Contributions on salaries

3,582

3,540

Other staff costs

1,123

1,166

25,301

25,641

Net salaries

As at 31 December 2015, the Bank had 183 employees (31 December 2014: 195).

9.

Impairment losses and provisions Note

2015

2014

Loans to customers

14

(59,614)

(96,654)

Interest

19

(3,459)

(5,352)

(2,191)

(17,034)

(32,587)

(41,995)

Impairment of tangible assets

(576)

(28,859)

Provisions for legal disputes against the Bank

(146)

(3,176)

(5,270)

(11,728)

(103,842)

(204,797)

Investments in debt securities (until maturity) Other assets

Contingent liabilities

19

27

Less: amounts collected and reversed Loans to customers

14

37,631

49,603

Interest

19

4,773

2,395

5,139

18,990

Investments in debt securities (until maturity) Other assets

19

37,781

37,868

Contingent liabilities

27

8,426

8,489

(10,093)

(87,452)

Total

Kreditna banka Zagreb d.d.

26

Notes to the financial statements (continued) For the year ended 31 December 2015

10. Income tax

Income tax is determined by applying the rate of 20% to taxable profits (2014: 20%). Reconciliation of income tax:

Current tax Deferred tax

2015

2014

(177)

-

(1,624)

1,624

(1,801)

1,624

Tax returns remain open and subject to tax audit at least over a three-year period. The Management Board believes that the Bank has made adequate provisions for tax liabilities in the accompanying financial statements. However, the risk remains that the relevant authorities could take a different view with regard to the interpretation of the applicable provisions. Reconciliation of current tax: 2015

2014

Accounting profit/(loss) before tax

8,525

(39,716)

Income tax at 20%

1,705

7,943

293

15

Effect of non-deductible expenses

(772)

(6,334)

Tax gain/(loss)

9,004

(8,122)

(8,122)

-

882

(8,122)

(177)

1,624

2.07%

-

Effect of non-taxable income

Utilised tax losses carried forward Income tax base for the year Current tax Effective tax rate

The Bank utilised deferred tax assets from 2014 in the amount of HRK 1,624 thousand arising from tax losses carried forward and deducted prior year tax loss from income tax in 2015.

Non-deductible expenses mostly relate to the entertainment costs, costs of personal transportation, write-offs of receivables, non-deductible costs of property valuation and other non-deductible expenses.

Kreditna banka Zagreb d.d.

27

Notes to the financial statements (continued) For the year ended 31 December 2015

11. Cash and balances with Croatian National Bank

31 December 2015

31 December 2014

47,191

53,642

-

7

47,191

53,649

Giro account with Croatian National Bank

264,387

501,200

Obligatory reserve in HRK

224,554

247,980

33,258

34,875

-

13,163

Total assets with the Croatian National Bank

522,199

797,218

Total cash and balances with the Croatian National Bank

569,390

850,867

Cash on hand Instruments in the course of collection Total cash

Obligatory reserve in foreign currency Other deposits with Croatian National Bank

The CNB determines the requirement for banks to calculate an obligatory reserve, which is required to be deposited with the CNB and held in the form of other liquid receivables. The statutory reserve requirement ratio in 2015 was 12%, the same as in 2014. As at 31 December 2015, the required rate of maintenance of the HRK obligatory reserve with the CNB amounted to 70% (31 December 2014: 70%), while the remaining 30% (31 December 2014: 30%) had to be held in the form of other liquid receivables. This includes the part of the foreign currency obligatory reserve required to be held in HRK (see below). 60% of the foreign currency part of the obligatory reserve (31 December 2014: 60%) is deposited with the CNB, while the remaining 40% (31 December 2014: 40%) must be held in the form of other liquid receivables, after adjusting for the obligatory reserve requirement arising from foreign currency funds from non-residents and related parties (which is required to be held in full with the CNB). 75% of the foreign currency obligatory reserve is required to be held in HRK and is added to the HRK part of the obligatory reserve (see above).

Kreditna banka Zagreb d.d.

28

Notes to the financial statements (continued) For the year ended 31 December 2015

12. Placements with other banks

31 December 2015

31 December 2014

195,085

443,657

17,633

17,083

-

7,000

212,718

467,740

(7,364)

(12,586)

205,354

455,154

Current accounts with other banks - denominated in foreign currency Loans and time deposits with other banks - denominated in foreign currency - denominated in HRK Total placements with other banks Allowance for impairment losses Total placements with other banks, net

Of the total amount of placements with other banks, HRK 4,190 thousand relates to a guarantee deposit with Erste Bank with original maturity exceeding 3 months.

Geographical analysis:

31 December 2015

31 December 2014

Germany

78,581

131,714

Italy

16,203

50,433

Croatia

24,240

28,387

Austria

35,335

85,524

USA

20,905

47,642

Spain

33,961

58,754

Belgium

3,342

65,281

Norway

150

5

212,718

467,740

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

Kreditna banka Zagreb d.d.

29

Notes to the financial statements (continued) For the year ended 31 December 2015

13. Financial assets at fair value through profit or loss

31 December 2015

31 December 2014

Units in investment funds

12,156

13,841

Total financial assets at fair value through profit or loss

12,156

13,841

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

14. Loans to customers

a) Analysis of lending portfolio

31 December 2015

31 December 2014

465,888

452,459

Corporate clients

1,219,418

1,420,568

Other companies

93,206

61,034

Financial institutions

48,923

123,119

Gross loans

1,827,435

2,057,180

Less: impairment allowance

(154,499)

(132,741)

Total loans to customers

1,672,936

1,924,439

Retail clients

Loans are secured by specific pledges on properties of appropriate value, deposits, guarantees, securities, policies and other types of collaterals.

In the period from 1 January 2015 to 31 December 2015, the interest rates on loans to corporate clients were set at 5% to 12.90% (2014: from 5% to 12.9%), and for loans to retail clients they were set at 2.6% to 10.05% (2014: 2.7% to 12%), while for financial institutions the interest rates were set at 0.25% to 5% during 2015.

Kreditna banka Zagreb d.d.

30

Notes to the financial statements (continued) For the year ended 31 December 2015

14. Loans to customers (continued)

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

2015

2014

Partially

Fully

Partially

Fully

recoverable

irrecoverable

recoverable

irrecoverable

loans

loans

loans

loans

212,184 ___________ 61,845

60,555 ___________ 933

146,347 ___________ 121,806

38,168 ___________ 349

2,321

-

389

-

-

8,533

-

23,691

Transfer to fully recoverable loans

(16,410)

(1,359)

(17,685)

(597)

Transfer to fully irrecoverable loans

(8,533)

-

(23,691)

-

-

(2,321)

-

(389)

(22,390)

(934)

(9,458)

(82)

-

(79)

-

(42)

At 1 January Transfer from fully recoverable loans Transfer from fully irrecoverable loans Transfer from partially recoverable loans

Transfer to partially recoverable loans Amounts collected Amounts written off

3,463

236

1,485

195

Other decreases

(1,608) ___________

(303) ___________

(7,009) ___________

(738) ___________

At 31 December

230,872 ___________

65,261 ___________

212,184 ___________

60,555 ___________

Other increases

Kreditna banka Zagreb d.d.

