Hrvatska Poštanska Banka d.d.

Annual Report (ESEF) • Mar 31, 2022

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TRANSLATION HRVATSKA POŠTANSKA BANKA P.L.C. Annual report for 2021 Zagreb, March 2022 Note: Report in PDF format is unofficial report. Official report is publicly available in European Single Electronic Format This page is intentionally left blank. 1 Content Introduction 3 Mission, vision and corporative values 4 Key Financial Indicators 5 Statement by the president of the Management Board 6 Management Board of Hrvatska Poštanska Banka p.l.c. 9 Macroeconomic environment 11 Business environment 15 Management Board Statement of Condition of HPB p.l.c. 17 Internal control system and control functions 46 Development plan of Hrvatska poštanska banka p.l.c. 53 Non-financial report for 2021 58 Report on Application of the Corporate Governance Code 66 Hrvatska poštanska banka organizational structure 72 Human resource management in HPB 76 Subsidiaries operations 78 Responsibilities of the Management Board for the preparation and approval of the Annual financial statements 80 Independent Auditor’s Report 82 Consolidated Statement of Financial Position 90 Consolidated Profit and Loss Account 91 Consolidated Statement of Other Comprehensive Income 92 Consolidated Statement of Changes in Equity and Reserves 93 Consolidates Cash Flow Statement 94 Separate Statement of Financial Position 95 Separate Profit and Loss Statement 96 Separate Statement of Other Comprehensive Income 97 Separate Statement of Changes in Equity and Reserves 98 Separate Cash Flow Statement 99 Notes to the Financial Statements 100 Regulatory Financial Statements of Croatian National Bank 222 Branch network and contacts 236 2 This page is intentionally left blank. 3 Introduction The Annual report includes a summary of financial information, description of operations and audited financial reports together with the independent auditor's opinion for the year ended December 31, 2021, in English language. Original and official Annual report is published in Croatian. Legal status The Annual report includes the annual financial reports prepared in accordance with statutory accounting requirements for banks in Republic of Croatia and audited in accordance with International Standards on Auditing. The Annual report has been prepared in accordance with the Accounting Act and the Companies Act that require reporting to shareholders at the annual shareholders' meeting of the Management Board. According to the Accounting Law the statutory financial reports are report of financial position, PNL report with a report of comprehensive income, report of changes in equity, cash flow report and notes to the financial reports, and the Companies Act, in accordance Article 250.a and 250.b, prescribes the obligation to submit an annual report on the state of the Bank, and other members of HPB Group. Abbreviations In the Annual report Hrvatska Poštanska Banka p.l.c. is referred to as «the Bank» or «HPB», Hrvatska Poštanska Banka Group is referred to as «the HPB Group» or just «the Group», the Croatian National Bank is referred to as «the CNB» or «HNB», Republic of Croatia is referred to as «RH» or «HR» and the Croatian Bank for Reconstruction and Development is referred to as «the CBRD» or «HBOR» Exchange rates For the purpose of translation of foreign currencies into Croatian Kuna, the following exchange rates of the CNB were used: December 31, 2021 EUR 1 = HRK 7.517174 USD 1 = HRK 6.643548 December 31, 2010 EUR 1 = HRK 7.536898 USD 1 = HRK 6.139039 4 s Mission and vision MISSION We create conditions for a better life in Croatia. VISION A Croatian-owned bank with relevant market influence that cares best for clients, shareholders and the community. 5 Key Financial Indicators HRK million Group 2021 2020 2019 2018 2017 Basic Indicators Profit for the Year 203 183 147 156 8 Operating Profit 313 291 344 308 373 Total Assets 27,833 25,464 23,773 23,082 20,048 Loans to Customers 14,252 14,723 13,334 11,529 11,141 Received Deposits 23,441 21,207 20,063 20,143 17,208 Share Capital and Reserves 2,657 2,479 2,377 2,016 1,911 Other Indicators Return on Equity 16.68% 15.10% 12.09% 12.84% 0.65% Return on Assets 0.73% 0.72% 0.62% 0.68% 0.04% Operating Expenses 1 to Operating Income Ratio 62.36% 64.10% 61.36% 61.98% 55.19% HRK million Bank 2021 2020 2019 2018 2017 Basic Indicators Profit for the Year 202 182 144 152 8 Operating Profit 312 289 323 303 372 Total Assets 27,833 25,464 23,773 21,233 19,777 Loans to Customers 14,252 14,723 13,339 11,062 10,979 Received Deposits 23,450 21,215 20,071 18,371 16,952 Share Capital and Reserves 2,650 2,473 2,370 2,003 1,905 Other Indicators Return on Equity 16.64% 14.99% 11.84% 12.50% 0.69% Return on Assets 0.73% 0.72% 0.60% 0.72% 0.04% Operating Expenses 1 to Operating Income Ratio 62.03% 63.78% 61.27% 60.14% 54.37% Regulatory Capital 2,631 2,312 2,209 1,777 1,654 Capital Adequacy 25.65% 21.82% 20.17% 17.86% 18.10% 1 General and Administrative Expenses, Depreciation and Amortization and Other Cost 6 Statement by the president of the Management Board Statement from the President of the Management Board of the Hrvatska poštanska banka p.l.c. Esteemed shareholders, clients and partners, dear colleagues, I am pleased to be able to present you, as the President of the Management Board of Hrvatska poštanska banka, the business results and other successes we have achieved in 2021. Managing a complex system such as a credit institution includes not only the attention of a good businessman, ie compliance with regulations and good practice, but also agility, speed of decision-making and the culture of achieving goals. Accordingly, in the year in which HPB marked its thirtieth anniversary, the best net financial result since its establishment was achieved, its capitalization was strengthened to levels that position it among the top of the banks in Croatia, thus demonstrating that we can successfully respond to all operational and the strategic challenges we face. I cannot stress enough the importance of the results achieved by the team I lead, because it was achieved in the second year of the global pandemic, which hampered the business of all economic entities, but also influenced consumer behavior, to which we responded affirmatively and ambitiously. "New normal" and new ways of working are now a permanent part of HPB's corporate culture, ie a new business reality that benefits both clients and employees, which is reflected, among other things, in the Bank's results. Comment on financial results of Hrvatska poštanska banka p.l.c. Based on prudent risk management, determining market position, growth of almost all income categories and rational cost management, the Bank continued with positive trends in 2021, and for the second year in a row achieved a record net profit in its corporate history of HRK 202 million, increase by 11 percent or HRK 20 million year-on-year. Total net operating income amounted HRK 821 million, which represent an increase of 2.8 percent compared to the previous year. In the income structue, the increase in net commissions and fees by 9.4 percent to the level of HRK 193 million stands out. In contrast, net interest income was reduced by 2.5 percent under the pressure of a long- term decline in interest rates, with the adjustment of pricing policy and the consequent reduction in interest rates paid by the Bank on sources of funds (33.3 percent) mitigated placements (by 5.0 percent). Other non-interest income consist one tenth of total income and relates primarily to the Bank's gains on the increase in securities prices in the trading book due to the accommodative monetary environment in the country and the world. Despite inflationary pressures, rising energy prices, as well as initiated development and regulatory projects and related costs of services and labor, the Bank curbed the growth of operating costs in 2021, operating costs decreased by 0.2 percent to HRK 509 million, which is the lowest cost level from 2018. The previously described dynamics of net income and operating expenses resulted in an operating profit of HRK 312 million, and the C/I business efficiency indicator, which amounts to 62.0 percent (63.8 percent in 2020), was significantly improved. New working methods and risk management measures initiated in the fourth quarter of 2019 are also indicated in 2021, which is primarily reflected in HRK 56 million lower value adjustments of placements and other assets, with NPL coverage of 61.1 percent (72.1 percent excluding 100% gov. guaranteed exposure). Comment on financial position of Hrvatska poštanska banka p.l.c. At the end of 2021, the Bank's assets amounted to HRK 27.8 billion, with a year-on-year increase of HRK 2.4 billion or 9.3 percent, while reducing the risk exposure measured by RWA by 3.2 percent, thus providing additional internal contribution to the Bank's capital strenghtening. Total loans to customers fell by HRK 471 million, which almost entirely refers to the segment of the central government where there was a net return of HRK 685 million, as well as a simultaneous slight net return in some large companies with decrease of HRK 148 million and SMEs for HRK 96 million. On the other hand, the retail loan portfolio increased by HRK 418 million, primarily due to the growth of housing loans by 15.5 percent due to the 7 Bank's significant participation in the APN program of subsidised housing loans, where HPB significantly exceeds its market share and in the previous, sixth round approved a new HRK 270 million. In 2021, HPB significantly strengthened its liquidity position and has HRK 6.2 billion in cash and receivables from the CNB and other banks, as well as HRK 5.2 billion in marketable securities. Thus, the LCR indicator (liquidity coverage ratio) remained at a stable level of 183 percent, while the NSFR (net stable funding ratio) was at a level of 174.4 percent. Traditionally good perception and trust that HPB has among its depositors is reflected in the continued growth of deposits, which increased by HRK 2.3 billion despite the environment of extremely low interest rates. The Bank's capital at the end of 2021 amounted to HRK 2.7 billion, or over HRK 1,300 per share, where the increase in capital in 2021 primarily relates to net profit, which mitigated the effects of reduced reserves for the fair value of the portfolio valued through other comprehensive income. The increase in capital on the one hand and the reduction in risk exposure on the other, resulted in a robust capital adequacy ratio of 25.7 percent, which ranks HPB among the top credit institutions in the domestic market. Comment on business operations of HPB Group and subsidiaries of HPB p.l.c. Apart from the parent company, Hrvatska poštanska banka, the financial results of the HPB Group for 2021 were contributed by HPB Invest d.o.o., a UCITS fund management company and HPB-nekretnine d.o.o., a company specializing in real estate. As HPB, as the parent company of the Group, accounted for the largest part of its balance sheet, the Group's net profit is almost identical to the parent company's profit, amounting to HRK 203 million. However, both subsidiaries contribute to the Group's positive financial results. Accordingly, HPB Invest generated a net profit of HRK 832 thousand, and HPB-nekretnine a net profit of HRK 586 thousand. HPB's business operations in 2022 The global pandemic of the COVID-19 disease required us to make extremely fast decisions, change the paradigm in management and business and maximum commitment to maintaining the quality of service and business continuity in the conditions of the "new normal". This 2022 year began with no less demanding aggravation of the geopolitical situation in Ukraine. The economic consequences of the current situation in Ukraine are spilling over into the domestic market, and the Bank was ready to react and acquire Sberbank d.d. Croatia, which is threatened with a certain collapse due to sanctions imposed on Russian entities, and it will continue to operate within the HPB Group as Nova hrvatska banka. In the coming period, we will be committed to the development of the HPB Group and a proactive market approach to continue to simplify operations based on digitalization and modern IT architecture, all in order to optimize the return on investment of the Bank and shareholders and meet customer needs with focus on those generations that are now entering to labor market. Accordingly, we are entering 2022 with a redefined strategic business framework, in which sustainable business together with sustainability goals in all three ESG elements is one of the most important pillars of development. In parallel, we will continue to strive for best practice in managing all categories of risks, both financial and sustainability risks, to increase the value and capitalization of the Bank, maintain the trust of depositors and other creditors who have entrusted their funds to us and increase the quality of services and benefits from HPB Group customers. I am proud that the team I lead consists of ambitious and motivated experts in all parts of the banking business, and I sincerely thank them for the exceptional commitment they give every day to the Bank and our clients. I am fully convinced that we can successfully respond to all the challenges ahead. Marko Badurina CEO of HPB p.l.c. 8 This page is intentionally left blank. 9 Management Board of Hrvatska Poštanska Banka p.l.c. Note: organizational jurisdiction as of December 31, 2021 Sustainability office started operating on January 1, 2022 Anto Mihaljević Member of the Management Board mr. sc. Marko Badurina President of the Management Board Ivan Soldo Member of the Management Board Large Companies and Public Sector Financial Markets Compliance Division Internal Audit Management Board Office HR Legal affairs Strategic development Sustainability Office Retail Direct Channels Banking SME Organization and Project Management Marketing Quality Service Management Business Support Cred Risk Management Strategic Risk and Risk Control Collection Management Financial Management ALM Management Board Area of responsibility 2019 – HPB d.d. President of the Management Board 2017 – Sberbank d.d. Advisor to the Business Strategy Board for Financial Markets, Investment Banking, Financial Institutions 2013 – Sberbank d.d. Deputy Director of the Financial Markets Division 2012 – Volksbank d.d. Deputy Director of the Financial Markets Division 2007 – Volksbank – Liquidity and Trading Management 2019 – HPB d.d. Member of the Management Board 2019 – Kentbank d.d. Director for Retail 2017 – Allianz Zagreb d.d. Director of Sales Support 2015 – Zagrebačka banka d.d. Sales Management Director for Individual Banking Clients 2010 – Zagrebačka banka d.d. The Director of the Region Zagreb 2005 – Zagrebačka banka d.d. The Director of the Region Sjeverozapadna Hrvatska 2019 – HPB d.d. Member of the Management Board 2018 – Raiffeisen Bank International AG, Executive Director, Risk Management of Financial Institutions and States 2015 – Raiffeisen Bank International AG, Director, Risk Management of Financial Institutions and States 2013 – Raiffeisen Bank International AG, Risk Manager, Senior Risk Manager 2011 – Raiffeisen Bank International AG Analitičar, Senior Analyst banks and Financial Experience 10 This page is intentionally left blank. 11 Macroeconomic environment Gross domestic product Decomposition of GDP growth by components 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 GDP – real growth rate -2.3% -0.4% -0.3% 2.5% 3.5% 3.4% 2.9% 3.5% -8.1% 10.4% GDP – nominal growth rate -0.9% 0.4% -0.2% 2.6% 3.5% 4.6% 5.0% 5.5% -8.2% 14.0% GDP deflator 1.4% 0.8% 0.1% 0.1% -0.1% 1.2% 2.1% 2.0% -0.1% 3.6% Contribution to GDP growth - household expenditure -1.5% -1.0% -1.5% 0.2% 1.8% 1.8% 1.9% 2.4% -3.1% 6.0% - government expenditure -0.2% 0.2% 0.3% -0.2% 0.2% 0.4% 0.5% 0.7% 0.8% 0.7% - gross investment into fixed capital -0.9% 0.2% -0.4% 1.5% 1.0% 0.3% 0.7% 1.9% -1.3% 1.6% - net exports 0.4% -0.3% 1.5% 0.4% 0.3% -0.7% -1.9% 0.0% -5.1% 6.8% - stock exchange and other -0.2% 0.6% -0.2% 0.6% 0.3% 1.6% 1.6% -1.5% 0.5% -4.7% Inter-annual growth of real GDP components - household expenditure -2.4% -1.6% -2.5% 0.4% 3.1% 3.1% 3.3% 4.1% -3.1% 6.0% - government expenditure -0.9% 0.7% 1.3% -0.9% 1.0% 2.2% 2.4% 3.3% 4.1% 3.0% - gross investment into fixed capital -4.6% 1.0% -2.3% 8.4% 5.0% 1.5% 3.8% 9.8% -6.1% 7.6% - export of goods and services -1.5% 2.5% 7.4% 10.3% 7.0% 6.9% 3.7% 6.8% -22.7% 33.3% - import of goods and services -2.4% 3.2% 3.5% 9.4% 6.5% 8.4% 7.5% 6.5% -12.3% 14.7% Source: CBS, www.dzs.hr (MSI Bruto domaći proizvod, obrazac 12.1.1.4.; temporary data for 2020 and 2021), analysis by HPB After an extremely strong decline in the total value of domestic product in 2020, in 2021 a record GDP growth of 10.45% compared to the previous year was achieved. Although this increase is partly influenced by the base period, measured by constant prices, the value of domestic gross domestic product in 2019 was exceeded. Net exports made the largest contribution to real GDP growth with 6.84% or HRK 51.4 billion measured at constant prices, also exceeding the value of exports in 2019. The next component that reacted most strongly after the mitigation of epidemiological measures is household consumption that in 2021 increased by 9.96% compared to the previous year. Gross fixed capital formation has returned to the pre-crisis positive trend and is expected to make a significant contribution to real GDP growth due to investments by the construction sector, which is additionally engaged in reconstruction and continuously growing demand for residential real estate. The continuation of positive economic momentum in the future will be predominantly influenced by geopolitical risks, the end of the pandemic and the accelerated rise in prices. 12 Assuming that these risks do not materialize to a significant extent, strong domestic and foreign consumption, ie good tourism results, would continue to be the main drivers of economic development. In the medium term, a significant contribution of exports of goods and services is expected due to the positive effects of the introduction of the EUR and stronger integration of domestic production capacities within the European common market. Prices Consumer price index (y-o-y changes in %) The y-o-y rate of change in prices of selected components of the index of consumer prices Source: CNB, www.hnb.hr (forms h-j1 i h-j2), analysis by HPB Source:CBS, www.dzs.hr, form 13.1.1., analysis by HPB The core price index, which stood at 1.6% in 2021, is at its highest level since 2013 and confirms the breadth of pressures on price growth due to disruptions in supply chains, which are likely to continue in 2022, after which they are expected to curb. through balancing demand, normalizing commodity flows and inflationary expectations. Accordingly, the consumer price index of 2.6% is at its highest level since 2012, but at the same time far lower than recorded in the 1990s and 2000s, when it was many times higher. Individual growth within the consumer basket was recorded in the transport item with 8.3%, however, due to the total share in the consumer basket of food and non- alcoholic beverages with 1.6% and housing and energy costs with the same percentage significantly affect total living costs. Rising prices of highly bulky goods such as alcoholic beverages and tobacco have further increased the value of the consumer basket. The only item that recorded a minimal decrease was clothing and footwear with 0.1%. (1.1) 1.2 1.5 0.8 0.1 2.6 0.4 1.4 0.8 1.0 1.0 1.6 2016 2017 2018 2019 2020 2021 Consumer price index Core inflation 2016 2017 2018 2019 2020 2021 Consumer price index – total -1,1% 1,1% 1,5% 0,8% 0,1% 2,6% Food and non-alcoholic beverages (0,5%) +2,9% +1,0% (0,1%) +1,9% +1,6% Alcoholic beverages and tobacco +0,4% +2,4% +2,8% +4,4% +3,6% +5,9% Clothing and footwear +0,2% +0,8% (1,3%) (0,9%) (0,6%) (0,1%) Housing, water, electricity, gas and other fuels (2,5%) (2,7%) +2,7% +3,1% (1,0%) +1,6% Furnishings, household equipment and routine household maintenance +0,2% +0,1% +0,4% +0,8% +0,3% +1,0% Health +1,8% +1,1% +1,4% (0,9%) +1,2% +0,8% Transport (4,1%) +3,3% +3,5% (0,3%) (4,3%) +8,3% Communication (2,4%) (1,6%) (0,2%) (0,2%) +1,5% +1,1% Recreation and culture (0,6%) +0,8% +0,9% +0,7% +0,1% +1,7% Education +0,0% +0,8% +0,4% +0,8% (0,4%) +0,5% Restaurants and hotels +1,3% +5,1% +3,0% +3,0% +1,5% +2,9% Miscellaneous goods and services +0,4% +0,3% +0,7% +0,3% +2,0% +0,9% Goods (1,4%) +1,4% +1,6% +0,6% (0,4%) +2,9% Services (0,1%) +0,4% +1,2% +1,3% +1,7% +1,7% 13 Employment and salaries Comparative movement of number and gross income of employees Source: CNB, www.hnb.hr (Bulletin, seasonally adjusted time series), analysis by HPB After the outbreak of the economic crisis at the end of 2008, employment in Croatia declined until 2014. During this period, the number of employees decreased from a maximum of 1.64 million (July 2008) to 1.39 million (February 2014). However, at the beginning of the economic recovery, the number of employees increased continuously, reaching a slightly lower level of employment at the peak of recovery (July 2019 = 1.60 million) than in the pre-crisis 2000s, due to the changed structure of the economy and labor force. underemployed population in EU countries and other developed countries with labor needs. Positive trends have been interrupted by the outbreak of the COVID-19 pandemic in 2020. However, the effects of the pandemic on the reduction of the number of employees were limited, primarily due to the timely reaction of the Government, which started the job preservation program in the first quarter of 2020. In absolute terms, the average number of employees in 2020 (= 1.54 million) was lower by only 18 thousand than the pre-crisis average in 2019, and over 100 thousand workers higher than in 2014 as the last year of the previous recession = 1 , 42 million). The breadth of coverage of these measures, supported by the repeated implementation of income tax relief, combined with a very low inflation rate in 2020, has affected the growth of both nominal and real levels of gross wages. In 2021, due to the prolonged impact of the omicron variant of the COVID-19 virus, which prolonged the total duration of the pandemic, the Croatian government was forced to continue with the job preservation program, which with strong economic activity affected the growth of total staff. According to incomplete data for 2021, nominal gross wages continued to grow, as did the total number of employed persons. 