31

Notes to the financial statements (continued) For the year ended 31 December 2015

14. Loans to customers (continued)

c) Movements in impairment allowances

Specific impairment allowances

Impairment allowance on collective assessment basis

Total

At 31 December 2013

68,362

17,165

85,527

New impairment losses (Note 9)

54,347

42,306

96,653

Amounts collected (Note 9)

(8,046)

(41,556)

(49,602)

42

-

42

121

-

121

114,826

17,915

132,741

36,969

22,645

59,614

(12,378)

(25,252)

(37,630)

(79)

-

(79)

(147)

-

(147)

139,191

15,308

154,499

Amounts written-off Foreign exchange differences At 31 December 2014 New impairment losses (Note 9) Amounts collected (Note 9) Amounts written-off Foreign exchange differences At 31 December 2015

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

At 1 January Collected and deferred fees

2015

2014

7,702

7,033

(6,800)

(7,740)

Fees recognised

6,601

8,409

At 31 December

7,503

7,702

Kreditna banka Zagreb d.d.

32

Notes to the financial statements (continued) For the year ended 31 December 2015

15. Held-to-maturity financial assets 31 December 2015

31 December 2014

517

240,045

Bonds

68,304

123,561

Allowance for impairment losses

(1,200)

(4,148)

Total held-to-maturity financial assets

67,621

359,458

Corporate bills of exchange

All bills of exchange were past due and collected during 2015, leaving in the portfolio only bills of exchange not past due from earlier years which have been fully impaired. The portfolio comprises the following foreign currency bonds: USD-denominated bonds of HEP with an interest rate of 6% and maturity in 2017, EUR-denominated of HBOR with an interest rate of 5% and 6% and maturity in 2017 and 2020, respectively. As at 31 December 2015, the collective assessment based allowances for financial assets held to maturity amounted to HRK 683 thousand.

16. Available-for-sale financial assets

Available-for-sale debt securities Available-for-sale equity securities

31 December 2015

31 December 2014

736,713

450,791

44,309

44,507

781,022

495,298

31 December 2015

31 December 2014

79,339

49,480

657,374

372,699

-

28,612

736,713

450,791

736,713

450,791

-

-

Available-for-sale debt securities

Treasury bills of the Ministry of Finance Bonds /i/ Commercial papers

Listed on the stock exchange Unlisted on the stock exchange

The bond RHMF-O-167A5 in the amount of HRK 6.5 million represents a security instruments for the repo loan from KD Locusta fondovi.

Kreditna banka Zagreb d.d.

33

Notes to the financial statements (continued) For the year ended 31 December 2015

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

/i/ Bonds 31 December 2015

31 December 2014

435,532

227,636

State corporate bonds

13,390

13,275

Other corporate bonds

14,976

-

112,470

91,117

81,006

40,670

657,374

372,699

657,374

372,699

31 December 2015

31 December 2014

43,695

44,085

93

74

521

348

44,309

44,507

Bonds of the Republic of Croatia

Bank bonds Foreign government bonds

Listed on the stock exchange

Available-for-sale equity securities

Investments in investment funds Securities listed on the stock exchange Securities unlisted on the stock exchange

Equity securities which are not listed on stock exchange markets contain a number of smaller individual investments carried at cost less impairment losses. There is no market for such investments which amount to less than 1% of their share capital.

Movements in equity securities during the year: 2015 At 1 January Change in fair value of shares Investment fund unit purchase Investment fund unit sale Change in fair value of units Foreign exchange differences At 31 December

Kreditna banka Zagreb d.d.

2014

44,507

65,275

19

(36)

-

2,000

-

(20,586)

180

(2,030)

(396)

(116)

44,309

44,507

34

Notes to the financial statements (continued) For the year ended 31 December 2015

17. Intangible assets

External software and other rights

Internally developed software

Intangible assets under constructio n

Total intangible assets

Cost At 1 January 2014

21,690

-

19,438

41,128

89 2,351

13,983

3,066 (16,334)

3,155 -

24,130

13,983

6,170

44,283

327 (533)

1,547

581 (327)

2,455 (860)

23,924

15,530

6,424

45,878

At 1 January 2014

13,204

-

-

13,204

Charge for the year

1,564

1,398

-

2,962

-

-

-

-

14,768

1,398

-

16,166

2,923

-

-

2,923

Additions Transfer from assets under construction At 31 December 2014 Additions Transfer from assets under construction At 31 December 2015 Amortisation

Expense At 31 December 2014 Charge for the year Expense

-

-

-

-

17,691

1,398

-

19,089

At 31 December 2014

9,362

12,585

6,170

28,117

At 31 December 2015

6,233

14,132

6,424

26,789

At 31 December 2015 Net book amount

Kreditna banka Zagreb d.d.

35

Notes to the financial statements (continued) For the year ended 31 December 2015 18. Tangible assets

Cost At 1 January 2014

Land

Buildings

Computers

Furniture and equipment

Assets under construction

Total

2,462

702

129,759

(289)

18,868 (2,703) -

33,998 (15,130) (1,231)

660 (281)

16,867 1,239 (1,244) -

147,397 1,264 436 (281)

2,552

16,862

148,816

Vehicles

-

100,516

4,706

21,373

Additions Transfer from assets under construction Transfers Disposals/write-offs

15,130 -

1,283 (15,130) -

536 (823)

884 (119)

At 31 December 2014 Additions Transfer from assets under construction Transfers Disposals/write-offs

15,130 -

86,669 -

4,419 777 -

22,138 25 243 -

At 31 December 2015

15,130

86,669

5,196

-

25,405

2,492

13,332

1,526

-

42,755

Charge for the year Impairment Elimination - sales

2,173 21,894 -

293 (823)

1,519 (119)

545 (187)

6,965 -

4,530 28,859 (1,129)

At 31 December 2014 Charge for the year Impairment Elimination - sales

-

49,472 1,628 (823) -

1,962 536 -

14,732 1,502 (30)

1,884 256 (281)

6,965 -

75,015 3,922 (823) (311)

At 31 December 2015

15,130

50,277

2,498

16,204

1,859

6,965

77,803

31 December 2014

15,130

37,197

2,457

7,406

289

9,902

72,381

31 December 2015

15,130

36,392

2,699

6,202

693

9,897

71,013

Depreciation At 1 January 2014

22,406

2,173

Net book amount

Kreditna banka Zagreb d.d.

36

Notes to the financial statements (continued) For the year ended 31 December 2015

18. Tangible assets (continued)

As at 31 December 2015, financial institutions have not placed a pledge over the building and depreciation is calculated at a rate of 3.03%.

19. Other assets

31 December 2015

31 December 2014

Accrued interest

24,653

17,788

Repossessed assets

21,020

20,122

Total non-financial assets

45,673

37,910

Fees and commissions

1,311

1,385

Receivables from credit card operations

2,768

2,947

Prepaid expenses and deferred income

9,381

11,099

Guarantee funds

2,541

2,177

Other receivables

7,347

16,736

Total financial assets

23,348

32,719

Total other assets before impairment

69,021

72,254

Less impairment allowance:

(5,623)

(5,708)

Total other assets

63,398

66,546

Non-financial assets

Financial assets

Accrued interest and fee income is presented on a net basis less accumulated impairment amounting to HRK 18,356 thousand (31 December 2014: HRK 19,622 thousand), while the impairment of other assets is presented in the table and amounts to HRK 5,623 thousand (31 December 2014: HRK 5,708 thousand).

All stated assets become due within one year.

Kreditna banka Zagreb d.d.

37

Notes to the financial statements (continued) For the year ended 31 December 2015

19. Other assets (continued)

Changes in impairment allowance

At 31 December 2013 Impairment allowance on collective assessment basis New allowances (Note 9) Amounts collected (Note 9) Amounts written off At 31 December 2014 Impairment allowance on collective assessment basis New allowances (Note 9) Amounts collected (Note 9) Amounts written off At 31 December 2015

Interest and fees

Other assets

16,325

3,983

-

(13)

6,172

2,590

(2,917)

(852)

42

-

19,622

5,708

-

(57)

4,292

1,124

(5,537)

(1,150)

(21)

(2)

18,356

5,623

The allowance based on collective assessment includes other receivables from clients based on issued invoices, fees and expenses paid for the client, except for accrued interest, which according to the Classification of placements are fully provided for on an individual basis.

Kreditna banka Zagreb d.d.

38

Notes to the financial statements (continued) For the year ended 31 December 2015

20. Deposits from banks and customers

31 December 2015

31 December 2014

90,563

133,049

Retail clients

154,649

143,245

Corporate clients

111,959

251,890

Other companies

4,377

3,780

361,548

531,964

79,686

201,169

2,233,653

2,452,606

Corporate clients

197,025

371,228

Other companies

33,780

39,421

Total term deposits

2,544,144

3,064,424

Total amounts due to customers

2,905,692

3,596,388

Demand deposits Banks and financial institutions

Total demand deposits Term deposits Banks and financial institutions Retail clients

The interest rate on demand deposits ranged from 0.10% to 0.20% during 2015 (2014: from 0.10% to 0.20%). The interest rate on time deposits for retail clients ranged from 0.10% to 7.0% during 2015, and from 0.10% to 7.0% during 2014, while for term deposits of legal entities and other companies the interest rate in 2015 ranged from 0.20% to 3.15% (2014: from 0.7% to 5.5%), while for financial institutions it ranged from 0.10% to 5.56% during 2015.

21. Borrowings

31 December 2015

31 December 2014

Long-term borrowings

123,700

84,321

Short-term borrowings

-

10,000

2,800

164,200

126,500

258,521

31 December 2015

31 December 2014

126,500

258,521

-

-

126,500

258,521

Repo loans Total borrowings

Denominated in HRK Denominated in foreign currency Total borrowings

Kreditna banka Zagreb d.d.

39

Notes to the financial statements (continued) For the year ended 31 December 2015

21. Borrowings (continued)

Borrowings comprise the following:

31 December 2015

31 December 2014

-

71,400

123,700

94,321

PRIVREDNA BANKA ZAGREB d.d. CROATIAN BANK FOR RECONSTRUCTION AND DEVELOPMENT (HBOR) ZAGREBAČKA BANKA d.d. KD LOCUSTA FONDOVI (LOCUSTA INVEST)

-

80,500

2,800

2,800

-

9,500

126,500

258,521

ERSTE&STEIERMÄRKISCHE BANK d.d.

Borrowings from the Croatian Bank for Reconstruction and Development (HBOR) relate to borrowings placed by HBOR through the Bank in accordance with its financing programs. The relationship between the Bank and HBOR is the subject of a separate agreement. The interest rate on HRK borrowings from HBOR ranged from 0% to 5%, while for the end user of these borrowings the interest rate ranged from 1% to 7% during 2015, which is the same as in 2014.

Collaterals

As at 31 December 2015, the Bank has received a repo loan from KD Locusta fondovi d.o.o. for Locusta Value IV AIF which is secured by the bond RHMF-O-167A5 in the amount of HRK 6.5 million. .

Kreditna banka Zagreb d.d.

40

Notes to the financial statements (continued) For the year ended 31 December 2015

22. Other liabilities

31 December 2015

31 December 2014

Accrued interest

63,084

57,737

Deferred income

112

68

63,196

57,805

4,706

2,362

450

1,521

Other liabilities

4,150

3,862

Total financial liabilities

9,306

7,745

72,502

65,550

Accrued expenses:

Total accrued liabilities

Financial liabilities: Trade payables Liabilities for credit card operations

Total other liabilities

23. Issued subordinated instruments 31 December 2015

31 December 2014

82,000

60,000

-

13,000

82,000

73,000

Subordinated bonds Hybrid deposits

During 2015, the existing and additionally issued subordinated capital instruments that are recognised in Supplementary capital in the amount of HRK 22 million have been replaced and amount to HRK 82 million as at 31 December 2015, amortised amount to the final maturity of the instrument.

Subordinated instrument were issued/replaced with a new interest rate set at 6% and maturity on 31 July 2022, while hybrid instruments/deposits were added to share capital. Interest on subordinated bonds is paid on a semi-annual basis.

Kreditna banka Zagreb d.d.

41

Notes to the financial statements (continued) For the year ended 31 December 2015

24. Share capital As at 31 December 2015, the Company’s share capital amounts to HRK 197,775,300 (2014: HRK 186,553,200 thousand) and is divided among 1,937,753 ordinary shares (KBZ-R-A) with a nominal value of HRK 100 per share (2014: 1,865,532).

The following shareholders owned more than a 5% share in the Bank as at 31 December 2015 and 31 December 2014:

Shareholders

Holding in share capital (%) 31 December 2015

31 December 2014

Euroherc osiguranje d.d.

19.98

17.86

Jadransko osiguranje d.d.

19.97

16.24

Agram životno osiguranje d.d.

19.86

17.86

Euroleasing d.o.o.

7.42

10.04

Podravska banka

5.47

-

Varaždinska banka

5.16

-

Agram Invest d.o.o

4.37

5.54

17.77

32.46

100.00

100.00

Other Total share capital

Share premium In 2015, share premium was increased by HRK 5,778 thousand through the payment of new shares in the amount of HRK 7,222 thousand, i.e. 72,221 shares, and refers to the premium on the shares issued, which represents the excess amount paid over the nominal value of shares issued.

Dividends Following the decision of the General Assembly, loss realised in 2014 was covered from retained earnings during 2015.

Kreditna banka Zagreb d.d.

42

Notes to the financial statements (continued) For the year ended 31 December 2015 24 Share capital (continued) Regulatory capital as at 31 December 2015 / 31 December 2014 In accordance with legal requirements arising from Directive EU 575/2013, regulatory capital was calculated as at 31 December 2015 and 31 December 2014 as follows: 31 December 2015

31 December 2014

HRK`000

HRK`000

244,316

231,316

35,321

73,413

-

(38,092)

Less: Intangible assets (-)

(26,789)

(28,117)

Unrealised loss from impairment of available-for-sale financial assets

(12,335)

(3,464)

Total basic capital

240,512

235,056

82,000

30,986

-

12,551

82,000

43,537

Regulatory capital Regular basic capital Legal and statutory reserves and retained earnings less current year result Recognised profit or loss

Supplementary capital Paid capital instruments and subordinated loans Subordinated instruments Hybrid instruments Gross supplementary capital Deductions

-

Total deductions from supplementary capital Total supplementary capital (gross supplementary capital less deductions) Gross regulatory / guarantee capital

82,000 322,512

278,593

1,728,985

2,153,293

207,400

221,890

1,936,385

2,375,192

16.66%

11.73%

Risk weighted assets Credit risk weighted exposure Other weighted assets Total risk weighted assets Capital adequacy ratio

Following the decision of the regulatory of February 2015, and based on SREP (Supervisory Review and Evaluation Process), the Bank was required to ensure an additional rate of total regulatory capital of 4.18% and, until the next SREP, maintain the rate of total regulatory capital at least at 12.18%. After including the requirements regarding additional tiers for capital protection and system risk, the minimum rate of total capital, that the Bank should maintain in accordance with legislation and relevant requirements set out in Chapter VII of the Credit Institutions Acts and relevant by-laws and in order to avoid limitations on distribution of regular core capital, amounted to 16.18%. The Bank fulfilled this requirement through a capital contribution by converting existing hybrid instruments as well as by converting and issuing additional instruments of supplementary capital. Kreditna banka Zagreb d.d.