6.000 7.000 8.000 9.000 10.000 11.000 1100,00 1200,00 1300,00 1400,00 1500,00 1600,00 January March May July September November January March May July September November January March May July September November January March May July September November January March May July September November January March May July September November January March May July September November January March May July September November January March May July September November January March May July September November January March May July September November 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 No of employees in ths (left axis) Nominal gross salaries (right axis) Real gross salaries (right axis) in HRK 14 Public finance As in 2020, and under the pressure of very high costs of neutralizing the negative effects of the COVID-19 pandemic, in 2021 the trend of negative difference in total revenues over total consolidated general government expenditures continued. In the first nine months of 2021, consolidated general government revenues amounted to HRK 143.9 billion, which is 12.37%, or HRK 15.8 billion more than in the same period last year. The growth of income is in line with the growth of economic activity in 2021, ie the increase in household consumption and the relatively successful tourist season. The mentioned cost of mitigating the consequences of the pandemic resulted in an increase in total expenditures in 2020 by 8.3% compared to the previous year, and in the first three quarters of 2021 total expenditures were 10% higher than in the same period in 2020. As in the first three quarters of 2021, the costs of social benefits of HRK 50.7 billion and subsidies in the amount of HRK 9.4 billion accounted for 37% of total expenditures. The next significant item was recorded in the employee benefit account of HRK 40 billion, or 8% more than in the same period last year. The net increase in indebtedness for the first nine months of 2021 amounted to HRK 17.5 billion, which continues the trend of the budget deficit that was interrupted in the period 2017-2020. Difference between total revenues and total expenses of the consolidated government (in HRK million) Source: CNB, www.hnb.hr (general government nonfinancial accounts, form h-i_1), analysis by HPB (12.500) (8.500) (4.500) (500) 3.500 7.500 11.500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 15 Business environment Number of credit institutions in the Croatian market due to market consolidation and discontinued operations of smaller banks continuously decreasin. The onset of the COVID-19 crisis in 2020 slowed down the process of consolidation of the sector in terms of the number of institutions, which did not change in 2021. Accordingly, as of 31.12.2021 20 commercial banks and 3 housing savings banks operated on the market. In 2021, the concentration of the sector, measured by the market share of the top 5 banks, increased from the already high 74% in 2017 to over 80% at the end of 2019, which further increased to 82.6% in 2021. Herfindahl- Hirschman's index of concentration of credit institutions' assets, after several years of continuous slight growth, and due to realized business combinations in 2018 and 2019, exceeded the level of 1,600 points, which indicates a moderately concentrated market. The HHI index also rose slightly by an additional 6 points in 2021, due to stronger organic growth in volume and consequent growth in market share in large banks. Number od credit institutions and Herfindahl-Hirchman indeks (HHI) of Concentration of Assets of Credit Institutions Source: CNB, www.hnb.hr (audited indicators of credit institutions from 2008. to 2019, Selected indicators of the structure, concentration and performance of credit institutions as of 31.12.2021), analysis by HPB A characteristic of the markets in the CEE region is that foreign-owned banks have a dominant share, with Croatia being no exception. Thus, foreign owned credit institutions represent 91% of total assets of the credit institutions sector, dominated by Italian, Austrian and Hungarian banks from the European Union. HPB is one of the two remaining state-owned banks and as of December 31, 2021. ranked sixth among credit institutions in the Republic of Croatia by assets, following the successful merger of Jadranska banka d.d. Šibenik and HPB-Stambena štedionica d.d., with a market share of 5.56 percent. Remaining State Bank - CROATIA BANK d.d. accounts for 0.37% of system assets, whereby domestic state-owned banks account for 5.93% of the share, while domestic privately owned banks account for 3.45% of the share in the assets of credit institutions. After 31.12.2021. year, HPB acquired a 100% ownership share in Sberbank d.d. Zagreb over which the resolution procedure has been opened. Completion of the resolution process is expected in 2022, when Sberbank d.d. continue to operate as Nova hrvatska banka d.d. The total assets of the sector increased by a significant HRK 43.4 billion or 9.4% in 2021. Such strong growth compared to the pandemic year 2020 is the result of the continuation of the expansive monetary environment and measures of the Croatian National Bank, while maintaining the stability and extremely high capitalization of the banking sector. Accordingly, most credit institutions operating in Croatia recorded an increase in assets, with liquidity instruments growing the most (mostly deposits with the CNB) and loans and advances while maintaining asset quality constant (share of non-performing loans - NPLs). at the end of 2021 it was 4.33%, and at the end of 2020 it was 5.42%. According to unaudited data, credit institutions operated with a net profit of HRK 5.6 billion in 2021, which is twice as much as the revenues generated in 2020. The recovery of overall economic activity had a positive impact on all banks and housing savings banks operating in the Croatian market, as they all achieved a positive difference in income and expenditure. Achieved revenue recovery, which was lost during the lockdown period, returned efficiency indicators to the level that was common in the pre-pandemic periods. Reduced operating costs have improved the cost-effectiveness indicator, which is returning to an average value below 50% with a tendency to further decrease. In 2021, the CNB's supervisory expectations and guidelines regarding the ban on profit payments were still in force, which had the effect of further capital strengthening of the financial sector. As a result of such measures, regulatory capital adequacy reached 25.58% at the end of 2021. The liquidity coverage ratio indicates very strong liquidity and stability of the banking system in Croatia. 33 32 32 31 30 29 27 27 25 24 21 20 20 20 5 5 5 5 5 5 5 5 5 5 4 3 3 3 1 2 1 1 1 1 1 1 1 1 700 900 1.100 1.300 1.500 1.700 0 10 20 30 40 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Banks Housing saving banks Saving banks HHI (right axis) No. of credit institution 16 Key performance indicators of credit institutions (in %) 2016 2017 2018 2019 2020 2021 Return on assets (ROA) 1.23 0.85 1.21 1.37 0.61 1.17 Return on equity (ROE) 9.24 5.91 8.40 9.82 4.43 8.74 Cost-to-income ratio (CIR) 51.40 48.98 48.05 46.32 54.97 48.76 Non-performing loans ratio (NPL) 12.07 8.73 7.49 5.47 5.43 4.33 Non-performing loans coverage 63.62 61.64 60.41 68.01 64.05 63.17 Total capital ratio 22.97 23.80 23.14 24.80 24.91 25.58 Liquidity coverage ratio (LCR) 193.98 190.83 164.38 173.71 181.94 202.48 Source: CNB, www.hnb.hr (Data on credit institution operations as at 31 December 2021, preliminary unaudited), analysis by HPB Credit institutions – overview of selected indicators of 2021 and ranking of a top-10 banks by category Source: CNB, www.hnb.hr (Data on credit institution operations as at 31 December 2021, preliminary unaudited), analysis by HPB Market share by assets Capital Liquidity Rank Name of the institution Share in total assets (%) Rank Name of the institution Capital adequacy (%) Rank Name of the institution LCR (%) 1 Zagrebačka banka d.d. 26.45 1 PBZ stambena štedionica d.d. 53.89 1 Raiffeisen stambena štedionica d.d. 1,908.30 2 Privredna banka Zagreb d.d. 20.90 2 Zagrebačka banka d.d. 35.60 2 J&T banka d.d. 1,228.88 3 Erste&Steiermärkische Bank d.d. 16.52 3 Addiko Bank d.d. 33.91 3 Samoborska banka d.d. 796.41 4 OTP banka d.d. 9.89 4 Privredna banka Zagreb d.d. 28.63 4 Istarska kreditna banka Umag d.d. 633.65 5 Raiffeisenbank Austria d.d. 8.30 5 Hrvatska poštanska banka d.d. 25.65 5 Wüstenrot stambena štedionica d.d. 581.57 6 Hrvatska poštanska banka d.d. 5.56 6 Samoborska banka d.d. 22.82 6 PBZ stambena štedionica d.d. 541.01 7 Addiko Bank d.d. 3.38 7 J&T banka d.d. 26.17 7 Karlovačka banka d.d. 467.61 8 Sberbank d.d. 2.21 8 Raiffeisenbank Austria d.d. 22.71 8 Imex banka d.d. 402.00 9 Istarska kreditna banka Umag d.d. 0.89 9 Raiffeisen stambena štedionica d.d. 23.56 9 Slatinska banka d.d. 273.32 10 Agram banka d.d. 0.86 10 OTP banka d.d. 19.85 10 Addiko Bank d.d. 261.96 17 Hrvatska poštanska banka d.d. 183.06 Return on equity Return on assets Profitability Rank Name of the institution ROE (%) Rank Name of the institution ROA (%) Rank Name of the institution Net profit (000 HRK) 1 Banka Kovanica d.d. 14.29 1 Zagrebačka banka d.d. 1.56 1 Zagrebačka banka d.d. 2,008,133 2 Raiffeisen stambena štedionica d.d. 12.05 2 Banka Kovanica d.d. 1.52 2 Privredna banka Zagreb d.d. 1,114,776 3 Karlovačka banka d.d. 11.41 3 OTP banka d.d. 1.33 3 Erste&Steiermärkische Bank d.d. 847,307 4 Zagrebačka banka d.d. 11.14 4 Partner banka d.d. 1.28 4 OTP banka d.d. 631,157 5 Partner banka d.d. 10.51 5 Raiffeisenbank Austria d.d. 1.14 5 Raiffeisenbank Austria d.d. 448,901 6 Istarska kreditna banka Umag d.d. 9.99 6 Privredna banka Zagreb d.d. 1.11 6 Hrvatska poštanska banka d.d. 202,107 7 OTP banka d.d. 9.57 7 Raiffeisen stambena štedionica d.d. 1.09 7 Addiko Bank d.d. 79,929 8 Erste&Steiermärkische Bank d.d. 9.39 8 Erste&Steiermärkische Bank d.d. 1.09 8 Agram banka d.d. 41,148 9 Agram banka d.d. 9.24 9 Agram banka d.d. 1.02 9 Istarska kreditna banka Umag d.d. 37,238 10 Raiffeisenbank Austria d.d. 9.07 10 Istarska kreditna banka Umag d.d. 0.90 10 Sberbank d.d. 33,515 14 Hrvatska poštanska banka d.d. 7.89 13 Hrvatska poštanska banka d.d. 0.76 17 Management Board Statement of Condition of HPB p.l.c. History and Development of Hrvatska Poštanska Banka p.l.c. Hrvatska poštanska banka was established at the beginning of the ‘90s as a result of the work of the group of enthusiasts and experts of the Croatian Post and Telecommunications (“HPT”) who, understanding good business practices of the postal banks in Europe, brought the idea of a postal bank to life after Croatia declared independence. The Bank was established in October in 1991 with its registered office in Zagreb, and its first business address was in Tkalčićeva street 7. The shares of the Bank were subscribed and taken over by 50 founders/shareholders, business partners of “HPT” which was the largest shareholder, and which ensured the premises and the first personnel for the operation of the Bank. As a universal banking organization, the Bank was registered for “all cash, deposit, credit and guarantee operations with legal persons and all banking operations with natural persons, including also the provision of payment services” at the end of October in 1991 in the court register.Due to retail and corporate needs for banking services, especially in local areas with no banks, the Bank had relied on around 1,100 HPT offices at the time where banking services were introduces including receiving retail deposits, corporate deposits – HPT-business partners. From May in 1992 the Bank started to provide international foreign exchange payment services and to collect the first foreign exchange deposits. During that year, the advantages of the newly established financial institution were also recognized, in addition to the founders and “HPT”’s business partners, by smaller private businesses which started to place their deposits into the Bank. Under the Regulation on Recovery of Debts and Funds Placed With Poštanska štedionica Beograd – Croatian subsidiary, Zagreb (dated 25th March 1992, Official Gazette 15/ 92), the Bank was named as legal successor of the mentioned subsidiary which led to a substantial contribution to its potentials and activities (exchanging passbooks and current accounts, taking savers and depositors, recovering claims). The first years of the Bank’s operation were marked in the light of the war by decline in total economic and investment activities in Croatia, decline in living standard, high inflation rate (even hyperinflation), monetary indiscipline and higher fiscal expenditures. This situation was ended when the Stabilization Program was passed in May in 1995, ending inflation and stabilizing DEM rate of exchange. During that time the Bank was doing mostly retail business by receiving HRD (dinar) and HRK funds from individuals, paying salaries and pensions, placing surpluses on money markets and making short-term loans to legal entities supporting their working capital, mostly to “HPT”, its business partners and founders of the Bank. Even under such complex working conditions, the Bank managed to record a constant balance sheet growth and profit, and was always taking care of preserving the value of the founders’ capital and clients and investors deposits. In 1995, the building in Jurišićeva 4 was bought and the Bank’s registered office was moved to the new business address. In the same year, the Bank’s acts were aligned with the Companies Act. The first branch was opened in Split in April in 2003. In July in 2005 the Bank established HPB-nekretnine, a real estate limited liability company and HPB Invest, a limited liability company for investment funds management, forming thus the Hrvatska poštanska banka Group. The development of the Group continued in 2006 with the establishment of HPB Stambena Štedionica, a joint stock company for housing savings, which was successfully merged with the parent company on December 2, 2019. as a result of business rationalization and optimization. In addition to the listed subsidiaries in which the Bank is a parent company and also a one hundred percent owner of all three companies, from July 2018 until April 1, 2019, the Bank become 100% owner of Jadranska banka, Šibenik. In addition to these subsidiaries, the Bank held between 2015 and 2017 the controlling ownership stake (58.2%) in H1 TELECOM, a public limited company. Through public share offering in September 2015, the Bank’s equity was increased by HRK 550 million by mixed private and public equity investments. The Bank’s shareholding structure includes pension funds, investment funds and other private investors which paid up HRK 305.9 million and acquired the 25.5% ownership stake. The Republic of Croatia paid up HRK 244.1 million and its and the related persons’ ownership stake fell from 99% to 74.5%. This share increased in 2021 to 77.3% through the transfer of shares due to the closure of the Prosperus Economic Cooperation Fund, which was a shareholder of the Bank, to participants in the fund: the Croatian Bank for Reconstruction and Development, which transferred its share to the Republic of Croatia and the Fund for Financing the Decommissioning and Disposal of Radioactive and Spent Nuclear Fuel of the Krško Nuclear Power Plant, which is 100% owned by the Republic of Croatia. 18 At the end of 2019, HPB entered the scope of a comprehensive assessment by the ECB, together with four other domestic banks. In May 2020, the ECB confirmed the quality of the Bank's assets and the resilience of its balance sheet, and the preconditions for initiating Croatia's accession to the European Monetary Union (EMU) were met HPB's network today is comprised of 6 regional corporate centers (RC Središnja Hrvatska based in Zagreb, RC Sjeverna Hrvatska based in Varaždin, RC Istra i Kvarner based in Rijeka, RC Slavonija based in Osijek, RC Dalmacija – sjever based in Šibenik and RC Dalmacija – jug based in Split within which 16 entrepreneurial centers operate) and 6 regional retail centers distributed on Središnja Hrvatska, Sjeverna Hrvatska, Slavonija, Istra i Kvarner, Dalmacija sjever i Dalmacija jug regions, 52 centers and 6 outlets spread over the entire territory of the HR. Market position and competition profile of Hrvatska poštanska banka, the largest domestically owned bank, enable it to ensure all financial services to individuals, comprehensive financial services to the government and support to the Croatian economy, especially in the small and medium sized enterprises segment. In cooperation with the Croatian Post plc (”HP”) banking products and services are accessible even in the most remote places in country. The strategic determinants of the HPB's development are focused on increasing market share, development of organization and business processes in line with the best global practices. Overview of key events in HPB corporate history d.d 07/2018 Acquisiton of Jadranska banka d.d. Šibenik 2020 - 2021 A period of record profitability and sustainable growth. Asset quality and balance sheet stability confirmed in a comprehensive assessment by the ECB. Capitalization strengthened at the highest level in the HPB's recent history a 19 Project of transition to the single currency of the EU In the context of the accession of the Republic of Croatia to the European Monetary Union, the Croatian kuna was joined to the European Exchange Rate Mechanism II (ERM II) on 10 July 2020, and the National Plan for the Exchange of the Croatian Kuna with the Euro was launched and implemented in the second half of 2020. The introduction of the euro is planned for January 1, 2023, and depending on the decision of the Council of the European Union that Croatia meets all the conditions, which decision is expected in July 2022. Commercial banks will play a significant role in the process of currency exchange, primarily through cash exchange activities, conversion of deposits and loans, adjustment of ATMs and POS devices, and consumer protection. Among other things, the currency swap process will include the CNB's pre-supply of cash to banks, double pricing five months before and 12 months after the changeover, the changeover of non-cash payments to the euro on the day of conversion and double cash flow during the first 2 weeks after introduction. All these activities will be provided by banks without additional fees for clients. Given the wide range of various business activities that need to be carried out for timely adjustment, as well as the impact that these activities will have on the Bank's operations and all its organizational parts, the Bank launched an internal project to replace the Croatian kuna with the euro. financial and human resources. 