43

Notes to the financial statements (continued) For the year ended 31 December 2015

On 29 February 2016, the Bank received the decision of the regulator whereby a new rate was determined following a new SREP. This set an additional rate of 3.26% for 2016, meaning that the Bank should maintain the rate of total regulatory capital at least at 11.26% during 2016. By including a combined tier for capital (inclusive: tier for capital protection, tier for system risk and anti-cyclic tier for capital specific for the Bank), the Bank must maintain the rate of total capital at least at 15.26% during 2016 and until the next SERP in order to avoid limitations on distribution of regulatory core capital set out in Chapter VII of the Credit Institutions Act and relevant by-laws.

25. Retained earnings and reserves Retained earnings include accumulated profits from prior years. In accordance with the local legislation, 5% of the net profit of the Bank is required to be transferred to a nondistributable legal reserve to equal 5% of the share capital of the Bank. The legal reserve, in the amount of up to 5% of the issued share capital, can be used for covering losses from the current and prior years. On 19 June 2015, the General Assembly made a decision to fully cover the loss from 2014 from prior periods retained earnings.

26. Earnings/(loss) per share

Basic For the purposes of calculating earnings per share, earnings are calculated as the profit (after tax) for the year attributable to equity holders of ordinary shares after deducting amounts relating to preference dividends. For the reconciliation of profit after tax which is distributed to ordinary shareholders please see below:

2015

2014

Profit/(loss) for the year in HRK

8,348,895

(38,092,083)

Weighted average number of ordinary shares in issue

1,885,516

1,865,532

4.43

(20.42)

Earnings/(loss) per ordinary share in HRK

Kreditna banka Zagreb d.d.

44

Notes to the financial statements (continued) For the year ended 31 December 2015

27. Contingent liabilities and commitments

a)

Legal disputes in progress

There are several outstanding legal disputes against the Bank. The Bank records provisions in accordance with the decision of the Croatian National Bank on the provisions for legal disputes outstanding against the Bank in the total amount of HRK 149 thousand as at 31 December 2015 (31 December 2014: HRK 3.5 thousand). No material losses are expected from ongoing proceedings.

b) Guarantees and credit commitments

The total amount of guarantees, letters of credit and unused lines of credit was as follows:

31 December 2015

31 December 2014

Guarantees in HRK

77,600

138,552

Guarantees in foreign currency

21,027

18,663

2,760

8,127

Unused lines of credit

110,266

168,518

Total guarantees and credit commitments

211,653

333,860

2015

2014

At 1 January

5,316

2,077

Increase (Note 9)

5,346

11,728

(8,512)

(8,489)

2,150

5,316

Letters of credit

c)

Movement in provisions

Decrease (Note 9) At 31 December

Kreditna banka Zagreb d.d.

45

Notes to the financial statements (continued) For the year ended 31 December 2015

28. Managed funds

The Bank manages funds for and on behalf of legal entities and citizens with respect to custodian activities. The related income and expense are charged to the customer, and the Bank does not bear any liabilities.

Net assets and liabilities from operations in the name and on behalf of third parties are as follows:

31 December 2015

31 December 2014

3,367

4,846

43,891

68,504

124,125

113,576

171,383

186,926

3,367

4,846

43,891

68,504

124,125

113,576

171,383

186,926

Assets Retail clients Corporate clients Financial institutions Total assets Sources Retail clients Corporate clients Financial institutions Total sources

29. Cash and cash equivalents

For the purposes of the statement of cash flows, cash and cash equivalents comprise the following balances with less than 90 days maturity:

31 December 2015

31 December 2014

264,387

501,200

47,192

53,642

-

7

Total placements with other banks (Note 12)

208,871

451,905

Total cash and cash equivalents

520,449

1,006,754

Cash account at Croatian National Bank (Note 11) Cash on hand (Note 11) Instruments in the course of collection (Note 11)

The Bank has significant reserves of primary and secondary liquidity.

Kreditna banka Zagreb d.d.

46

Notes to the financial statements (continued) For the year ended 31 December 2015

30. Risk management This note provides details of the Bank’s exposure to risk and describes the methods used by management to control risk. The most significant types of financial risk to which the Bank is exposed are credit risk, liquidity risk, market risk and operational risk. Market risk includes currency risk, interest rate risk and debt and equity quoted securities price risk. The Bank has established an integrated system of risk management by introducing a set of policies and procedures and establishing the limits of risk levels acceptable to the Bank. The methodology and models for managing operational risk have been developed.

a) Credit risk The Bank takes on exposure to credit risk which is the risk upon that the counter party will be unable to pay amounts in full when due. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and principal repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees. In accordance with the legal provisions governing the internal control system, when approving loans the Bank has established decision-making levels governed by the principle that when the loan approval decision is not made by the Bank's Management Board and the amount of client exposure exceeds the internally specified amounts of client exposure, at least two persons should participate, whereby the person with the sales function makes a decision which is approved by the person in charge of the risk control function. Also, prior to making a decision in case when the client's exposure exceeds certain internally established exposure amounts, the draft decision of the sales function is subject to a review by the risk control function.

In addition the Bank monitors and analyses the structure and quality of its loan portfolio through different indicators pointing to the improvement or deterioration in asset quality of the Bank, thus enabling the Bank a better credit risk management as well as timely actions in order to reduce credit risk. Also, the Bank monitors and analyses the degree of concentration of loans by sector and the largest client exposures using the HHI index methodology.

Credit related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit represent irrevocable assurance that the Bank will make payments in the event that customer cannot meet its obligations to third parties and carry the same credit risks as loans given. Documentary and commercial letters of credit are written undertakings on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions.

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

47

Notes to the financial statements (continued) For the year ended 31 December 2015

30. Risk management (continued) a) Credit risk (continued) Loans are classified into the following three main groupings, in accordance with the regulations of the CNB: 

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



partially recoverable loans – B Risk Group – measured on an individual basis, or on the collective basis for a "small loans portfolio" that are not sued, or insured by adequate collateral according to the CNB Decision on Classification of Placements and Off-Balance-Sheet Liabilities of Credit Institutions



fully recoverable loans – B Risk Group – measured on an individual basis, or on the collective basis for a "small loans portfolio" that are not sued, or insured by adequate collateral according to the CNB Decision on Classification of Placements and Off-Balance-Sheet Liabilities of Credit Institutions

All three levels contain sub-categories, which are mandatory for partially recoverable loans. The Bank's policy is to require suitable collateral to be provided by certain customers prior to the disbursement of approved loans. Collateral for loans, guarantees and letters of credit is usually in the form of deposits, pledges, investments, housing or commercial mortgages, bills of exchange, promissory notes or other types of assets.

Commitments to lend represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to lend, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to lend are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because long-term commitments generally have a greater degree of credit risk than short-term commitments.

b) Liquidity risk

The Bank is exposed to daily calls which it settles through available cash resources, which include overnight deposits, current account funds, maturing deposits and loan drawdowns.

The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. It is unusual for banks ever to be completely matched since business transacted is often of uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses.

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Bank and its exposure to changes in interest rates and exchange rates. Liquidity requirements to support guarantee payments and standby letters of credit are considerably less than the amount of the commitment because the Bank does not generally expect the third party to draw funds under the agreement.

Kreditna banka Zagreb d.d.

48

Notes to the financial statements (continued) For the year ended 31 December 2015

30. Risk management (continued) The Bank carries out its liquidity risk management through a gap analysis in which the maturity of assets and liabilities are divided into several time categories and differences are observed in certain time categories in order to timely harmonise its assets and liabilities. In addition, the Bank monitors and analyses the movement of the minimum liquidity ratio (weekly and monthly) in terms of legislation and established internal limits. In the event that an indicator of the minimum liquidity ratio falls below the internally prescribed limits the Control and Risk Management Department shall inform the Assets and Liabilities Commission as well as the Bank’s Management Board in order to take measures. The total outstanding contractual amount of commitments to extend credit at the balance sheet date does not necessarily represent future cash flows, since many of these commitments will expire or be terminated without being funded. Liquidity risk is presented in the maturity analysis of assets and liabilities as at 31 December 2015 and 31 December 2014 (see Note 32). c) Market risk The majority of available-for-sale instruments are subject to market risk, the risk that future changes in market conditions may impair the value of the instrument. The instruments are recognised at fair value, and all changes in market conditions directly affect net trading income. The Bank manages its use of trading instruments in response to changing market conditions. The limits are defined following the needs and strategy of the Bank and in accordance with the senior management risk policy provisions. The exposure to market risk is formally managed in accordance with the risk limits approved by the senior management and revised at least annually. The exposure figures and limit utilization are delivered to the Treasury Division on a daily basis. In addition, limit control is performed by the Control and Risk Management Department as a second level of control, which in the case of exceeding certain limits of market risk notifies the Management Board. d) Interest rate risk

The Company is exposed to various risks associated with the effect of changes in market interest rates on its financial position and cash flows. The interest rate gap table summarises the Bank's exposure to interest rate risks. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorized by the earlier of contractual re-pricing or maturity dates (see Note 33). The Bank carries out the control and analysis of interest rate risk exposure via a standard interest rate shock, a methodology prescribed by by-laws and according to which the interest rate risk in the banking book is viewed as a change in the value of banking book in relation to its regulatory capital. In addition to statutory limits, the Bank prescribed internal limits that are monitored by the Control and Risk Management Department and in case they are exceeded, it notifies the Assets and Liabilities Commission as well as the Management Board of the Bank.

Kreditna banka Zagreb d.d.

49

Notes to the financial statements (continued) For the year ended 31 December 2015

30. Risk management (continued)

e) Foreign exchange risk The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Bank sets limits on the level of exposure by currency and in total for both overnight and intra-day positions. In addition to monitoring currency risk and open foreign currency position on a daily basis, in accordance with the by-laws, the Bank monitors and analyses the impact of the currency risk on the basis of stress tests under certain conditions. Monitoring with the use of the VAR indicators methodology is also being introduced. Foreign currency balance sheet and foreign exchange risk table summarizes the Bank’s exposure to foreign currency exchange rate risk at 31 December 2015 and 31 December 2014. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorised by domestic currency and foreign currency (see Note 34).

f) Equity price risk

Equity price risk is the possibility that equity prices will fluctuate affecting the fair value of equity investments and other derivative instruments. The primary exposure to equity prices arises from the Bank’s holding of equity instruments available for sale. The Bank does not actively trade in equity securities.

Kreditna banka Zagreb d.d.

50

Notes to the financial statements (continued) For the year ended 31 December 2015

31. Credit risk a) Total credit risk exposure – balance sheet and off-balance-sheet

Gross placements ____________

Individually based impairment allowance ____________

Collectively based impairment allowance ____________

Net placements _______

522,199

-

-

522,199

212,718

-

7,363

205,355

781,022

-

-

781,022

68,821

517

683

67,621

Loans to customers (Note 14)

1,827,434

139,193

15,307

1,672,935

- fully recoverable

1,530,634

-

15,307

1,515,327

231,540

73,994

-

157,546

65,261

65,198

-

63

45,820

23,760

220

21,840

2,676,992

163,470

23,573

2,489,950

211,653

63

2,087

209,503

208,691

-

2,087

206,604

2,942

43

-

2,899

20

20

-

-

211,653

63

2,087

209,503

2,888,645

163,533

25,671

2,699,441

At 31 December 2015

A Balance sheet exposure Cash and balances with Croatian National Bank (Note 11) Placements with other banks (Note 12) Available-for-sale financial assets (Note 16) Held-to-maturity financial assets (Note 15)

- partially recoverable - completely irrecoverable Interest, fees and other assets

Total balance sheet exposure B Off-balance-sheet exposure Customers - fully recoverable - partially recoverable - completely irrecoverable Total off-balance-sheet exposure TOTAL EXPOSURE (A+B)

Kreditna banka Zagreb d.d.

51

Notes to the financial statements (continued) For the year ended 31 December 2015

31. Credit risk (continued) a) Total credit risk exposure – balance sheet and off-balance-sheet (continued)

Gross placements ____________

Individually based impairment allowance ____________

Collectively based impairment allowance ____________

Net placements _______

797,218

-

-

797,218

467,740

-

(12,586)

455,154

495,646

(347)

-

495,298

363,606

(517)

(3,631)

359,458

Loans to customers (Note 14)

2,057,180

(114,826)

(17,915)

1,924,439

- fully recoverable

1,784,441

-

(17,915)

1,766,526

212,184

(54,338)

-

157,845

60,555

(60,488)

-

67

56,312

(25,054)

(275)

30,983

4,237,702

(140,744)

(34,407)

4,062,551

325,082

-

(3,251)

321,831

8,758

(2,045)

-

6,713

20

(20)

-

-

333,860

(2,065)

(3,251)

328,544

4,571,562

(142,809)

(37,658)

4,391,094

At 31 December 2014

A Balance sheet exposure Cash and balances with Croatian National Bank (Note 11) Placements with other banks (Note 12) Available-for-sale financial assets (Note 16) Held-to-maturity financial assets (Note 15)

- partially recoverable - completely irrecoverable Interest, fees and other assets

Total balance sheet exposure B Off-balance-sheet exposure Customers - fully recoverable - partially recoverable - completely irrecoverable Total off-balance-sheet exposure TOTAL EXPOSURE (A+B)

Kreditna banka Zagreb d.d.

52

Notes to the financial statements (continued) For the year ended 31 December 2015

31. Credit risk (continued) b) Uncollected past due receivables Uncollected past due receivables include gross receivables based on maturity of both due and not due principal, on an individual basis, including due but uncollected interest and other income related to the principle. Other past due receivables include uncollected interest not past due and receivables written off whose collection is still in progress. The total amount of individual placement is allocated to the maturity class of the oldest uncollected receivable, relating to either principal or the interest. The financial statements do not include the impairment of loans and other receivables. At 31 December 2015

Loans to customers Held-to-maturity financial assets Available-for-sale financial assets Other past due receivables Total uncollected past due receivables

Past due up to 30 days

Past due from 31 to 90 days

Past due from 91 to 180 days

Past due from 181 to 365 days

Past due from 1 to 2 years

Past due from 2 to 3 years

Past due over 3 years

_______

_______

_______

_______

_____

_______

_______

671,346

282,635

13,107

12,123

38,121

42,622

92,097

-

-

-

-

-

-

517

-

-

-

-

-

-

-

5,312

6,574

678

250

1,776

3,724

17,489

676,658

289,208

13,785

12,373

39,897

46,346

110,102

Past due up to 30 days

Past due from 31 to 90 days

Past due from 91 to 180 days

Past due from 181 to 365 days

Past due from 1 to 2 years

Past due from 2 to 3 years

Past due over 3 years

_______

_______

_______

_______

_____

_______

_______

863,333

275,469

70,295

21,464

49,012

20,790

74,682

-

-

-

-

-

-

517

-

-

-

-

-

-

-

7,197

4,912

2,989

881

5,308

1,404

19,902

870,530

280,381

73,285

22,345

54,320

22,194

95,102

At 31 December 2014

Loans to customers Held-to-maturity financial assets Available-for-sale financial assets Other past due receivables Total uncollected past due receivables

Kreditna banka Zagreb d.d.