20 Business Activity of Hrvatska poštanska banka The Bank offers all banking and financial services with the focus on retail and corporates, among which: • all types of deposit and credit products and services for corporates and retail in domestic and foreign currency, • transaction services (HRK and FX payments), • issuing guarantees, avals and similar products, • factoring, financial lease services, • securities services, • services related to lending, such as collecting data, making analysis and providing information on the creditworthiness of legal and natural persons carrying out their business independently; • performing business related to the sale of insurance policies in accordance with the regulations governing insurance, • issuing electronic money, • issuing and managing other payment instruments if the provision of these services is not considered to be payment service provision in accordance with a separate law, • other banking products and services (safes, Western Union services). Regulatory Framework Conditions for the Bank's founding and business as a credit institution in the Republic of Croatia are regulated by the Credit Institutions Act (Official Gazette 159/ 2013, 19/ 2015, 102/ 2015, 15/2018, 70/2019) and the Companies Act (Official Gazette 152/ 2011, 111/ 2012, 68/ 2013 and 110/ 2015, 40/2019). Offering of investment services and investment activities in the Republic of Croatia are regulated by the Capital Market Act (Official Gazette 65/2018 and 17/2020), the by-laws of Croatian Financial Services Supervisory Agency and EU regulation markets throughout the European Union and payment services offered by the Bank are regulated by the Payments Act (Official Gazette 66/2018), together with certain by-laws. The Bank's core business is also regulated by the Croatian National Bank's by-laws as the top regulator which regulates the Bank's core business and operations related to the core business. During 2021 Amendments to the Decision on the Management System (Official Gazette 145/2021 of 29 December 2021) were adopted. The COVID-19 pandemic continued to have negative effects on the economic and financial system in 2021 and continued to cause uncertainty, due to increased resilience of credit institutions and maintaining the stability of the financial system during the COVID-19 pandemic, Banks became subject to certain supervisory expectations, through published circulars of the Croatian National Bank, recommendations of the European Banking Authority and recommendations and supervisory expectations of the European central bank, all in connection with the COVID-19 pandemic. These recommendations and expectations relate essentially to certain actions regarding the approval of moratoriums, their treatment and classification and reporting on them, impairment and credit risk management systems, as well as recommendations regarding the suspension of dividend payments and variable remuneration to employees. Thus, the Decision of the Croatian National Bank on the temporary restriction of distributions (OG 4/2021), which entered into force on 16 January 2021, restricts the distributions to credit institutions until 31 December 2021, which includes the payment of dividends, creating a dividend payment obligation, repurchasing treasury shares, allocating variable receipts and other forms of distribution. The decision was made with the obligation of the Croatian National Bank to review the reasons of restrictions no later than September 30, 2021, whereby the regulator may, depending on the assessment, lift the duration of the temporary restriction before December 31, 2021. 21 Above Decision was taken in accordance of the authority under Article 144a) of the Credit Institutions Act, according to which the Croatian National Bank is the designated body - when necessary to preserve the stability of the financial system as a whole, strengthen the resilience of the financial system and avoid and reduce systemic risk - authorized to issue bylaws prescribing appropriate measures and instruments. Accordingly, this regulatory measure was adopted due to the uncertainties arising from the duration and dynamics of the COVID-19 pandemic and its consequences. In accordance with Article 4 of the Decision on Temporary Restriction of Allocations, in early September 2021 the Croatian National Bank reviewed the existence of the reasons for the Decision and assessed that the circumstances have changed since the Decision sufficient to justify the early repeal of the Decision from October 1, 2021. In addition to the aforementioned normative activity, the Croatian National Bank is also responsible for supervising the operations of credit institutions in the Republic of Croatia. Following the establishment of close cooperation between the Croatian National Bank and the European Central Bank (hereinafter: the ECB), and in accordance with Article 1 of Regulation (EU) no. 468/2014 of the European Central Bank of 16 April 2014 establishing a framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (Single Supervisory Mechanism Regulation) - hereinafter the SSM Regulation, the scope of the ECB's supervisory tasks is also defined, which is limited to the prudential supervision of credit institutions, and supervisory tasks not entrusted to the ECB remain the responsibility of the national supervisory authorities. According to the above, the Croatian National Bank remained solely responsible for the supervision of banks in areas not covered by the SSM Regulation. These areas relate to areas regulated by the Credit Institutions Act and bylaws of the Croatian National Bank, such as restrictions on investment in tangible assets, rules for accounting and classification of exposures, methods of determining credit losses and consumer protection, and monitoring the implementation of national regulations that regulates the prevention of money laundering and terrorist financing. On 10 July 2020 the ECB adopted a Decision on establishing close cooperation with the Croatian National Bank, and as of 1 October 2020 the Republic of Croatia participates in a single supervisory mechanism since the establishment of close cooperation between the Bank and the ECB is one of the preconditions for entering ERM II (Single European Exchange Rate Mechanism II). In December 2020, the Government and the Croatian National Bank prepared a strategic document - the National Plan for the Exchange of the Croatian Kuna with the Euro - which outlines a plan for implementing the main activities needed for an efficient and successful changeover to the euro. this will be made possible by wider economic and financial circumstances. In addition, in January 2022, the Coordination Committee for Economic Adjustment and Consumer Protection issued Guidelines for Economic Adjustment in the Process of Replacing the Croatian Kuna with the Euro in order to provide information to businesses on activities and adjustments awaiting them in the replacement process. In addition, the Plan of Legislative Activities of the Government of the Republic of Croatia for 2022 was published at the end of 2021, which within the Ministry of Finance for the first quarter of 2022 envisages referral to the procedure for adopting the Act on the Introduction of the Euro as the Official Currency in Croatia. The Croatian Financial Services Supervisory Agency is responsible for supervising the provided investment and connected services and the performance of investment activities. The Croatian Deposit Insurance Agency controls the fulfillment of obligations of credit institutions under the Deposit Insurance Act (Official Gazette 146/2020) which entered into force on 01.01.2021. The Croatian National Bank implements the rules and determines the procedures and instruments for the resolution of credit institutions in accordance with the Resolution of Credit Institutions and Investment Companies Act (Official Gazette 146/2020 and 21/2022). By amending the Law on Credit Institutions, as well as the Law on Resolution of Credit Institutions and Investment Companies, the Croatian National Bank takes over the powers for the resolution of credit institutions, and the Croatian Agency for Supervision of Financial Services over investment companies. The Personal Data Protection Agency monitors the fulfillment of all rights and obligations in the field of personal data protection on the basis of which the Bank is determined obligations and responsibilities in the process of personal data processing related to the application of regulations covered by the legal framework of personal data protection in Croatia. 22 The Bank uses the EU regulation which includes regulations adopted by the Parliament and the Council. The most important is Regulation (EU) 575/ 2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/ 2012 (Official Journal of the European Union L 176/ 2013). There are also delegated and implementing regulations of the European Commission which concern conducting business of credit institutions in Croatia, as well as other relevant acts which regulate corporate business activities in the Republic of Croatia, and corporates and credit institutions with headquarters in Croatia in part in which they conduct business with foreign entities (e.g. acts of other countries, international contracts related to anti-money laundry, international payments etc.). The Bank as an obligator of Act on the Prevention of Money Laundering and Terrorist Financing (OG 108/2017, 39/2019), undertakes in its operations measures, actions and procedures prescribed by this Act in order to prevent and detect money laundering and terrorist financing and implement preventive measures to prevent use of the financial system for money laundering and terrorist financing. In relation to the above, the CNB provided a notice to credit institutions on the application of the new Guidelines of the European Supervisory Authority on risk factors for money laundering and terrorist financing EBA / GL2021 / 02 of 1 March 2021, which repeal the existing Guideline JC / 2017/37 and complements them by transposing changes to the EU legal framework related to the prevention of money laundering and terrorist financing as well as new risks of money laundering and terrorist financing. The revised Guidelines entered into force on October 26, 2021 and represent additional expectations of the CNB that should guide companies obliged to implement measures and procedures to prevent money laundering and terrorist financing in assessing the risk of money laundering and terrorist financing in the entire business. The CNB also emphasizes that the factors and measures described in the Guidelines are incomplete and that companies should take into account other factors and measures to prevent money laundering and terrorist financing that are important for their business. Given that the Republic of Croatia, directly or through companies owned by it, is the majority owner of the Bank's shares, the Bank applies as relevant the special laws and bylaws for companies in majority state ownership. 23 Overview of HPB Group and Bank's Position in the Group HPB p.l.c. is part of a group of linked entities according to the Credit Institutions Act, and is 100% owner of the following companies which make HPB Group: Industry State Ownership % HPB Invest d.o.o. Investment fund management Croatia 100.00 HPB-nekretnine d.o.o. Real estate and construction Croatia 100.00 Hrvatska poštanska banka p.l.c. is not a member of a concern in terms of the Companies Act. Subsidiaries Parent company Hrvatska poštanska banka p.l.c. HPB Invest d.o.o. HPB-nekretnine d.o.o. 24 HPB-R-A Share HPB Stock is listed on ZSE's Official market. Last share price at the end of 2021 amounted to HRK 730.00 (trading day 30.12.2021), representing a decrease by 55.32 percent in comparison with the last price achieved in 2020 (HRK 470.00 trading day 30.12.2020). Trading of HPB-R-A stock during the reporting period was as follows: Stock data and details Issue date December 12, 2000 ISIN HRHPB0RA0002 Segment Official market of the Zagreb Stock Exchange Listed quantity 2,024,625 Share price as at December 30, 2021 (in HRK) 730.00 Market capitalization (in HRK million) 1,477.98 25 Ownership Structure of Hrvatska poštanska banka p.l.c. On December 31, 2021 the Bank's ownership structure was as follows: Source: CDCC On December 31, 2021 Republic of Croatia through the Ministry of Physical Planning, Construction and State Assets controlled 77.42% of the equity and voting rights of the Bank. REPUBLIC OF CROATIA HZMO HP OTHERHAOD PRIVATE SHAREHOLDERS Σ = 77.42% Σ = 22.58% 44,90% 8.76% 8.98% 11.93% 2.85% equity holdings managed by the Ministry of Physical Planning, Construction and State Assets companies owned by the Republic of Croatia and other related parties private institutional shareholders and individuals 26 Business and financial overview In 2021 the Bank made a net profit after tax in the amount of HRK 202.1 million. Net profit Operating profit before provisions amounts of 311.8 million. Provisions for loan losses and other impairments of financial and non-financial assets amounts HRK 65.8 million, while cost from the reversal of provisions for liabilities and charges amounts to HRK 307 thousand. Operating profit before provisions 27 Net interest income in the amount of HRK 524.1 million generates share of 63.8 percent in the total operating income. Net income composition for the period 01.01.- 31.12.2021 Operating expenses decreased slightly, mainly due to lower depreciation costs and the abolition of the deposit insurance fee. Compared to 2020, the cost of employees increased due to investments in IT internal resources and general and administrative costs due to activities aimed at timely resolution of regulatory obligations and improvement of the Bank's process in order to eliminate technological debt. The Bank continues its efforts to manage costs as efficiently as possible. Cost management 2017 – 2021 28 Provisions for losses Portfolio optimization has resulted in a reduction in risk costs despite the effects of COVID 19. Assets and RWA In parallel with the growth of assets and loans and receivables from the Bank's customers, the risk-weighted assets decreased as a result of the strengthening of the capital management culture. 29 At the end of 2021, the Bank's assets amounted to HRK 27,833 million, which is an increase of HRK 2,369 million (+9.3 percent) compared to 2020. With 51.2 percent, loans and receivables from customers make up the most significant part of the asset structure. Assets composition Total deposits grew by 10.9%. Retail and corporate are on the rise, with a noticeable spillover from term deposits (- 13.9%) to a vista deposits (+ 19.8%), which has a favorable impact on the average cost of resources. Liabilities and equity composition 30 Description of business segments Retail segment operations 528 thousand total clients 20 thousand new clients Retail business is done through the Bank's own network of 9 regional centers, 51 center and 6 outlets, as well as HP's distribution channel with more than 1,000 post offices distributed all over the Republic of Croatia. In the past year, which continued in a pandemic atmosphere, the Bank recorded the stability of deposits, which as at 31 December 2021 amounted to HRK 11.8 billion, 2% higher than in previous year. Of that, a vista deposits amounted to HRK 8.1 billion, and term deposits amounted to HRK 3.7 billion, which shows the continuation of the trend of spilling term deposits into a vista deposits. With the overflow into a vista, 2021 was marked by a decline in interest rates on liabilities, which resulted in a 50% reduction in interest expenses compared to the previous year. The total retail gross loan portfolio at the end of 2021 amounted to HRK 8.2 billion which is a 5% increase over the year before. In 2021, the market share of total loans continued to grow by 0.2% compared to the same period last year, and the share of housing loans increased by 0.5%. The growth of the deposit and loan portfolio is the result of stable operations, quality services, customer loyalty and the recognition of the Bank as a stable financial participant in Croatian banking industry despite all the 51 center and 6 outlets 6 regional centers Payment services in HRK and contracting Bank’s products and services in 1,015 post offices post offices for retail clients while services for corporate clients are available at 987 locations; • Loan services to retail clients in HP financial corner at 142 locations. 31 circumstances to which the Bank had to adapt due to the pandemic and the measures introduced to restrict clients' access to the Bank's centers. 2021 achievements: Sales / development In 2021, in the part of the gross loan portfolio related to housing loans, HPB grew by 15%, which is a continuation of the Bank's strategy to make a bigger step in safer collateralized placements, but also offer quality products and services to younger clients. a secure and long-lasting customer base of the Bank. In addition to participating in APN, as there was only one grant competition in 2021, the Bank worked to create preconditions for the acquisition of new clients and continued to build its image of 'Bank for Important Life Decisions' and a reliable partner for housing loans. 32 Direct channels Division operations Card business 504 ATM 733 thousand valid cards 15 various card products 3,199 EFT-POS terminals In 2021, the Bank signed an Agreement on the expansion of business cooperation with Visa Europe and the replacement of its card portfolio with the Visa brand. Visa brand is one of the most important card brands in the world, and by switching, all conditions and benefits that customers have had so far for existing cards will be transferred to a new, Visa card with possible improvements in functionality for certain types of cards. During 2021, the migration of debit cards took place and the debit portfolio of cards from Cirus Maestro, Mastercard Debit and Visa Electron was consolidated into a Visa debit card. A total of 346,000 debit cards were migrated, representing 76% of the debit card portfolio. Bank had a total of 733,454 valid cards on 31.12.2021, which is 59,979 less than in 2020, as a result of the consolidation of debit cards from three brands on Visa Debit. Of the total number of valid cards, 98.13% refers to cards issued to natural persons, and 1.87% were issued to business entities. The bank realized a total of 31.1 million transactions, which is an increase of 9.4% compared to the previous year. The total volume of transactions amounted to HRK 13.6 billion, which is approximately the same value as last year. The number of transactions with the Bank's cards amounted to 28.1 million, which is an increase of 10% in comparison with 2020. The increase in the number of transactions with cards of other banks at the Bank's acceptance points is 18.1%. The number of EFTPOS terminals is 3.5% higher than last year, and the number of ATMs is approximately at similar levels as last year. The trend of increasing the number of ecommerce transactions (on the Internet) with the Bank's cards is on the rise and amounts 8.5% more than last year. In accordance with the Bank's business strategy, in which one of the guidelines is the digitalization of business, in 2021 the project "Mobile Payment" was launched, which will, in cooperation with VISA and company Netsi, introduce card virtualization service and enable payments to virtual bank cards via Google Pay system. Together with the Croatian Post, the Bank implemented a payment card payment service on "Paketomat" self-service devices. Thus, the Bank introduced for the first time the payment service at self-service EFTPOS terminals outside the Bank and positioned itself in the segment of card acceptance on such devices, and at the same time expanded the offer in the area of card acceptance. As of the end of 2021, 119 Paketomat devices have been installed and in 2022 a significant increase in the number of transactions is expected. Digital banking At the end of 2021, the number of Internet banking users for retail amounted to 69 thousand, which represent a decrease by 0.1% compared to 2019. Retail clients prefer the mobile banking channel and, accordingly, the number of mobile banking users is growing. At the end of 2021, the number of mobile banking users is 113 thousand, which represent an increase by 7.4% compared to 2020. The number of transactions is 24.5%, and the volume is 30.8% higher than in 2020. 33 The number of corporate clients that have a contracted Internet banking service is more than 9 thousand, which is an increase of 14% compared to last year. Also, a large increase is recorded in the number of corporate clients with contracted mobile banking, which is as much as 30% higher than in 2020. 2021 achievements: • PSD2 Continuation of further development of the PSD2 interface and intensive preparation of the PSD2 interface for the changeover to the euro. • mHPB application Continuous upgrade of mobile banking for retail and corporate clients with new functionalities, including: o mHPB application support for Huawei devices o Improved home screen design o Implemented the ability to change the theme of the application o Ability to pay bills by uploading a payment slip from the gallery o Ability to switch applications from one device to another without the need to physically come to the branch o Display of unregistered card transactions o Functionality Donations through which it is possible to participate in the ecological- voluntary project of afforestation of Croatia - the functionality allows the payment of donations in favor of Croatian Forests. o Possibility of payment through the register of indirect account identifiers (RPIR) and functionality mPlati - RPIR is a register in which it is possible to define an indirect way of identifying the recipient's account. This means that the owner can "link" his transaction accounts (IBANs) with his email, mobile device number and OIB. Thus, the indirect connection of the account with, for example, the mobile phone / email number enables payments in favor of the account by entering an indirect identifier or cell phone number/e-mail/OIB. In addition to the above-mentioned functionalities, in 2021 intensive work was done on the redesign of the entire mHPB application. It will now have a fresh, modern design, and production is expected in early March this year. Also, intensive preparations were made for the adjustment of the application for the changeover to the euro. • Open a SuperSmart account online Intensive activities to define the online contracting process of the HPB SuperSmart current / gyro account via the eBranch without the need to come to the physical branch. • Internet banking o The possibility of payment through the register of indirect account identifiers (RPIR) has been introduced o Preparation and announcement of a business application for the opening of the New Internet Banking project for corporate clients o Intensive preparations needed to adapt the application for the changeover to the euro. 34 Overview of Retail Products and Services: Product group Products and services Retail products and services Accounts Current account - domicile currency Basic Account / Basic account for sensitive groups - domicile currency Special purpose accounts - domicile currency Switching payment accounts - domicile currency Giro account – HRK/fx Foreign currency account Children account Kockica - domicile currency SuperSmart HPB account - domicile currency Payment operation – national/foreign, cash/non-cash, domicile currency/fx Reporting – monthly/annually Business with foreign checks Standing orders SEPA direct debit Savings A vista deposit – HRK/fx Children's open savings Flexy Kockica - domicile currency Motiv Plus deposits – HRK/fx HPB DUO plus savings - domicile currency/foreign currency Non-purpose term deposits – HRK/fx Multipurpose term deposits – HRK/fx Term savings with multiple deposits – HRK/fx Children term deposits – HRK/fx Rent deposits- HRK/fx Gift voucher HPB Kockica - domicile currency Loans Housing loans Housing consumer loan in HRK with a combination of fixed and variable interest rates Housing consumer loan in HRK with currency clause EUR with a combination of fixed and variable interest rates Housing consumer loan in HRK Housing consumer loan in HRK with currency clause EUR Housing consumer loan in HRK without a mortgage Housing consumer loan in HRK without a mortgage with a currency clause EUR Housing consumer loan in HRK based on the Housing Loan Subsidy Act Housing consumer loan in HRK with a currency clause EUR based on the Housing Loan Subsidy Act Housing consumer loan in HRK with currency clause EUR for the purchase of apartments under the Program Socially encouraged housing program A Housing consumer loan in Kuna with currency clause EUR for the purchase of apartments based on the Socially Incentived Housing Program A housing consumer loan in HRK based on housing savings of HPB-housing savings bank housing consumer loan in HRK with currency clause EUR based on housing savings of HPB-housing savings bank Multipurpose loans Tourist loan in HRK Tourist loan in HRK with currency clause EUR Credit for the costs of enrollment in a private high school or grammar school, for undergraduate, graduate and / or postgraduate studies in HRK with a currency clause in EUR Credit for settling the allowed overdraft on the current account in the Bank in HRK Non-purpose loans non-purpose cash loan in HRK non-purpose cash loan in HRK with currency clause EUR non-purpose cash loan in HRK with a combination of fixed and variable interest rates non-purpose cash loan in HRK with currency clause EUR with a combination of fixed and variable interest rate non-purpose cash loan for pensioners in HRK Lombard loan secured by term deposit 35 Overview of Retail Products and Services (continued): Product group Products and services Retail products and services Cards Debit Mastercard contactless card VISA Electron/Debit current account card Maestro current account card Mastercard debit gyro account card VISA prepaid card VISA prepaid card for young people - IDEEEŠ! Visa installments card Gold Mastercard card Mastercard Pošta & HPB card Mastercard credit card (revolving) Mastercard deferred payment card (charge) E - banking mHPB mToken Internet banking SMS / e-mail services e-account e-cash e-citizens HPB Invest HPB short-term euro bond fund HPB short-term Kuna bond fund HPB bond fund HPB Bond plus fund HPB Global fund HPB Equity fund Croatia osiguranje Car liability policy CPI CO Assets Accident insurance policy Travel health insurance policy Life insurance policy BASIC Life insurance policy PREMIUM CO scholarship EXCLUSIVE Plus Policy Krug života Policy Riziko plus Health insurance policy Voluntary pension fund Other Brokerage services through the channel "Kreditni posrednici" RoboAdvice application consulting services - determining the suitability of open-end investment funds for the client Exchange business Safes 36 Corporate segment operations Large corporate and public sector 1,370 total clients 5.4 bn loan volume 773 local government and self-government units and affiliated companies 8.7 bn deposit volume The large corporate and public sector division provides banking services to 1,370 clients, striving to continually improve services and innovate to better meet customer needs. Although 2021 is characterized by new circumstances caused by the COVID-19 pandemic, there has been a further increase in the number of clients, especially in the segment of business with local governments, which is influenced by the launch of the pilot project Payments of Legal Entities in Hrvatska pošta. The level of gross loans to legal entities in the large corporate and public sector amounts to HRK 5.4 billion. In the structure of gross loans to legal entities, loans to companies and republic funds have a dominant share, with HPB continuing to support companies and activities that generate value for the economy. During 2021, we continued to enable businesses that were unable to meet their financial obligations due to the effects of the COVID-19 pandemic to contract assistance measures, such as approval of new liquidity loans. As additional assistance measures, the Bank, in cooperation with CBRD and HAMAG-BICRO, offer new credit lines to ensure liquidity on favorable terms. Total deposits of corporate clients of the large corporate and public sector (excluding bank deposits) as at 31 December 2021 amounted to HRK 8.7 billion, of which demand deposits amounted to HRK 7.9 billion and primarily related to clients from the central government segment. The recorded increase in deposits also stems from a significant acquisition of clients and system liquidity. The situation of high liquidity of the overall financial system and strong interbank competition posed a major challenge for the Bank. The development in the segments of large companies, central government and local governments in 2021 was influenced by two important factors, namely adjustments to the risks of recovery from the primary pandemic strike that occurred in 2020 and exceptional price competition in the banking sector. The large corporate segment showed a certain recovery during 2021, but the absence of significant investments affected the impossibility of a significant expansion of lending activities. Demands for liquid assets and attempts to refinance existing liabilities of quality clients in search of more favorable interest rates and reducing the cost of financing predominate. More lucrative work related to project financing of renewable energy sources was completely absent due to the incomplete process of establishing a premium system to encourage production, while the tourism sector postponed larger investments for future periods. In the given conditions, the focus is on the preservation of the substance through quality risk control in anticipation of a stronger economic momentum in the year ahead. The central government and local self-government units based their financing strategies through 2021 on one simple idea - financing through invitational tenders - with the aim of obtaining as cheap funds as possible. In these conditions, the Bank has created its position by trying to realize those opportunities that do not represent too great a price compromise. The central government realized a significant part of its financial needs on the market by issuing bonds, significantly reducing the space for lending, and the credit funds acquired through tenders were mostly below the acceptable price threshold for the Bank. Local self-government units realized a number of investments in communal infrastructure, in which the Bank achieved a quality result, but the postponement of certain announced investments (especially in the southern counties) affected it to be significantly better. Local elections have also significantly slowed down activities in this segment, so it is to be expected that their business activities and the need for financing will intensify over time. 37 The development of new products and strengthening of the Bank's specialization continued, especially in the segment of co-financing projects from ESIF funds through the established EU desk in order to provide expertise and achieve excellence in monitoring clients of both public and private sector in financing and implementing projects from ESIF funds. Project financing has also been established with the aim of monitoring large projects in infrastructure, energy, tourism, etc., in order to be in line with the increase in demand for investment loans. Successful business cooperation with CBRD and HAMAG-BICRO in all programs, as well as cooperation with the EBRD and the EIB continues. As before, the large corporate and public sector will continue to cooperate intensively in the coming period and provide credit support to large economic entities, state units, as well as local government units. The focus will be on the dispersion of the loan portfolio in favor of large privately owned companies and local governments and on the growth of non-interest income with the continuous improvement of quality and expansion of the range of services. New products for business entities, redesign of Internet banking for business entities and improvement of payment and transaction solutions are being prepared. 38 Small and medium enterprises 10,364 total clients 2.2 bn loan volume 6 regional centers 1.9 bn deposit volume included craftsmen The SME business sector provides banking services to more than 10,000 clients, with an emphasis on business innovation and continuous improvement of financing opportunities. In 2021, the Bank continues to face the great challenges posed by the COVID-19 epidemic. In line with this challenging market environment, the SME Division focuses its efforts on quality management of the existing portfolio with a conservative approach to new investments and focuses on contracting moratoriums, reprograms and new sources of liquidity for clients affected by the COVID-19 pandemic. As at 31 December 2021, gross placements of business entities in the SME Sector amounted to HRK 2.2 billion, while value adjustments amounted to HRK 428.4 million. Total deposits of business entities in the SME Sector amounted to HRK 1.9 billion, with a vista deposits amounting to HRK 1.7 billion and term deposits to HRK 0.2 billion. HPB is continuously engaged in creating complete financial solutions for small and medium-sized enterprises with an increasing emphasis on the micro segment. With the aim of expanding the network of banking services and bringing the bank closer to customers in every part of the country, HPB continues the project "Bank at the Post" providing its services to businesses and thus becoming the largest distribution channel of basic banking products and services in Croatia. 2021 achievements: • Strengthening cooperation with HAMAG BICRO, HBOR, EIB and other partners • Digitalization • Client portfolio rationalization In 2021, Hrvatska poštanska banka strengthened its existing cooperation with HBOR, HAMAG BICRO and the EIB, all in order to provide its clients with the most favorable financing conditions. In this challenging period, the clients of the SME Division recognized the benefits of the Bank's cooperation with HAMAG BICRO, especially through the National Guarantees for Certain Activities program. The fact that the participation of the SME Division in HAMAG BICRO national guarantees is more than 10 times higher than the market share of the Division speaks in favor of it. The continuous introduction of guarantee schemes has had a positive impact on RWA and portfolio stabilization. With the constant introduction of innovations, fast and simple services, Hrvatska poštanska banka is developing in the direction of digital banking. Currently, 3 out of 4 clients use digital banking services in the Small and Medium Business Sector. The SME business sector is focusing special efforts on streamlining the client portfolio and complying with regulatory requirements, which are manifested through an increase in the share of active clients and a fully updated client base from the regulatory aspect. 39 Overview of products and services in the corporate segment: Product Group Products and services in 2021 Products and services in corporate segment Payment operations Transaction account Entrepreneur Packages Cash pooling Escrow account Cash payments Non-cash payments Reporting on the status and changes on account Solvency data (BON2) SEPA direct payments SEPA credit transfers International payment services EFTPOS E-commerce SME financing Short-term financing Corporate Account Overdraft Loans for Working Capital Revolving loans Loans for refinancing Interfinancing loans Margin loans Loan with fixed-term deposits Loans for preparation of tourist season Agricultural loans Loan for the preparation of exports and for the export of goods based on foreign exchange inflows Discount of bills of exchange of creditworthy companies Discount of securities, bonds, commercial papers and bills of exchange with government institutions Loan based on cession on credit rating companies in the country Loan based on cession from state institutions Purchase of credit rating companies' claims (factoring) Purchase of receivables from state institutions (factoring) Long-term financing Loan for working capital and permanent working capital Loan for investments in fixed assets - investment Loan for refinancing liabilities Loan with fixed-term deposits Loans for preparation of tourist season Agricultural (Agro) Loan Loan to exporters for the purchase of fixed assets Loan for improving energy efficiency and for renewable energy Loan for all kinds of works on common parts of the building Loan for the renewal of buildings damaged in earthquakes Loan for the purchase of ECO MOBILE equipment Frames for financial monitoring Framework for the use of short-term and long-term products (loans, guarantees, letters of credit) The framework for the purchase of receivables Special loan programmes – in cooperation with CBRD Loan program: Entrepreneurship of young people, women and beginners Loan program: Private sector investment Loan program: EU projects Loan program: Export preparation Loan program: Working capital 40 Product Group Products and services in 2021 Products and services in corporate segment SME financing Loan program: Financial restructuring Framework Loan - Working capital loans Framework Loan – Investment financing Export Guarantee Bank Insurance Program Working capital loan portfolio insurance program for exporters COVID credit programs - in cooperation with CBRD Framework loan for working capital number: COV3-20-1100795 Export Liquidity Loan Portfolio Insurance Program - Covid-19 Measure-S-OPK-COVID-03/20 Framework loan for working capital number: COV6-20-1101210 Special loan programmes – in cooperation with HAMAG-BICRO ESIF program (individual guarantees co-financed by EU Structural and Investment Funds) ESIF (Limited Portfolio Guarantee) Program HAMAG individual guarantees for rural development 'PLUS' guarantee program COVID credit programs - in cooperation with HAMAG-BICRO Guarantee Program for the allocation of state aid to the maritime sector, transport, transport infrastructure and related activities in the current COVID-19 pandemic Guarantee Program for loans for entrepreneurs active in the field of culture and creative industries Special loan programs - loans in cooperation with MINPO, the City of Zagreb and the counties Program "Credit to Success 2014, Measure 1 - Credit to Competitiveness" with the Ministry of Entrepreneurship and Crafts and Counties Program "Credit to Success 2014, Measure 2 - Credit to Successful Business" with the Ministry of Entrepreneurship and Crafts and Counties Special Credit Programs - in collaboration with the EIB Credit to small and medium-sized enterprises (SMEs) and medium-capitalized (Mid-Cap) enterprises Special Loan Programs - In cooperation with the EBRD Loan for micro, small and medium-sized enterprises Loan to women entrepreneurs Loan for financing the energy efficiency of apartment buildings Loan for financing the energy efficiency of businesses Special loan programmes – other Loans in cooperation with Craftsmen Society of Zagreb Loans for member of Croatian Lawyers' Association Loans in cooperation with the Ministry of Croatian Veterans for micro, small and medium-sized enterprises of Croatian veterans and children of Croatian veterans Large corporate financing Short-term financing Corporate Account Overdraft Loans for Working Capital Revolving loans Loan for refinancing liabilities Interfinancing loan Margin loans Loan with fixed-term deposits Loans for preparation of tourist season Loans for Financing Stocks of Sugar, Wheat and Other Commodities Agricultural (Agro) Loan Loan for the preparation of exports and for the export of goods based on foreign exchange inflows Discount of bills of exchange of creditworthy companies Discount of securities, bonds, commercial papers and bills of exchange with government institutions 41 Product Group Products and services in 2021 Large corporate financing Loan based on cession on credit rating companies in the country Loan based on cession from state institutions Purchase of credit rating companies' claims (factoring) Purchase of receivables from state institutions (factoring) Products and services in corporate segment Long-term financing Loans for permanent working capital Loan for investments in fixed assets - investment Loan for refinancing liabilities Loan with fixed-term deposits Loans for preparation of tourist season Agricultural (Agro) Loan Loan to exporters for the purchase of fixed assets Loan for improving energy efficiency and for renewable energy Loan for all kinds of works on common parts of the building Loan for the purchase of ECO MOBILE equipment Project financing Frames for financial monitoring Framework for the use of short-term and long-term products (loans, guarantees, letters of credit) The framework for the purchase of receivables Special Loan Programs - In cooperation with CBRD Loan program: Private sector investment Loan program: Public sector investment Loan program: EU projects Loan program: Export preparation Loan program: Working capital Loan program: Financial restructuring Framework Loan - Working capital loans Framework Loan - Investment Lending Export Performance Bank Guarantee Insurance Program COVID credit programs - in cooperation with CBRD Framework loan for working capital number: COV3-20-1100795 Exporter liquidity loan portfolio insurance program - Covid-19 measure - S-OPK-COVID-03/20 Special Loan Programs - In cooperation with EIB Loan to Mid-Cap Enterprises and Public Sector Entities Loan to public sector entities Loan to private sector entities Special Loan Programs - In cooperation with EBRD Loan to women entrepreneurs Loan for financing the energy efficiency of apartment buildings Loan for financing the energy efficiency of businesses Guarantees and letters of credit Performance guarantees Payment guarantees Counter guarantees and Super guarantees Nostro (import) letter of credit/Stand by letter of credit Loro (export) letter of credit/Stand by letter of credit Documentary collections Cards VISA Business debit VISA Bonus Plus VISA Prepaid business card VISA Business with delayed payment E-banking mHPB mToken Internet banking SMS service Deposits Term deposits in HRK/fx A vista deposits in HRK/fx Letter of intent Non-binding letter of intent Binding letter of intent Other Croatia insurance package Croatia poduzetnik HPB Invest products HPB nekretnine services 42 Financial markets operations 2021, both on the world and domestic markets, was still marked by the continuation of the corona virus pandemic. Given the previously launched pandemic programs of central banks, there were no liquidity problems. Indeed, extremely high liquidity, as well as disruptions in supply chains, began to lead to inflationary pressures, which began to manifest itself in the second half of the year. Thus, at the end of the year, both the Eurozone and the United States recorded the highest inflation rates in the last 30 and 40 years, respectively. Such a situation prompted central banks to reduce and announce the final closure of pandemic bond repurchase programs in early 2022, as well as the announcement of the likely start of growth in reference interest rates. In the moments of record excess liquidity in the domestic banking system, which reached new high levels of HRK 80 billion, the main challenge remained the management of liquidity reserves in terms of creating an adequate portfolio of liquid instruments with appropriate yield levels. Given the historically low yields on auctions of treasury bills of the Ministry of Finance of the Republic of Croatia, as well as the yields of money market funds, investments are mostly focused on debt instruments with fixed yields. Also, the stock markets had an excellent year, so the Bank, through its shares in the equity and mixed funds of HPB Invest, recorded an increase in value, which had a positive effect on trading income. Due to such high liquidity, the Bank did not participate in regular repo auctions held by the CNB in 2021 and successfully maintained the prescribed liquidity ratios and ratios. The liquidity coverage ratio at the end of the year is a high 183%. In terms of foreign exchange trading and foreign exchange earnings in 2021, the Bank achieved a record result despite still reduced volumes compared to the years before the outbreak of the pandemic. The largest contribution to this result came from the management of the foreign exchange position and slightly more open positions, primarily in EUR, with acceptable levels of risk. In the part of sales of treasury products and in the part of foreign exchange trading, the Bank maintained its activity in cooperation with corporate clients through contracting spot and forward purchase and sale of foreign currency despite smaller volumes than in previous years. In the area of cash operations, the Bank is still one of the most important participants. With a wide network of branches and exchange offices of the Bank, through cooperation with FINA cash services, the Bank offers a competitive service in trading and supply of cash. In this area, there has been a recovery in volume, which is mainly related to foreign exchange business as a result of a solid tourist season. However, these volumes are still lower compared to the pre-pandemic period, and we expect the recovery to continue in 2022. Investment banking After growing at the beginning of the year, the capital market in 2021 was marked by slightly stronger volatility in both prices and turnover, and the total turnover on the Zagreb Stock Exchange was 19% lower than in the previous year. At the same time, all indices strengthened significantly, and the Crobex index recorded a growth of 19.55% last year. In 2021, the Bank also participated as a co-partner in the issue of bonds of the Ministry of Finance of the Republic of Croatia on the domestic market. In the area of custody and depository services for pension and investment funds, the Bank improves and harmonizes its services with numerous regulatory requirements and changes, and in this segment it also records continuous growth of assets under the custody and depository service. 