53

Notes to the financial statements (continued) For the year ended 31 December 2015

31. Credit risk (continued)

c) Placements secured by collateral

Housing mortgages

Commercial mortgages

Other instruments

_______

_______

_______

-

-

-

-

522,199

63,106 -

600,053 -

Other assets

118,962 -

1,045,313 68,821 45,820

212,718 -

Total balance sheet exposure

118,962

63,106

600,053

1,159,954

734,917

B Off-balance-sheet exposure Guarantees Letters of credit Unused lines of credit

8,438 -

-

22,897 769 -

99,116 1,990 78,442

-

8,438

-

23,667

179,548

-

127,400

63,106

623,720

1,339,502

734,917

Deposit

Housing mortgages

Commercial mortgages

Other instruments

No collateral

_______

_______

_______

-

-

-

-

797,218

44,923 -

517,585 119,102 -

1,270,458 227,104 53,312

467,740 -

Other assets

224,213 17,400 3,000

Total balance sheet exposure

244,613

44,923

636,687

1,550,874

1,264,959

B Off-balance-sheet exposure Guarantees Letters of credit Unused lines of credit

55,621 1,693

8,013 -

40,860 724 9,885

216,875 172 17

-

57,314

8,013

51,469

217,064

-

301,928

52,936

688,156

1,767,938

1,264,959

At 31 December 2015 A Balance sheet exposure Cash and balances with Croatian National Bank Placements with other banks Loans to customers Held-to-maturity financial assets

Total off-balance-sheet exposure Total exposure (A+B)

At 31 December 2014 A Balance sheet exposure Cash and balances with Croatian National Bank Placements with other banks Loans to customers Held-to-maturity financial assets

Total off-balance-sheet exposure Total exposure (A+B)

Kreditna banka Zagreb d.d.

Deposit

_______

_______

No collateral

_______

_______

54

Notes to the financial statements (continued) For the year ended 31 December 2015

d) Allowances ratio in loans to customers

31 December 2015 Loans to Allowances ratio customers (%) in loans (%) Fully recoverable Partially recoverable Completely irrecoverable

83.76 12.67 3.57

Total

31 December 2014 Loans to Allowances ratio customers (%) in loans (%)

1.00 53.16 100.00

86.14 10.57 3.29

100.00

1.00 28.78 100.00

100.00

32. Liquidity risk The amount of the total assets and liabilities was analysed according to the most conservative assumption of the remaining maturity from the balance sheet date to the contractual maturity. 0 - 30 days

1-3 months

3-12 months

1-2 years

2-3 years

Over 3 years

Total

358,452 191,582 -

27,639 6,772 -

119,579 7,000 -

40,180 -

13,703 -

9,838 12,156

569,390 205,354 12,156

252,867

98,475

187,156

261,156

185,896

686,655

1,672,935

-

-

-

67,621

-

-

67,621

-

749 -

142,625 -

213,473 -

43,261 -

380,913 26,789 71,013

781,022 26,789 71,013

Other assets

35,132

-

-

-

-

28,262

63,395

Total assets

838,033

133,634

456,359

583,161

242,860 1,215,628

3,469,675

528,300 2,802

311,506 1,347,720 15,050

452,852 16,419

154,436 24,976

110,877 67,252

2,905,692 126,500

178 336

312

19

82,000 40

72,502 82,000 2,150

311,752 1,363,285

469,585

179,431

260,169

3,188,844

113,576

63,429

955,458

280,835

At 31 December 2015 Assets Cash and balances with Croatian National Bank Placements with other banks Financial assets at FVTPL Loans to customers Held-to-maturity financial assets Available-for-sale financial assets Intangible assets Tangible assets

Liabilities Deposits from customers Borrowings Other liabilities Subordinated instruments Provisions for other liabilities

72,324 1,197

246

Total liabilities

604,622

Maturity gap

233,415 (178,118)

Kreditna banka Zagreb d.d.

(906,925)

55

Notes to the financial statements (continued) For the year ended 31 December 2015

32. Liquidity risk (continued)

At 31 December 2014 Assets Cash and balances with Croatian National Bank Placements with other banks Financial assets at FVTPL Loans to customers Held-to-maturity financial assets Available-for-sale financial assets Intangible assets Tangible assets Other assets Total assets

0 - 30 days

1-3 months

3-12 months

1-2 years

2-3 years

Over 3 years

Total

638,704 455,154 -

30,478 -

101,355 -

34,002 -

29,296 -

17,032 13,841

850,867 455,154 13,841

354,280 10,552

133,451 195,380

422,383 153,526

186,709 -

193,228 -

634,387 -

1,924,439 359,458

-

45,733 -

138,920 -

64,935 -

90,623 -

155,086 28,117

495,298 28,117

31,646

713

6,090

426

857

72,381 26,814

72,381 66,546

1,490,336

405,754

822,275

286,072

314,004

947,659

4,266,101

407,084 1,353,769

454,145

391,243

214,364

3,596,388

Liabilities Deposits from banks Deposits from customers

775,783

Borrowings Other liabilities Subordinated instruments

164,058 14,975 -

8,391 -

11,219 19,154 -

3 12,864 -

17,175 4,011 60,000

66,065 6,154 13,000

258,521 65,550 73,000

3,929

403

498

244

219

23

5,316

467,256

472,648

299,605

3,998,775

(562,366) (181,184) (158,644)

648,053

267,326

Provisions for other liabilities Total liabilities

958,746

415,878 1,384,641

Maturity gap

531,590

(10,124)

Kreditna banka Zagreb d.d.

56

Notes to the financial statements (continued) For the year ended 31 December 2015

33. Interest rate risk

The following table is the Management Board’s estimate of the interest rate risk for the Bank at 31 December 2015 and 31 December 2014. The table provides some indication of the sensitivity of the Bank’s earnings to movements in interest rates. Earnings will also be affected by the currency of the assets and liabilities.

At 31 December 2015

0 - 30 days

1-3 months

3-12 months

1-3 years

Over 3 years

Interest free

Total

Cash and balances with Croatian National Bank

522,199

-

-

-

-

47,192

569,930

Placements with other banks Financial assets at FVTPL

191,582 -

6,772 -

7,000 -

-

-

12,156

205,354 12,156

1,591,851

-

-

43,291

37,793

-

1,672,935

736,713

-

-

-

-

44,309

781,022

67,621

-

-

-

-

-

67,621

Tangible and intangible assets

-

-

-

-

-

97,803

97,803

Other assets

-

-

-

-

-

63,395

63,395

Of which assets at fixed interest rate

1,487,337

-

-

-

-

-

1,487,337

Total assets

3,109,966

6,772

7,000

43,291

37,793

264,854

3,469,675

2,905,692

-

-

-

-

-

2,905,692

126,500

-

-

-

-

-

126,500

Subordinated instruments

-

-

-

-

82,000

-

82,000

Provisions for contingent liabilities

-

-

-

-

2,150

2,150

Assets

Loans to customers Available-for-sale financial assets Held-to-maturity financial assets

Liabilities Deposits from customers Borrowings

Other liabilities

72,326

-

-

-

-

-

72,326

Of which liabilities at fixed interest rate

1,652,393

-

-

-

82,000

-

1,734,393

Total liabilities

3,104,518

-

-

-

82,000

2,150

3,188,668

Kreditna banka Zagreb d.d.