43 Financial markets products and services: Products Description Financial markets products and services Domestic Trading Trading (buy and sell) in domestic financial instruments Clients decide which stocks they will buy or sell and at which prices, as well as what will be the structure of their portfolio Brokers are obliged to acquaint a client with potential risks, current stock price, specifics of each market, movements of certain stocks and to recommend a portfolio diversification on several shares Regional Trading Trading in financial instruments in Montenegro, Serbia, Macedonia and Bosnia and Herzegovina Clients decide which stocks they will buy or sell and at which prices, as well as what will be the structure of their portfolio Brokers are obliged to acquaint a client with potential risks, current stock price, specifics of each market, movements of certain stocks and to recommend a portfolio diversification on several shares Global Trading Trading in leading global financial instruments. Clients decide which stocks they will buy or sell and at which prices, as well as what will be the structure of their portfolio. Brokers are obliged to acquaint a client with potential risks, current stock price, specifics of each market, movements of certain stocks and to recommend a portfolio diversification on several shares Portfolio Management The portfolio management service is a specialized service that enables users to entrust their funds to the Bank for management. The service is intended for people who, in accordance with their own goals and limitations, want to invest in securities and other financial instruments for a period longer than one year in order to achieve additional income. Every month or even more often, clients receive a report on all activities and changes in the value of financial instruments in their portfolio, i.e. a report on the movement of the value of invested funds Investment Services Investment services include investment advisory services and those related to capital structure consulting, business strategies and related issues, as well as consulting and services related to mergers and acquisitions in companies, and other services in the investment banking segment. Securities Issuance The Bank manages issuances for the following financial instruments: a) debt financial instruments - short-term (commercial papers) and long-term (bonds) b) equity financial instruments - shares When issuing financial instruments, the Bank offers services that cover the entire issuance process, i.e. include all activities related to the organization, preparation and implementation of registration and payment of securities, as well as other tasks for the issuer in order to achieve successful registration and payment. 44 Products Description Financial markets products and services Securities Custody The basis of custody consists primarily of activities related to the storage of assets and the implementation of settlement of transactions and monitoring of corporate activities. Beneficiaries of custody services are active participants in the capital market, investment and pension funds and other institutional investors, as well as retail and corporate clients who invest their assets in financial instruments. Custody services: custody and safekeeping of assets, settlement of transactions of financial instruments on the client's order, determination of the value of assets, notification of activities of joint stock companies, collection of income from financial instruments and reporting, representation at annual general meetings, notification of changes in legislation. Depositor of UCITS/ AIF Investment and Pension Fund A depositary is a credit institution domiciled in the Republic of Croatia or a branch of a credit institution of another member state, established in the Republic of Croatia, which has the approval of the CNB (or the competent authority of that member state) to store and administer financial instruments on behalf of clients including depositary and related services, entrusted to: - control activities of the fund - monitoring the cash flow of the fund - fund asset storage operations The depositary keeps accounts for the fund's assets and separates each individual fund from the assets of other funds, the assets of the depository and other clients of the depository and the management company, controls that the fund's assets are invested with regulatory provisions and acts, informs the Regulator on determination of fund asset and unit prices, executes the orders of the management company in connection with transactions with the fund's assets, reports on corporate actions, provides voting services at the company's general meetings, receives payments of revenues and rights due to the fund, ensures that the fund's revenues are used in accordance with regulatory provisions; acts of the company, reports to the Regulator any significant violation of legal elements and elements of the acts of companies. Moj broker - Web Trader Moj broker – Web Trader service enables trading in securities and monitoring the status of the portfolio via the Internet, regardless of the working hours of the Bank's broker Options: - placing orders for the purchase and / or sale of financial instruments on the ZSE - cancellation or change of order - checking the status of own portfolio - insight into the balance and turnover of brokerage account - overview of stock prices on the ZSE with the 50 best offers in real time - security of data exchange Short-term HRK loans for Buying Financial Instruments (Margin Loans) Short-term HRK loan for the purchase of financial instruments for retail and corporate clients, with the purpose of purchasing financial instruments that are included in the List of financial instruments for margin loans, and in accordance with the daily investment limits for each financial instrument Loan repayment period up to 12 months The loan is approved in the amount of up to 100% of the value of pledged financial instruments, minimum HRK 50 thousand, and maximum HRK 2 million. Spot FX Buy/ Sell Product users: Domestic and foreign retail and corporate clients and financial institutions Product purpose: - Purchase of foreign currencies for payment abroad or deposit on a foreign currency account - Sale of foreign currencies based on inflows from abroad - Foreign currency conversion Forward FX Buy/ Sell Product users: Domestic and foreign retail and corporate clients and financial institutions Product purpose: - Purchase and sale of foreign currencies at a pre-agreed exchange rate on the currency date higher than two business days from the date of agreement - Purchase of foreign currencies for payment abroad or deposit on a foreign currency account - Sale of foreign currencies based on inflows from abroad - Foreign currency conversion 45 Products Description Financial markets products and services FX Swap Product users: Domestic and foreign corporate clients and financial institutions Product purpose: - Agreement on the simultaneous purchase and sale of foreign currency at pre- agreed exchange rates. It consists of one spot and one forward transaction of opposite sign. - A SWAP contract is a replacement of two currencies to maturity when they are exchanged again Cash trading Purpose: trading in cash is managed in cash in the position of the Bank, therefore it is to maintain the stock of effective foreign and domestic money at the optimal level Given deposits Product users: Banks Purpose: short-term financing Deadlines: Contracts on a given deposit are usually agreed for terms of up to one year, but it is possible to agree on longer terms Deposit management: Funds are available on the value date until the due date of the contracted deposit Received deposits Product users: Domestic and foreign Banks and financial institutions Purpose: Realization of yield on free HRK/ foreign currency funds Deadlines: Money market deposit agreements are negotiated for a fixed term, usually up to one year Deposit management: It is not possible to use the funds during the term of the deposit; Termination is possible with financial institutions with which there is an agreement on early termination Repo/ Reverse repo Product users: Domestic corporate clients and financial institutions Purpose: - A contract in which one party transfers some form of financial asset (security) to the other in exchange for cash. At the same time, it is agreed that a reverse transaction will be made on a fixed date in the future. - The contract is implemented through two transactions: one purchase and one sale of the security at a pre-agreed price - Represents a loan of a security to one contracting party and cash to another - The repo agreement is structured so that all benefits as well as the associated risks of holding the security remain with the original owner - A reverse repo agreement represents two opposite transactions from those in a repo agreement Deadlines: Repo agreements are agreed mainly as money market deposits for up to one year, but it is possible to agree on longer terms. Securities trading (bonds, treasury bills, CNB bills, commercial bills, shares) Product users: Domestic corporate clients and financial institutions Purpose: Investment of free cash by purchasing debt securities with fixed yields issued by the state, local governments, cities or companies Deadlines: - Short-term debt securities are issued for periods of up to one year - Long-term debt securities are issued for maturities longer than one year 46 Internal control system and control functions Risk management HPB manages risks through a risk management system consisting of a set of procedures and methods established to identify, measure, monitor, manage and manage the risks to which HPB is or may be exposed. The purpose of setting up a risk control system is to manage the risks and minimize their unintended consequences, thereby ensuring the stability of HPB's business (including the fulfillment of all commitments). It is important to note that despite the established risk management system, HPB (and no other credit institution) is able to completely eliminate any of the risks to which it is exposed. The risk management system is regularly updated, including its qualitative and quantitative components, and has been established in accordance with the following principles in risk assumption and management: • Defining acceptable levels of risk exposure based on internal individual risk exposure limits and regulatory requirements, • Continued improvement of procedure for determining, measuring, evaluating and monitoring risks to which the Bank is exposed, • Continued development of measuring and monitoring risk procedures and methods in line with development of control risk function and development of certain IT support. By the nature of its business, HPB assumes various risks when it comes to contracting business with customers. When taking over (and managing risk), HPB has the following goals: • Ensuring stable and secure growth through an effective risk management system, • Improvement of risk profile, • Ensure the implementation of a comprehensive management system based on the application of harmonized procedures and procedures at the Bank level. Considering the size and complexity of its activities HPB defined substantial risks which are monitored through the risk management system • Credit Risk, • Market Risk, • Liquidity Risk, • Interest Risk in the Bank’s book • Operational Risk Credit Risk Credit risk is the risk of loss due to a borrower's default on a credit institution. This risk is assumed by HPB as part of its regular business activities and is also the most significant risk for HPB (and for all credit institutions). Accordingly, the greatest attention was given to credit risk management through the prescribed policies, procedures and other internal acts of the Bank. The objective of credit risk management is to ensure a quality credit portfolio, earnings and growth in placements while maximizing the rate of return with an acceptable level of risk-earnings ratio and their relationship to the price of the source of funds. Credit risk management is organized through: • The Management Board, • Authorized committees (Credit Committee) and persons, • Operating and organizational separation between front and back office activities, • Credit risk management Department, • Strategic risk management and risk control Department, The tendency to assume credit risk is determined by the established limits on credit risk exposure. 47 For the purposes of credit risk control and management, different risk parameters are monitored (e.g. debtors' creditworthiness, regularity in settlement of HPB liabilities, quality of collateral, regulatory and internal capital adequacy, portfolio quality) and different estimates are made (e.g. credit risk assessment placements prior to approval, estimation of recoverability of placements). Credit risk is also related to concentration risk and currency induced credit risk which HPB manages in the same way as it manages credit risk. Market Risk Market risks include position risk, FX and commodity risk. • Position risk assumes loss due to price change of financial instruments or financial derivatives • FX risk assumes loss due to change in exchange rate and/or price of gold • Commodity risk assumes loss due to price change of commodities. Market risk management is organized through: • The Management Board, • Operating and organizational separation of front and back office trading activities, • Assets and Liabilities Office, • Strategic risk management and risk control Department. The tendency to assume market risks is determined by the established market risk exposure limits. In order to manage market risks, appropriate limits have been established at the portfolio, sub-portfolio and instrument levels with respect to (depending on the nature of the financial instrument) certain market risk exposure measures. Also, stop-loss limits for individual equity securities classified as trading assets have been established. In measuring and valuing market risk exposure the Bank uses a methodology based on value at risk (VaR) method, duration and PV01 (internal model). Liquidity risk Liquidity risk is the risk of loss arising from the credit institution's existing or expected inability to meet its financial obligations as they fall due. Liquidity risk is closely related to the following two risks and the Bank considers them as a whole in terms of risk management: • Funding liquidity risk is the risk that a credit institution will not be able to successfully meet expected and unexpected current and future cash needs and collateral needs without affecting its regular day- to-day operations or its own operations. financial result. • Market liquidity risk is the risk arising from the inability of a credit institution to simply offset or eliminate those positions at market price, due to market disturbance or insufficient market depth. Liquidity risk management in HPB is organized through: • The Management Board, • Assets and Liabilities office, • Assets and Liabilities management committee (Liquidity Subcommittee), • Strategic risk management and risk control department, • Financial markets department. The methodology for measuring or estimating liquidity risk exposure is based on the calculation of the liquidity coverage ratio (LCR), the calculation of structural liquidity exposure indicators including monitoring and reporting on net stable sources of financing (NSFR) and additional monitoring parameters for liquidity reporting (ALMM). The propensity to assume liquidity risk is determined by the established limits of liquidity risk exposure. In order to manage liquidity risk, appropriate limits have been established in relation to the liquidity ratio and limits for structural liquidity indicators. Also, the limits set by the Decision on reserve requirements and the Decision on the minimum required foreign currency claims of the CNB have been established. 48 Interest rate risk in the banking book Interest rate risk in the banking book is the risk of loss arising from possible changes in interest rates that affect the items in the book of non-trading positions. Managing interest risk in the Bank's book is organized through • The Management Board, • The Assets and Liabilities Committee, • Strategic risk management and risk control department, • Assets and Liabilities office. The tendency to assume interest rate risk in a bank ledger is determined by the established limits on interest rate risk exposure in the bank ledger. In order to manage the interest rate risk in the bank's book, appropriate limits have been established in relation to the ratio of the change in the economic value of the bank's book and regulatory capital and in relation to the change (decrease) in net interest income. Operational risk Operational risk is risk of loss stemming from inadequate or unsuccessful internal processes, people or systems or external events, including legal risks. Operational risk management is organized through: • The Management Board, • Structure of operational risk management (Operational risk manager, Support persons for operational risk management, Connection persons), • Operational Risk Management Committee, • Corporate Security office, • Compliance office, • Strategic risk management and risk control department. Methodology of measuring, i.e. estimating operational risk exposure is based on collecting and analyzing data on events due to operational risk, self-assessment of risk and controls, estimated IT risk, results of analysis of business effects taking into count implemented going concern plan and estimation of externalized risks. Also, the Bank estimates effect of introducing new products to its risk profile. The Bank primarily uses measures for mitigating operational risk through internal control system and risk transfer measures (hedge) in cases where applicable. Also, there is going concern management system. Other risks Other risks, although present in HPB's business, are less significant than previously described and the methodology and method of managing them are less complex than for the significant risks (described above). Concentration risk is the risk arising from each individual, direct or indirect, exposure to a single person, group of related persons or central counterparty or group of exposures connected by common risk factors, such as the same economic sector or geographic area, equivalent business or products, i.e. using techniques to for lowering credit risk, including risks related to indirect credit exposure to same collateral provider which can lead to losses that could jeopardize credit institution's going concern or make material change to its risk profile. Collateral Value Risk assumes inconvenient market movements of assets used as collateral which will be a collateral trigger and cashed in for receivables collection. Government Risk assumes government bodies or the central bank will not be able to meet its obligations toward other countries or foreign lenders and that other debtor of the country will not be able to meet their obligation to foreign lenders. Strategic Risk assumes loss due to wrong business decisions, inflexibility to economic changes etc. 49 Management Risk assumes loss due to credit institution having limited capacity in forming sophisticated management system, mechanism and controls. Credit Value Adjustment Risk (CVA) assumes portfolio value adjustment at mid-market value (this risk is related to all OTC derivatives for all business activities except credit derivatives recognized for reduction of credit risk weighted exposure). Credit value adjustment reflects current market value of counterparty credit risk for the institution but does not reflect current market value credit risk for the counterparty. The Bank regularly reports on credit value adjustment risk, which is not significant considering the scope of the Bank's operations. Compliance risk assumes potential measures and penalties and the risk of significant financial loss or reputation loss which the credit institution may suffer due to non-compliance with regulations, standards and codes and internal laws. Business risk assumes negative, unexpected change in the volume of business and / or profit margins that can lead to significant losses and thus decrease the credit institution's market value. First of all, business risk can be caused by a significant deterioration of the market environment and changes in competition or consumer behavior. Legal risk assumes legal procedures against the Bank due to unfulfilled contractual obligations, legal proceedings against a credit institution and business decision which are not applicable or have a negative effect on the Bank's business and financial position. Regulatory Risk assumes regulation change which can affect the Bank's business and profitability. 50 Internal Audit The management and all employees are responsible for the implementation and application of the elements of internal control systems. The elements of internal control systems are described in the internal regulations and implementing documents of business areas with particular emphasis on preventive control activities and early detection of weaknesses and disadvantages. Internal Audit provides an independent assessment of the adequacy and effectiveness of internal controls of each audited area. Internal controls are a set of processes and procedures established for adequate risk control, monitoring of business efficiency, reliability of financial and other information and compliance with internal and external regulations. They represent a reasonable guarantee that the business objectives will be achieved in the prescribed manner, within the set deadlines with the application of applicable regulations. Internal controls are an integral part of the management processes of the management and all employees of the Bank. The basic principles of the internal control system are reflected through: • clear lines of responsibility, • delimitation of powers and responsibilities, • specific control procedures and • Internal audit function. Internal audit Internal audit is organized as an independent and autonomous organizational part whose work is based on the professional principles of internal auditing and related legislation. The management and responsibility of the internal audit function is determined by the principle of dual responsibility, whereby it is administratively accountable to the Management Board, and functionally to the Supervisory Board, i.e. the Audit Committee. The Internal Audit office is organized by areas and specialized teams and skills are encouraged for each area. Therefore, there are teams for: Information system, Financial markets, Risk management, Retail and general audit. The Charter of Internal Audit determines the independence and organizational autonomy of the internal audit function. Access to data, information, persons and spaces is direct and unrestricted. In accordance with the general standards of internal audit and legal regulations, the internal audit procedures are carried out through four phases: planning, conducting tests, reporting and monitoring the results. Planning is based on a documented risk assessment, and the Annual Working Plan is adopted by the Management Board with the prior consent of the Audit Committee and the Supervisory Board. Internal audit covers all business areas of the Bank and is structurally divided into audits of retail banking, risk management, general audit, information system audit and audit of financial markets. Reporting on the results of the audited areas is submitted to the responsible person of the audited entity, the competent member of the Management Board of the audited area, the Management Board and the Audit Committee. Each individual report is submitted to the Management Board meeting, thus ensuring that the Management Board has taken note of the audit results, proposed recommendations and measures and deadlines for fulfilling the recommendations and measures. Individual internal audit reports are submitted to the Audit Committee at board meetings. The same is done through the Office of the Administration as part of the regular submission of documentation. Internal Audit prepares the Report on the work on a semi-annual and quarterly basis and submits it to the Management Board, the Audit and Supervisory Boards, while the quarterly work reports are submitted to the Management Board and the Audit Committee. The work report contains information on the implementation of the annual work plan, a list of planned and extraordinary tasks performed, a list of planned tasks not performed with reasons for non-implementation of the plan, a summary of the most significant facts identified during audits, the effectiveness of the risk 51 management system and a report on the implementation of proposals, recommendations and measures resulting from the performed audits with the reasons for their non-implementation. Compliance monitoring function The compliance monitoring function is organized within the Compliance Department in Compliance and data protection Division, compliance office. The Executive Director of the Compliance Department, as the holder of the Compliance Monitoring Function, is the person responsible for the work of the control function of monitoring compliance, and in addition to the duties and responsibilities prescribed by the Bank's internal acts, in particular - is responsible for coordinating compliance risk management; - is obliged to identify and assess the risk of compliance once a year; - is responsible for the annual work plan, operational plans and work methodology, and the budget of the Compliance Department; - is obliged to submit a report on the work of the Management Board, the Risk Committee and the Supervisory Board of the Bank at least semi-annually; - is obliged to issue a general assessment of the Bank's compliance with the regulations governing the provision of investment services and the performance of investment activities once a year; - is obliged to submit at least an annual report on the work related to the provision of investment services and the performance of investment activities to the Management Board, the Risk Committee and the Supervisory Board. The Executive Director of the Compliance Department, the Director of the Compliance and Data Protection Division and the employees of the Compliance Department, who perform compliance monitoring activities (hereinafter: the Compliance Monitoring Function) act independently of business areas, processes and activities where compliance risk arises and do not perform tasks in which they could come into conflict of interest. Furthermore, they are authorized to request and obtain access to all information, data and documentation necessary for the performance of tasks within their competence, and other organizational units of the Bank are obliged to cooperate in providing the requested information. The tasks, scope and manner of work, i.e. work methodology and reporting system of the Compliance Monitoring Function to the Management Board and the Supervisory Board of the Bank are regulated by the following internal acts: 1. Business Compliance Policy; 2. Rulebook on business coordination; 3. Business Compliance Methodology. Compliance monitoring functions include at least: 1) determining and assessing the compliance risk to which the Bank is or may be exposed, 2) advising the management and other responsible persons on the manner of application of relevant laws, standards and rules, including information on current events in these areas, 3) assessment of the effects that changes in the relevant regulations will have on the credit institution's operations, 4) verification of compliance of new products or new procedures with relevant laws and regulations as well as with amendments to regulations, in cooperation with the risk control function, 5) supervision and verification of the handling of inside information in terms of capital market regulations and keeps prescribed records and registers, 6) monitoring and control of recording telephone conversations and electronic communication related to the provision of investment services and the performance of investment activities, 7) management of the system of resolving clients' complaints regarding the provision of investment services and the performance of investment activities, 52 8) compliance monitoring activities related to investment product management, 9) monitoring and control of qualifications and personnel conditions of employees who provide investment services and perform investment activities 10) provide a general assessment of the Bank's compliance with the regulations governing the provision of investment services and the performance of investment activities, 11) reporting to the Management Board, the Supervisory Board and the Risk Committee on compliance risk and other control functions if the assessment determines the Bank's exposure to high compliance risk, 12) cooperation and exchange of information with the Strategic Risk and Risk Control Sector related to compliance risk and risk management, 13) consulting activities in the part of preparation of educational programs related to compliance, 14) supervision and verification of compliance of operations with relevant regulations and reporting on performed supervision, 15) monitoring and controlling the compliance of the Bank's employees with legal and other regulations as well as with high ethical and professional standards established in the Bank's Code of Ethics and reporting to the Management Board on the performed controls, 16) supervision of the Bank's operational compliance with the provisions of Articles 80 and 81 of the Capital Market Act and the Ordinance on organizational requirements and rules of business conduct for investment services and activities and remuneration policies and criteria for significant investment companies related to client property protection. The compliance function continuously cooperates with managers and employees of the Bank's organizational units, especially in the part related to consulting on the application of relevant regulations to individual obligations and responsibilities in the business domain, and participates in compliance and implementation activities with regulatory requirements. recognized compliance risk and managed it adequately. In doing so, it is necessary to ensure that the cooperation of the compliance monitoring function with other organizational units does not in any way jeopardize its objectivity and independence. At the beginning of the business year, and no later than 31 January each year, the Executive Director of the Compliance department submits to the Management Board, Risk Committee and Supervisory Board the annual work plan of the compliance monitoring function, which is adopted by the Bank's Management Board. Furthermore, the Executive Director of the Compliance department annually, as part of the annual work report, identifies and assesses compliance risk in accordance with the categories of compliance priorities set out in the Compliance policy and assesses the Bank's compliance with relevant regulations. The annual report shall be submitted to the CNB by 31 March of the current year for the previous year. The compliance monitoring function also cooperates with the other two control functions - the Internal Audit office and the Strategic Risk and Risk Control department - especially in the part related to monitoring the implementation of the recommendations of supervisory and regulatory bodies. Cooperation is aimed at the goal of all three control functions to jointly establish an effective system of internal controls in all areas of business, while avoiding overlap and conflict of jurisdiction. The Executive Director of the Compliance department, also once a year, as part of the annual report on the provision of investment services and investment activities, provides a general assessment of the Bank's compliance with obligations under the Capital Market Act, Regulation (EU) no. 569/2014, Regulation (EU) no. 600/2014 and regulations issued by CFSSA based on them. Annual Report The compliance monitoring functions related to the provision of investment services and the performance of investment activities shall be submitted to the Croatian Financial Services Supervisory Agency by 31 March of the current year for the previous year. Once a year, when reviewing the annual report on the work of the Compliance Monitoring Function, the Bank's Management Board reviews the adequacy of the procedures and the effectiveness of the Compliance Monitoring Function. Supervision of work Compliance monitoring functions are performed by the Internal Audit Office as part of continuous and comprehensive supervision of the Bank's operations. 53 Development plan of Hrvatska poštanska banka p.l.c. The summary and basic framework of the strategy, presented in this document, is largely based on the currently valid document Business Strategy of Hrvatska poštanska banka, p.l.c. 2019-2023, which was approved by the Supervisory Board in accordance with Article 48 of the Credit Institutions Act on December 24, 2019. In the last quarter of 2021, the Bank started the process of updating the Business Strategy document, the completion of which was delayed due to new circumstances in the previous period, but the most important changes are included in the presentation below. The guidelines and business goals set out in the Strategy have been largely achieved and form a permanent part of the Bank's strategic management. The realization of the business model based on the strategic pillars of development presented below achieves the preconditions for doing business in accordance with the vision and mission of the Bank. . Banks, like any other corporate client, can no longer ignore climate change and the responsibility they have to achieve sustainable development and ecosystem conservation. Accordingly, as well as due to regulatory needs, the Bank will focus on the development of sustainable business in the coming period, which is an umbrella that includes activities in the areas of environmental sustainability, corporate governance, credit policy, community relations, employee development, etc. development is fully complementary to others, and will be the basis for HPB's strategic documents in the coming medium term. MISSION VISION A Croatian-owned bank with relevant market influence that cares best for clients, shareholders and community. We create conditions for a better life in Croatia. SUSTAINABLE BUSINESS CROATIAN POST CHANNEL DIGITALIZATION 54 Sustainable business The huge challenge of global warming and climate change poses a responsibility to all actors who can make a difference to contribute to change. Accordingly, the Bank recognized the need for stronger inclusion of ESG risk in risk management and capital management. The measures that will be implemented in the next period will be based on supporting clients with technologically advanced and sustainable business, who rely less on carbon and use energy from renewable sources. In addition, the Bank will prefer clients who operate on an ethical basis and use an operating model based on good and stable corporate governance. Croatian Post Channel The Croatian Post network as a contracted externalized network is the distinguishing potential of the Bank which enables it full territorial coverage on the entire territory of the Republic of Croatia. Contractual, IT and ownership connections are the basis of the largest branch network in Croatia, which is used to contract the sale of part of the financial products from the HPB range. The expansion of HPB's services in the HP network will contribute to the results of both strategic partners and benefit customers. Digitalization is the Bank's focus on monitoring trends in banking and non-banking competition on the one hand, and timely recognition of increasingly refined customer needs on the other. Digitization for credit institutions is no longer an advantage but a prerequisite for survival, and will be implemented from two aspects: (i) the customer aspect, which refers to the functionality of products and services, and (ii) the internal aspect, which refers to automation and process efficiency. 55 Corporate and public sector operations The strategic focus of the Large Corporate and Public Sector department (“Sector”) continues to be the intensive expansion of business cooperation with existing clients and the acquisition of new ones, based on best banking practice. In doing so, special attention will be paid to the balance between the commercial opportunities provided by the markets and the Bank's need to follow its conservative approach when it comes to risk management. The further development of the Sector's business is based on increasing the base of active large clients in private domestic and foreign ownership through the provision of credit lines for investments and working capital, documentary business in the country and abroad and a wide range of payment services. The sector invests great efforts in the development of sophisticated financial monitoring services for "greenfield" investments in the segment of energy, water and communal services, housing and tourism, guided by the principle of supporting the highest quality projects that are adequately capitalized and can be assessed with a high degree of reliability. adequacy of future cash flows from project operations. In addition, special care is taken to approach clients in accordance with their affiliation with industries, which leads to additional specialization aimed at increasing the quality of the overall business relationship with clients. In doing so, the maximum of branch exposures to credit risk should be considered, all in accordance with the macroeconomic indicators of the respective branches of activity. The target acquisition groups of clients are all creditworthy clients who have an open account and a stable business relationship with other banks - large systems, state and local government bodies. The aforementioned Bank's approach to customer segmentation will provide the opportunity to offer the highest quality solutions to new customers while maintaining a much-needed level of security in the area of risk management. The aim of this approach is to apply such a specialist model of sales and business relationship management that will respond to the needs and expectations of customers in the best possible way. Using various acquisition tools - customer bases, pre-selection, sales promotions, etc. - will allow access to new customers and expand relationships with existing ones. In this sense, the Bank's plan is to fully harmonize the quality of the credit process, the level of authorization in approval of individual products and customer segments, and the offer of product solutions with a high level of flexibility. Automation and digitalization are trends that the Bank has already adopted in order to keep pace with global trends and create a modern sales infrastructure. Development processes are underway and the introduction of a number of automated services based on mobile technologies is expected in the coming period. In this way, the Bank ensures faster and simpler business operations for entrepreneurs with quality long-term business relationship management. One of the Sector's main focus will continue to be on expanding business cooperation and lending to those clients and industries that largely contribute to increasing the GDP of the Croatian economy - manufacturing, exporters, manufacturing and energy production. In doing so, as an imperative of quality risk management, an individual approach is imposed on each client in assessing its overall financial quality, the potential of the industry in which it operates and the potential of the specific business transaction in which it enters. From the very beginning of the crisis caused by the COVID-19 pandemic, the Bank has been continuously introducing assistance measures in order to facilitate the financial operations of entrepreneurs and enable the fastest growth of their business activities. The implementation of assistance measures will continue in the coming period, including new measures to mitigate the consequences caused by the earthquake for businesses. In order to achieve the best possible position on the market, provide the best service to customers and optimize revenue, the Sector will strengthen cooperation with Croatian Post d.d. as a strategic partner, especially in the part of increasing the number of clients from the sphere of Local Government