57

Notes to the financial statements (continued) For the year ended 31 December 2015

33. Interest rate risk (continued)

At 31 December 2014

0 - 30 days

1-3 months

3-12 months

1-3 years

Over 3 years

Interest free

Total

Cash and balances with Croatian National Bank

797,218

-

-

-

-

53,649

850,867

Placements with other banks Financial assets at FVTPL

455,154 -

-

-

-

-

13,841

455,154 13,841

1,871,345

-

-

53,094

-

-

1,924,439

Available-for-sale financial assets

450,791

-

-

-

-

44,507

495,298

Held-to-maturity financial assets

359,458

-

-

-

-

-

359,458

Tangible and intangible assets

-

-

-

-

100,498

100,498

Other assets

-

-

-

-

-

64,081

64,081

Of which assets at fixed interest rate

1,853,038

-

-

-

-

-

1,853,038

Total assets

3,933,966

-

-

53,094

-

279,042

4,266,101

-

-

-

-

-

-

-

3,596,388

-

-

-

-

-

3,596,388

258,521

-

-

-

-

-

258,521

Subordinated instruments

-

-

-

-

73,000

-

73,000

Provisions for contingent liabilities

-

-

-

-

-

5,316

5,316

Other liabilities

-

-

-

-

-

65,550

65,550

Of which liabilities at fixed interest rate

2,088,430

-

-

-

73,000

-

2,161,430

Total liabilities

3,854,909

-

-

-

73,000

70,866

3,998,775

Assets

Loans to customers

Liabilities Deposits from banks Deposits from customers Borrowings

The concentration of assets as well as multiple coverage of current liabilities suggests resistance to possible shocks from the environment as well as the possibility of recalibration of the portfolio maturity during sudden yield curve changes.

Kreditna banka Zagreb d.d.

58

Notes to the financial statements (continued) For the year ended 31 December 2015

33. Interest rate risk (continued)

The following table summarizes the effective average interest rate by major currencies for monetary financial instruments as follows: 31 December 2015 HRK Foreign currency % %

31 December 2014 HRK Foreign currency % %

Assets Cash and balances with Croatian National Bank Placements with other banks Financial assets at fair value through profit or loss Loans to customers Available-for-sale investments Held-to-maturity investments Tangible and intangible assets Other assets Of which assets at fixed interest rate Total assets

7.11 5.52 8.50 4.30 6.18

0.03 5.29 3.51 5.42 2.66 2.94

0.60 7.39 4.88 7.69 6.48 6.57

0.02 6.53 5.16 2.74 2.74

Liabilities Deposits from banks Deposits from customers Borrowings Provisions for contingent liabilities Other liabilities Of which liabilities at fixed interest rate Total liabilities

2.80 1.15 6.00 3.42 2.84

0.20 2.71 2.53 2.71

2.13 1.46 7.14 3.90 2.27

0.20 3.32 3.60 3.33

The table below shows the sensitivity of interest-bearing assets and liabilities on changes in interest rates. For the calculation of the interest rate sensitivity on the income statement, the Bank used the assumption of an interest rate increase by 1% except for cash and balances at the Croatian National Bank and other assets. If the interest rates would have decreased by the same percentage, the result would have been interest income in the same amount.

Assumed interest rate growth

Effect on income statement for 2015

Effect on income statement for 2014

Assets Cash and balances with Croatian National Bank Deposits given Loans and receivables Other assets

% 1.00% 1.00% 1.00%

2,107 16,923 8,723

4,562 19,576 8,724

Liabilities Liabilities arising from deposits Borrowings Other liabilities

1.00% 1.00% -%

26,050 1,266 -

31,200 2,587 -

436

(925)

Impact on net interest income

Kreditna banka Zagreb d.d.

59

Notes to the financial statements (continued) For the year ended 31 December 2015

34. Foreign exchange risk

As at 31 December 2015, the Bank had the following foreign exchange position:

EUR

USD

Other foreign currenci es

41,500

1,021

1,450

43,971

525,419

569,390

143,384

26,806

35,164

205,354

-

205,354

-

-

-

-

12,156

12,156

1,277,419

1,630

-

1,279,049

393,886

1,672,935

38,728

28,893

-

67,621

-

67,621

392,397

96,232

-

488,629

292,393

781,022

Intangible assets

-

-

-

-

26,789

26,789

Tangible assets

-

-

-

-

71,013

71,013

Other assets

15,731

1,277

1

17,009

46,390

63,399

Total assets

1,909,159

155,859

36,615

2,101,633

1,368,046

3,469,679

1,852,963

152,640

34,676

2,040,279

865,413

2,905,692

24,661

-

-

24,661

101,839

126,500

-

-

-

-

82,000

82,000

42,868

2,739

512

46,119

26,383

72,502

-

-

-

-

2,150

2,150

1,920,492

155,379

35,188

2,111,059

1,077,785

3,188,844

(11,333)

480

1,427

(9,426)

290,261

280,835

22,749

5,943

-

28,692

182,691

211,653

Total foreign currencies

HRK

Total

Assets Cash and balances with Croatian National Bank Placements with other banks Assets at fair value through P&L Loans to customers Held-to-maturity investments Available-for-sale investments

Liabilities Deposits from customers Borrowings Subordinated instruments Other liabilities Provisions for contingent liabilities Total liabilities Net foreign exchange position Contingent liabilities and commitments

Kreditna banka Zagreb d.d.

60

Notes to the financial statements (continued) For the year ended 31 December 2015

34. Foreign exchange risk (continued)

As at 31 December 2014, the Bank had the following foreign exchange position:

EUR

USD

Other foreign currenci es

45,707

1,141

995

47,843

803,024

850,867

374,945

56,702

23,507

455,154

-

455,154

1,822

-

-

1,822

12,019

13,841

1,390,745

1,136

-

1,391,881

532,558

1,924,439

Held-to-maturity investments

192,900

-

-

192,900

166,558

359,458

Available-for-sale investments

168,929

70,222

-

239,151

256,147

495,298

Intangible assets

-

-

-

-

28,117

28,117

Tangible assets

-

-

-

-

72,381

72,381

Other assets

9,729

1,053

-

10,782

55,764

66,546

Total assets

2,184,777

130,254

34,502

2,339,533

1,926,568

4,266,101

-

-

-

-

-

-

2,124,223

126,946

29,481

2,280,650

1,315,738

3,596,388

29,656

-

-

29,656

228,865

258,521

-

-

-

-

73,000

73,000

38,680

1,768

411

40,859

24,691

65,550

-

-

-

-

5,316

5,316

2,192,559

128,714

29,892

2,351,165

1,647,610

3,998,775

Net foreign exchange position

(7,782)

1,540

(5,390)

(11,632)

278,958

267,326

Contingent liabilities and commitments

50,893

4,629

55,522

111,044

222,816

333,860

Total foreign currencies

HRK

Total

Assets Cash and balances with Croatian National Bank Placements with other banks Assets at fair value through P&L Loans to customers

Liabilities Deposits from banks Deposits from customers Borrowings Subordinated instruments Other liabilities Provisions for contingent liabilities Total liabilities

Kreditna banka Zagreb d.d.