and Self- Government Units and affiliated companies. Significant distribution potential of Croatian Post it provides the Bank with a great opportunity to increase the number of clients, which is already evident from the pilot project that has been running since August 2020 and increase the sales volume of its products and 56 services, in 2021, primarily in the area of payment transactions and card products, which trend we expect in the coming period, which will affect the increase in non-interest income.. The Bank will continue to develop its business relationship with FINA as one of the most dominant partners in terms of total payment transactions and revenue generated by this business line. Activities related to the improvement of business in the area of cash management are being prepared in cooperation with large clients who have the need to deposit it at their locations. Special attention will be paid to further improving the counter operations of the Bank's clients through FINA through joint projects that should enable clients to more easily dispose of their funds after payments are made at FINA locations. In the deposit business, the emphasis will be on expanding transaction business with large companies and corporations, but also on continuing good cooperation with state and public companies, local self- government units and companies owned by them. In doing so, emphasis will continue to be placed on the optimal ratio of interest expense and the Bank's need for liquidity to be placed on clients' markets. In this context, interest rates on deposits are continuously decreasing without detrimental consequences for the total deposit sphere of the Sector and the Bank. In the area of business with the economy, the Bank is recognized as a partner by clients who place their trust in it through the continuous inflow of new time and a-vista deposits. The ambition of the Sector and the Bank in the area of business with the economy is to be a reliable partner to clients who will positively influence their business with their expertise while achieving continuous growth of their profitability and a high degree of protection and security of their portfolios. These will be the main guidelines in business in the forthcoming period, which ensures the establishment of Hrvatska poštanska banka as one of the leading credit institutions on the market. Small and Medium Enterprises operations SME department is focused on efficiency and productivity, deepening the strategic partnership with the Croatian Post, digitalization, employee training and synergy with all organizational parts of the Bank, all in order to increase the quality of service and support entrepreneurs who can contribute to faster business development and employment growth. In the coming period, we expect to additionally strengthen the credit activity of entrepreneurs, which we are ready to support through specialized lending programs through cooperation with cities, counties, ministries and CBRD, HAMAG BICRO, EIB and other partners that will be aimed at supporting entrepreneurs in their business. ventures. The SME business sector will continue to actively contribute to the balanced development of all regions of Croatia through placement growth and regional expansion. In addition, in order to strengthen the portfolio, we will continuously work on diversifying the Bank's portfolio and increasing the share of micro and small and medium-sized enterprises in it. Focusing to achieve the best possible position on the market, provide the best service to customers and optimize revenues, the SME Business Sector will use the opportunity to further develop cooperation with Croatian Post as a strategic partner primarily in the area of payment operations and product contracting using the distribution channel of Croatian Post. Hrvatska poštanska banka is also actively working on optimizing business processes and introducing digital technological solutions. Technological solutions are integrated into the Bank's products and generate added value for customers to whom the Bank provides faster and simpler operations. With the new business model for small and medium-sized enterprises, we want to achieve business and operational excellence in order to provide the fastest, most efficient and competitive service and contribute to the development of Hrvatska poštanska banka into a leading bank for micro, small and medium enterprises.. 57 Retail operations Retail banking is a strategic segment of the Bank's business. In the coming period, we will continue development activities to improve existing and introduce new products and raise the quality of services in order to increase the number of working clients. We continue with acquisition offers and cooperation with selected employers and strategic partners, and especially with business cooperation in the part of offers of favorable housing loans with interest rate subsidies by the state and local self-government units. We are aware that only by constantly improving the level of service can we achieve the planned acquisitions and growth, so we conduct continuous training of employees and measuring the quality of service. After the credit-scoring model of automated processing and approval of non-purpose loans was improved in 2021, in the further development the emphasis will be placed on the integration of card products into the subject models, further integration of credit-scoring models in the credit approval process and offer and placement products through digital channels. Also, the plan is to improve and digitize the entire credit process, in order not only to improve and accelerate the process of processing and approving credit applications, but also to more efficient monitoring over the life of the product. Given that in 2022.g. marked by a series of preparatory activities related to the transition to the EURO currency in the Croatian monetary system, the focus of development activities in the coming year will be to ensure all functional prerequisites for successful credit and transaction operations in the conversion of products and services to the EURO currency. Taking into account the protection of the environment, but also in light of the new circumstances resulting from the COVID 19 pandemic, which made it difficult and limited for citizens to move, the Bank launched a project in early 2022 to digitalize customer information channels. The aim of the project is to ensure customer information and availability of reports for customers through digital channels, which significantly raises the quality of service but also contributes to environmental protectio. Financial market operations Providing liquidity and managing portfolios in order to support the stable operations of the Bank and its clients is the most important part of financial market activities. We expect still high liquidity in the domestic market, and the growth of yields on debt securities in line with the growth of yields on foreign markets and the likely increase in reference interest rates. In the domestic money market, we expect a high level of liquidity through 2022, with low interest rates and more intensive trading in a period of seasonally stronger demand for local currency (HRK). After the recovery in 2021, we expect continued growth in GDP in a slightly smaller amount than in the previous year and the continuation of increased inflows from tourism and inflows of EU funds. Given the likely entry of the Republic of Croatia into the euro area and the replacement of the Croatian kuna by the euro with 1.1.2023, we expect further lower volatility of the EURHRK exchange rate and further narrowing of spreads. A large part of the activities will be focused on adjusting the business in order to successfully switch to EUR. Notwithstanding the completion of the ECB's PEPP bond repurchase program in March, high liquidity in the euro area will continue to provide relatively favorable sources of funding. We expect short-term rates in negative territory to continue, and a special challenge will be to maintain an adequate level of liquidity while reducing the bank's costs on foreign currency funds with foreign banks and on the CNB account. Planned yield growth should be more pronounced in the first half of the year, while growth in the rest of the year should be limited given the expected introduction of the EUR, GDP growth and a possible increase in investment rating. In the capital market, we expect GDP growth and economic recovery to be reflected in the good results of companies and higher trading volumes on the ZSE. In the investment banking segment, activities will be focused on expanding client's network and revenue growth based on fees from investment services and custody. 58 Non-financial report for 2021 Accepting responsibility and role in creating conditions for a better life in Croatia in accordance with its mission, legal provisions and regulatory guidelines for non-financial reporting, Hrvatska poštanska banka as part of the Annual Financial Report informs the public about its activities in the segment of socially responsible and sustainable business. Sustainable development is a strategic determinant and one of the priorities in the operations of Hrvatska poštanska banka, which is aware of the role of the financial sector in achieving the goals that lead to carbon neutrality. In line with the environmental (E), social (S) and governance (G) goals of sustainable development, HPB's actions and activities seek to address global climate and social challenges and ensure a better future for generations to come. In accordance with its strategic guidelines and respecting the recommendations of the European Central Bank issued through the Climate and Environmental Risks Guide, in 2021 a special organizational unit of the Sustainability office was established at HPB, which enables further progress in implementing sustainability goals and ensuring comprehensive application of ESG regulations. As a long-standing signatory to the UN Global Compact, HPB has been regularly reporting on its activities and plans in the areas of human rights, working conditions, environmental protection and the fight against corruption since 2007, and prepares and publishes a Progress Report. The Bank also regularly publishes the annual Corporate Governance Code, established by the Croatian Financial Services Supervisory Agency (HANFA) and the Zagreb Stock Exchange (ZSE) with the aim of promoting effective governance and accountability for companies listed on the Zagreb Stock Exchange. With the Code, the Bank publishes data related to general corporate governance rules (G), but also information related to the company's strategy, taking into account the potential impact of activities on the environment and community (E), encouraging ethical behavior, respect for human rights and appropriate and stimulating work environment (S). In December 2021, the Bank was awarded the prize for the best corporate governance and compliance with the Corporate Governance Code. Through its activities aimed at the well-being of customers, the community in which it operates, employees and shareholders, HPB supports and encourages the development of various segments of society, taking into account regional and local needs and characteristics of society. Through the segments of environmental, social and managerial responsibility, the Bank improves its business practices and social role every year, contributing to the creation of preconditions for sustainable development. He is an active participant in socially responsible projects important for social progress and better living conditions, encourages sustainable entrepreneurial ideas, cares about a healthy environment, the environment of its employees, human and children's rights and the community and society in which it operates. It implements the principles of transparency, security and trust in all segments of its activities. The following is an overview of key stakeholders, material issues and the impact of the Bank's operations in the context of the 17 United Nations Sustainable Development Goals (SDGs). Although it supports all 17 global goals, HPB recognizes its greatest influence in the following segments: 1. Good health and well-being (SDG 3) 2. Quality education (SDG 4) 3. Gender equality (SDG 5) 4. Decent work and economic growth (SDG 8) 5. Reduced inequalities (SDG 10) 6. Climate action (SDG 13) The identified key impacts of HPB are classified by identified stakeholders, ie stakeholders: clients, employees, shareholders, suppliers, society and the environment. 59 CLIENT’S WELL-BEING 1) Transparency and trust Every client and his financial needs and decisions are unique and important to us. We adapt our approach to the specific needs of different groups of clients, and we are direct and helpful, professional, efficient and transparent in all forms of communication. Our responsibility in business is a fundamental determinant of the Bank, which we express through the creation of our offer of products and services in accordance with the real needs and important life situations of our clients. We provide clear and unambiguous information about the products we offer, and we write contract terms in clear and understandable language, avoiding misunderstandings and ambiguities. We inform our clients about the news from the Bank's operations through our own channels, respecting security and their right to privacy. 2) Quality of service and availability We are continuously improving our products and services, with increasingly represented technological innovations that enable greater accessibility to customers. The primary focus of our activities is on developing products that meet the financial needs and capabilities of different categories of clients. Because we value the time our clients have, we develop products and services that are simple and affordable. With the development of digital banking, we are continuously increasing our availability to customers. Thanks to the strategic cooperation with the Croatian Post and the project Bank at the Post Office, HPB is today the most accessible Bank in Croatia. We offer our clients products and services in 12 regional centers for population and economy, which include 57 branches for individuals and 16 business centers. In 1,016 post offices, payment operations and transaction operations are available to natural and legal persons, while credit operations are also available to citizens in 140 post offices with a financial corner. 3) Equality and respect for diversity When designing products, offering and providing services, we do not discriminate against clients based on nationality, religion, gender, gender, race, political beliefs, union membership, etc. and strive to encourage financial availability and financial involvement of all social structures in local communities. In our business premises and offices where we are in direct contact with clients, we do everything we can to remove architectural barriers to access for people with disabilities. We approach the elderly population, pregnant women, parents with small children with special sensitivity, and we demand the adoption and observance of these standards from our contractual partners who participate in any way in providing services to our clients. We support the development of new entrepreneurial ideas and new technologies, especially those that are important for the local economy. We are open to cooperation with newly established companies and start-up companies and we have an understanding for their specific needs. We treat new clients the same as we treat long-term clients. We provide support to business entities in their intention to expand their business and competitiveness, especially if they are export-oriented, and we do not discriminate against them on any grounds. 60 4) Personal data protection All information available to the Bank, regardless of whether the Bank has received it from a client or is the result of business, cooperation and service to clients, is confidential. Continuous attention is paid to security and protection, as well as to improving the IT aspect of security and raising security standards for the protection of all data available to the Bank. We take care of the protection of personal data of clients, contractual partners and employees and implement the Personal Data Protection Policy, which sets out the rules related to the protection of individuals with regard to the collection and processing of personal data. All detailed information on the processing of personal data of clients, employees, business partners and other persons whose data are processed is published publicly on the Bank's website. The Bank has appointed a Personal Data Protection Officer who is independent and takes care of the protection of the rights of clients, employees and contractual partners with regard to their personal data. The Personal Data Protection Officer is also the primary point of contact for respondents who wish to exercise their rights, send an inquiry related to personal data protection, request additional information, express concern about the processing of their personal data, file a complaint regarding personal data protection and exercise their rights. related to data protection. 5) Resolving complaints We respond to all customer complaints effectively and within the prescribed period. We correct mistakes as soon as possible. We have established adequate policies for resolving consumer and business complaints, as well as monitoring the process of managing consumer complaints and service quality management. We continuously conduct measurements and research of customer satisfaction, and based on the results we improve and enhance the quality of service in certain business areas. 6) Avoidance of conflicts of interest and anti-corruption behavior Aware of the fact that even potential conflicts of interest negatively affect the relationship of trust we build with clients, we have adopted effective procedures to avoid situations where personal interests of employees may conflict with the interests of clients, contractors or HPB Group. We avoid situations and transactions in which the employee represents the interests of the Bank, and at the same time such a transaction for him, directly or indirectly, represents any form of material benefit or convenience. With regard to the provision of investment and ancillary services related to financial instruments, we implement the Conflict of Interest Policy, which introduces standards that we adhere to in order to identify and prevent or effectively manage conflicts of interest, all with the aim of eliminating possible harmful consequences , including potential conflicts of interest. Employees are paid for their work and we do not accept inappropriate gifts, services or money from clients and contractual partners. We continuously carry out activities related to promoting business integrity and transparency by improving corporate governance, harmonizing operations with laws, regulations and standards, continuous development of internal control systems and control functions and implementing the Anti-Corruption Program of the Government of the Republic of Croatia for majority state-owned companies. ENCOURAGING ENVIRONMENT FOR EMPLOYEES 61 1) Gender diversity and the right to equality Recognizing how useful diversity is, we are guided by this idea in employment and in the everyday relationship with employees and in managing them. All employees have equal opportunities for professional development, professional growth and development. In no case do we tolerate favoritism or discrimination of employees based on gender, gender, age, marital status and condition, nationality, race, religious and political beliefs, trade union membership, sexual orientation and identity, health, disability or physical impairment. We promote a work environment in which employees are free to express their opinions and ask questions to senior management. We encourage the creation of a work environment in which employees feel safe to report any violations of internal acts, bylaws and regulations, as well as any form of unethical behavior of customers, employees and contractual partners or suppliers with whom the Bank cooperates. 2) Education and development of competencies Continuous employee development is one of the key principles of HPB. HPB Group encourages its employees to develop their talents, innovation and creativity and to push the boundaries of their professional development. We believe in the power of lifelong learning, so we design and develop training programs and provide internal and external employee training. We encourage employees to improve their knowledge and skills, teamwork skills, togetherness and achieving common business goals. It is especially important for us to transfer knowledge and exchange experiences between employees, because in addition to spreading knowledge in this way, we connect employees around a common goal - to improve that knowledge. We value the trust that employees have in HPB as an employer and we appreciate their loyalty and loyalty. In 2021, the development of more interactive content of trainings on the e-Classroom intensified, which was contributed by the better education of internal trainers and persons in charge of the implementation of internal trainings. A unique Data literacy program called Data Nursery has been launched for about 80 employees. The goal of the program is to improve data / analytical competencies of employees, increase awareness of the importance of quality data management and guide HPB in the data-driven direction by creating a data center of excellence. In 2021, we continued with a comprehensive induction program for new employees with the aim of faster orientation and integration of employees into the new work environment. The focus of the program is to clarify the employer's expectations in a short period of time through the identification of key development areas and to ensure two-way communication between employees and managers through continuous feedback. 