61

Notes to the financial statements (continued) For the year ended 31 December 2015 34. Foreign exchange risk (continued)

The table below presents the sensitivity of the Bank's net assets and profit or loss to fluctuations in the CNB's middle exchange rate. If the same assumed percentage would have been applied to the decrease in the middle exchange rate of the CNB, the impact on profit or loss by individual currency on a net basis would have been equal and opposite, that is, the total impact on all currencies would have been charged to 2013. The result of the exchange rate changes is reflected in the income statement as foreign exchange gains or losses.

Currency as at 31 December 2015

EUR USD Other currencies

Currency as at 31 December 2014

EUR USD Other currencies

Kreditna banka Zagreb d.d.

Assumed increase in CNB's middle exchange rate

0.15% 0.92%

Assumed increase in CNB's middle exchange rate

0.18% 0.92%

Effect on income statement

Effect on income statement

Effect on income statement

Assets

Liabilities

Net

2,882 1,419 317

3,760 2,136 594

(879) (718) (277)

Effect on income statement

Effect on income statement

Effect on income statement

Assets

Liabilities

Net

15,698 211 274

18,540 316 451

(2,842) (105) (177)

62

Notes to the financial statements (continued) For the year ended 31 December 2015

35. Fair value of financial assets and liabilities Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.

Financial assets at fair value through profit or loss and available-for-sale financial assets are measured at fair value. The Bank categorises fair values by levels in line with the following hierarchy: 

Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).



Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).



Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

The following table presents assets that are measured at fair value at:

Level 1

Level 2

Level 3

Total

12,156

-

-

12,156

Available-for-sale financial assets

781,022

-

-

781,022

Total

793,178

-

-

793,178

13,841

-

-

13,841

Available-for-sale financial assets

495,298

-

-

495,298

Total

509,139

-

-

509,139

31 December 2015 Assets Financial assets at fair value through profit or loss

31 December 2014 Assets Financial assets at fair value through profit or loss

What follows is a summary of the major methods and assumptions used in estimating the fair values of financial instruments not measured at fair value.

Kreditna banka Zagreb d.d.

63

Notes to the financial statements (continued) For the year ended 31 December 2015 35. Fair values of financial assets and liabilities (continued) Loans

The fair value of loans is calculated based on discounted expected future principal and interest cash flows. Loan repayments are assumed to occur at contractual repayment dates, where applicable. For loans that do not have fixed repayment dates repayments are estimated based on experience from previous periods when interest rates were at levels similar to current levels, adjusted for any differences in interest rate expectation. Expected future cash flows are estimated considering credit risk and any indication of impairment. Expected future cash flows for homogeneous categories of loans, such as residential mortgage loans, are estimated on a portfolio basis and discounted at current rates offered for similar loans to new borrowers with similar credit profiles. The estimated fair values of loans reflect changes in credit status since the loans were originated and changes in interest rates in the case of fixed rate loans. As the Bank has a very limited portfolio of loans with fixed rates and longer-term maturity, the fair value of loans is not significantly different from their carrying value. Deposits from banks and customers For demand deposits and deposits with no defined maturities, fair value is taken to be the amount payable on demand at the balance sheet date. The estimated fair value of fixed-maturity deposits is based on discounted cash flows using rates currently offered for deposits of similar remaining maturities. The length of relationship with depositors is not taken into account in estimating the fair value. As most of the Bank’s deposits are given at variable rate, there is no significant difference between the fair value of these deposits and their carrying amount. Borrowings As most of the Bank's long-term borrowings carry a variable interest rate, there is no significant difference between their carrying and fair value.

Kreditna banka Zagreb d.d.

64

Notes to the financial statements (continued) For the year ended 31 December 2015

36. Related party transactions

In selecting a methodology to allocate related party transactions, the following is a presentation of related party transactions on the basis of equity and economic relations with the Bank. The group includes the following companies: Euroherc osiguranje d.d., Jadransko osiguranje d.d., Sunce osiguranje d.d., Agram life osiguranje d.d., Euroleasing d.o.o, Eurodom d.o.o, Euroduhan d.d., Euro Daus d.d., Automehanika servisi d.d., Agram Invest d.d., Agram Yachting d.o.o., Auto-Dubrovnik d.d., Euroagram TIS d.o.o, Agram brokeri d.d., Autocentar Vrbovec d.o.o, Poliklinika Sunce d.d., Auctor d.o.o., Locusta fond Value IV, Autoslavonija d.d., Istratrans STP d.o.o, Ustraj d.o.o, Lider press d.d. and Automehanika servisi zastupanje d.o.o. The table below shows the transactions with the above related parties and the Management of the Bank: Management Board

Related parties

2015

2014

2015

2014

443 763 (207) 999

772 (329) 443

257,488 195,664 (348,012) 105,140

183,428 210,535 (136,475) 257,488

88

12

9,407

20,178

842 4,941 (238) 5,545

497 445 (100) 842

168,409 184,299 (204,178) 148,530

225,021 493,941 (550,553) 168,409

169

1

5,200

7,373

6 (973)

6 (694)

6,230 16,209 -

7,151 37,951 -

93

18

15,637

27,329

Total expenses

169

(1)

21,407

45,324

Dividends paid

-

-

-

-

5 5 227 227 175 175

7 7 49 49

9,063 3,446 1,767 3,850 317 3,197 336 8,743 5,939 2,804

8,451 3,026 5,425 2,669 1,205 880 584 16,177 10,034 6,143

Type of transaction Loans given Opening balance at 1 January Additions Loans repaid Closing balance at 31 December Interest income Deposits and loans received Opening balance at 1 January New deposits received Deposits repaid Closing balance at 31 December Interest expense Fee and other income Fee and other expenses Salary and fee expenses Total income

Fees and other receivables Interest and fees receivable Other receivables Liabilities Interest payable Trade payables Liabilities for credit card operations Off-balance-sheet items Issued guarantees Unused lines of credit

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Notes to the financial statements (continued) For the year ended 31 December 2015 In the period from 1 January to 31 December 2015, remunerations to the Supervisory Board were paid in the amount of HRK 304 thousand (2014: HRK 315 thousand).

37. Commitments for operating lease of vehicles and equipment

As at 31 December 2015, the Bank has 3 operating lease agreements for vehicles (2014: 4 lease agreements). Annual commitments under operating leases are as follows: 31 December 2015

31 December 2014

Within one year

121

257

From 2 to 5 years

115

70

236

327

38. Commitments for business premises leases

As at 31 December 2015, the Bank has 24 lease agreements for business premises (31 December 2014: 22 lease agreements). Contracted annual lease liabilities for business premises are as follows: 31 December 2015

31 December 2014

6,499

8,571

From 2 to 5 years

25,996

32,844

From 5 to 10 years

32,495

41,055

64,990

82,470

Within one year

39. Regulatory measures In previous periods, the Bank's operations were subject to the direct supervision of the Croatian National Bank. The Bank carried out all measures prescribed by the regulator within the prescribed deadlines.

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Notes to the financial statements (continued) For the year ended 31 December 2015

40. Events after the balance sheet date

On 19 February 2016, at the meeting of the Council of the Croatian National Bank new two-year mandates of the Bank’s Management Board were confirmed. As of 19 February 2016, mandate were given to: 

Boris Zadro, President of the Management Board



Nataša Jakić Felić , Member of the Management Board

On 24 February 2016, Mr. Silvije Orsag was appointed as the new member of the Bank’s Supervisory Board.

41. Approval of the financial statements These financial statements were approved by the Management Board on 30 March 2016.

Signed on behalf of the Management Board:

President of the Management Board

Member of the Management Board

Boris Zadro

Nataša Jakić Felić

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