3) Work life balance We have recognized the balance between private and business life of employees as one of the important goals of sustainable development because it affects the satisfaction and commitment of employees and ultimately the creation of a healthy and comfortable working environment. We respect the private life of employees and do not abuse the technical possibilities and the related availability of employees. Therefore, employees performing managerial functions are expected to contact employees and team members outside of working hours only exceptionally and only if the needs of the job or project so require. The success of managerial functions is also assessed on the basis of acting in accordance with ethical principles towards employees and team members. 4) Care for health, safety and protection Concern for the health, safety and protection of employees in the conditions of the pandemic in 2021 remains a priority. As a large number of employees continued to work from home, they were provided with new IT equipment for easier work, and a discount on the purchase of office desks and chairs was provided with part of the furniture stores. Guidelines for working from home at the Bank level have been developed and communication from the top management level on the results and current events in the Bank has been strengthened. 62 Employees were given the opportunity to use psychological counseling services at the expense of the employer throughout the year. The purpose of such counseling is to strengthen employees to successfully cope with difficulties by adopting new procedures and ways of action that enable change, and thus raise the quality of life. Mental health care in terms of importance is on the same level as physical health care. Employees who recognized the need for counseling were supported in using counseling, taking responsibility, and caring for their own mental health. All employees are insured with supplementary health insurance and supplementary health insurance and are encouraged to go to the annual systematic examination, and in 2021 the range of services that each employee can use has been further expanded. On the day of the systematic review, employees can use the paid day off, to which they are entitled in addition to annual leave. The same goes for the days when employees decide to go for voluntary blood donation. Aware of the importance of a positive organizational climate and culture for the successful operation of our organization and employee engagement, but also the feedback on the work survey during the COVID- 19 pandemic, we conducted a large study of organizational vitality in the HPB Group. With the aim of introducing focused management of organizational climate, culture and engagement as a regular process of the HPB Group. The research has achieved an extremely high response and the development of a plan for improvements by organizational units is underway, which will include all employees. On the topic of physical activity, which has become increasingly important since we have been working from home, members of the HPB Sport Association have become especially active, intensifying their activities towards stronger communication and a more attractive sports program to encourage more employees to move and socializing. SUPPORT TO SOCIETY AND COMMUNITIES 1) Financial literacy Personal financial management is a real challenge nowadays, and as a responsible institution we provide financial service users with all the information and facts important for savings and investment planning, optimal borrowing and quality risk management. We regularly promote the importance of financial responsibility and literacy, and for many years we have been cooperating with schools, colleges and student associations in various financial literacy programs. In order to raise awareness of the importance of good financial management of clients, especially the younger population, we launched in 2021 on our social networks a simple video series of financial education HPB for financial literacy on the basics of managing your own money. 2) Sponsorships and donations Aware of its impact on the environment, as well as the fact that acting and doing business in society implies constant care and respect for it, HPB is always happy to help the community and society through donations and sponsorships. We support projects at the local and national level that encourage the creation of new values in order to promote knowledge, excellence and preserve the cultural heritage of our homeland. Special attention is paid to humanitarian associations and actions. 63 3) Dialogue with the community Our goal is to help clients achieve financial sustainability and we believe that by working committed to this goal we have a positive impact on the local community in which we operate, but also on society as a whole. Through our work and presence, we strive to continuously contribute to the social and economic well-being of the communities in which we operate, while actively working to reduce the impact of our business on the environment. Our business strategy is based on the idea of being accessible and accessible, and our funding programs seek to stimulate the local economy, support small and medium enterprises whose quality strategic and business decisions can have a positive impact on economic and social development and create a positive economic climate. Our branches and regional centers continuously monitor the needs of local communities, while respecting the cultural and social differences of the communities in which we operate. It is extremely important for us to have good partnerships with the local community, to cooperate and promote initiatives that bring significant social value. The Bank has demonstrated its continued commitment and work for the prosperity of the community through specially designed activities during 2021, marking the 30th anniversary of its operations. On this occasion, social initiatives were launched with the aim of achieving special benefits and / or lasting contribution to the community. We launched a corporate volunteering program We volunteer for Croatia in which HPB employees participated in environmental actions and support programs for better working and living conditions for those who need it during the process of education. We also conducted a large volunteer-environmental campaign Plant with HPB in which, in addition to the Bank, citizens joined in with their donations, and our volunteers together with Croatian Forest experts participated in planting 30,000 seedlings at seven locations throughout Croatia. In cities across Croatia, we have provided a series of mini-concerts of the famous Zagreb Soloists ensemble called Feel the Harmony in order to provide citizens with an opportunity to socialize and follow musical events in new circumstances during the pandemic and limited access to cultural events. ENVIRONMENTAL SUSTAINABILITY Environmental responsibility and sustainability are fundamental aspects of the operations of Hrvatska poštanska banka, and participation in projects that promote environmental sustainability are at the top of our business priorities. We respect and advocate for the promotion of national and international protocols and principles, practices and standards of environmental protection, as well as for the adoption of stricter environmental principles whenever their application is possible at the project level. We give priority to projects that bring greater social and environmental value and avoid those financial or economic relationships that directly or indirectly harm human health and the environment. 1) Green Office Our orientation towards environmental protection is reflected in the long-standing existence and promotion of the Green Office, which is a set of activities that increase the level of environmental awareness of Bank employees in order to reduce negative environmental impact and increase energy efficiency in everyday office operations. 64 Through the info-educational page on the Intranet - Green Panel, continuous education on current events, problems and interesting things from the world of ecology was continued, as well as advising employees on Green Office measures related to prudent paper consumption, optimal heat regulation in workplaces, rational water and lighting consumption. old paper and the like. One of the activities we used to increase the environmental awareness of our employees and encourage them to rationally consume energy and resources and reduce the negative impact on the environment was the initiative My Green Decision. The initiative was launched to mark Earth Day with the aim of raising awareness at the individual level of the importance of responsible waste management, in the workplace and beyond. The first activities of this initiative were aimed at reducing the consumption of plastics and the use of sustainable materials In 2021, the first large ecological-volunteer campaign Plant with HPB was organized, in which HPB, in cooperation with Croatian Forests, collected donations from clients and citizens for afforestation, and for the collected money, including the Bank's donation, planted throughout Croatia. 2) Digitalization of business We continuously consider the impact of our business activities on the environment and climate change, and our projects and initiatives are aimed at the fastest and easiest transition to a society with significantly reduced CO₂ emissions. We actively participate in the implementation of sustainability not only within our own organization, but we strive to be an example and encourage our customers and the community to adapt to digital transformation. In the circumstances of the pandemic, when it is recommended to replace physical contact with digital technologies, HPB continues to strengthen its digital channels in order to enable customers to conduct as much financial business as possible online. The Bank is especially improving its mobile banking and virtual eBusiness, which relies on remote communication with customers, online contracting of the Bank's products and services, digital documentation and qualified digital signing of documents. This way of doing business increases the time availability of products and services to the Bank's clients, and at the same time has a significant positive impact on the environment. The use of eBusiness also reduces the impact of vehicles on the environment, and digital documents and signatures in communication with customers reduce the amount of paper used. It also reduces the need for office space, energy and resources needed for the Bank to function. HPB was one of the first banks to introduce SEPA Instant payments in 2020, ie almost real-time payment transactions at any time, and in 2021 it enabled mobile banking users to set up payment orders even faster and easier by selecting indirect account identifiers such as mobile phone numbers. , email or OIB, instead of IBAN. The significant increase in activities through HPB's digital channels proves that the Bank's clients have also accepted remote banking, which is ultimately faster, simpler, safer and more affordable for them. HPB continuously encourages its clients to choose the option of sending statements of account balances and changes, as well as statements on card spending via e-mail, which together contribute to reducing paper consumption. 3) Trend of decreasing energy and paper consumption Business activities and processes, organization of sessions and meetings and conducting large-scale training in 2021 were carried out remotely, which caused a further positive impact on paper consumption and printing solutions and energy savings, as evidenced by measurement results. Due to these circumstances, energy consumption as well as the frequency of printing documentation at the annual level was record low. 4) Waste management The Bank continued to dispose of waste paper responsibly through authorized waste disposal companies. For the Slavonian area from the end of 2020 for the locations of HPB in Osijek, Beli Manastir, Našice, Đakovo, Valpovo and Donji Miholjac, the removal of old paper has been contracted in cooperation with an authorized company. For the removal of collected old paper from the Bank's Zagreb locations, the services of an authorized company are still ordered, if necessary, while local companies are hired for branches from other locations of the Bank or employees independently dispose of the paper in designated containers. 65 All electronic waste (old computers, printers, fax machines) is still adequately disposed of by companies authorized to dispose of this type of waste. • Paper consumption KPI: Reduce the total amount of paper consumption, ie printing by 10% compared to 2020. Result: Achievement 10.33% • Electricity consumption KPI: Reduce total electricity consumption by 5% compared to 2020. Result: Achievement 6.6% • Water usage KPI: Reduce total water consumption by 5% compared to 2020. Result: Achievement 7.9% In the forthcoming period, the Bank will, in accordance with regulatory guidelines, develop methodologies and metrics for the development of key performance indicators for adaptation to climate change, as well as other environmental objectives prescribed by the Taxonomy Regulation. RESPONSIBILITY TO SHAREHOLDERS The Bank protects the interests of all its shareholders or potential investors, without discrimination or preferential treatment. Business books and documentation are accurate and complete and information of a financial nature is published and available to all shareholders at the same time and in the same way. The Bank's website publishes annual, semi-annual and quarterly financial reports, information to shareholders on the exercise of their rights such as participation in the General Meeting of Shareholders, basic acts of the company, press releases and presentation of business results and data on the Bank's shares. We encourage the participation of all shareholders in the General Meeting of Shareholders in order to exercise their voting right and thus influence the adoption of decisions that are of the utmost importance for the Bank's operations. In order to enable potential investors to be informed about the Bank's operations when making their investment decisions, to request and obtain relevant information in writing, the Bank has appointed a person in charge of investor relations. We implement effective procedures and risk management systems, we have established control functions, the effectiveness of which we regularly review. We expect employees in managerial positions to adhere to the principles of corporate governance. SUPPLIERS AND CONTRACT PARTNERS The selection of service providers and suppliers who have adopted and are guided in their business by the principles of social and corporate responsibility and whose values coincide with the values to which HPB is committed is encouraged. We work with suppliers we trust who are aware of the fact that business connections with other business entities affect our reputation and public perception of us. We do not cooperate with suppliers that may adversely affect the good reputation of the Bank. We select suppliers on the basis of clear and documented criteria, while respecting a clear and transparent procedure, avoiding any and even potential conflicts of interest. HPB does not cooperate with businesses owned and majority co-owned by employees and their family members. We respect the agreed deadlines and pay for goods and services to suppliers and service providers in accordance with the contractual terms. We do not accept inappropriate gifts or money from suppliers and service providers. 66 Report on Application of the Corporate Governance Code Application of the Corporate Governance Code Pursuant to Article 272p of the Companies Act and Article 22 of the Accounting Act, the Management Board and the Supervisory Board declare that the Bank, as an issuer of shares listed on the regulated market of the Zagreb Stock Exchange, applies the Corporate Governance Code (Code) developed jointly by the Croatian Financial Services Supervisory Agency (HANFA) and the Zagreb Stock Exchange. ZSE), and is publicly available on their website www.zse.hr and www.hanfa.hr. The Bank operates in accordance with good corporate governance practice and the recommendations of the Code. Explanations can be found in the annual Questionnaire on compliance with the Code, approved by the Management Board and the Supervisory Board, which is published on the ZSE website (www.zse.hr), in the Official Register of Prescribed Information at HANFA (www.hanfa.hr) and the Bank's website (www.hpb.hr). In December 2021, Hrvatska poštanska banka, a joint stock company, was declared the winner of the award for the best compliance with the Corporate Governance Code for 2020 on the Official Market of the Zagreb Stock Exchange d.d. HANFA awards this recognition to the best companies - issuers of securities listed on the regulated market in Croatia. Also, the Bank applies the Code of Corporate Governance of Companies in which the Republic of Croatia has shares or stakes, adopted by the Government of the Republic of Croatia (Official Gazette 132/2017) at the end of 2017 in which it seeks to contribute with its business strategy and key internal acts to transparent and efficient operations and better relations with the business environment in which it operates through the application of anti-corruption provisions and mechanisms, measures and procedures to manage conflicts of interest. In addition to the recommendations of these codes, and in accordance with the regulations of credit institutions, we are actively working on continuous improvement of corporate governance in the Bank, bearing in mind the structure and organization of the Bank, strategy and business objectives, distribution of powers and responsibilities. monitoring and reporting on risks in the Bank's operations, as well as establishing appropriate internal control mechanisms. In order to reduce risk in the financial reporting process, the Bank has established an appropriate system of internal controls and risk management that is ensured through a clear delineation of responsibilities of participating organizational units in accordance with internal acts, and adequate and effective internal controls integrated into business processes and activities. A description of the basic features of conducting internal control in the company and risk management in relation to financial reporting can be found in the description of the Bank 's operations in Note 2. Significant shareholders and restrictions on share rights The Republic of Croatia is the most important individual shareholder of the Bank with 44.90% of the Bank's shares and together with the HP - Croatian Post d.d., Croatian Deposit Insurance Agency, Croatian Pension Insurance Institute and the Krško NPP Fund hold over 77% of share capital and voting rights at the General Assembly. In accordance with the Bank's Statute, one share gives the right to one vote, i.e. the right to vote is not limited nor are there any restrictions for exercising the right to vote. The Bank's shareholders exercise their rights at the General Assembly of the Bank. The General Assembly of the Bank decides on issues determined by the Companies Act and the Bank's Articles of Association. As a rule, the General Assembly is convened by the Bank's Management Board, and must be convened when requested by the Supervisory Board or shareholders in accordance with the relevant provisions of the Companies Act. The right to participate in the General Assembly of the Bank and to exercise the right to vote may be exercised by each shareholder in person or by proxy if he announces his participation in the General Assembly no later than six days before the General Assembly and if he is registered in the Central Depository submitting an application for participation in the work of the General Assembly. 67 Rules for the Appointment or Removal of the Management Board, Statute Changes and Special Authorizations of the Management Board In accordance with the Bank’s Statute the Management Board should have at least 2 and no more than 5 members with the Supervisory Board deciding on the number. Members and the president of the Management Board are appointed by the Supervisory Board to a maximum of 5 years, and can be reappointed without time limit. Member of the Management Board must fulfill all the necessary conditions as set by The Companies Act, the Credit Institutions Act and the relevant bylaws, ie which has received the prior consent of the Croatian National Bank to perform the function for which it was appointed. The suitability of an individual member of the Management Board of the Bank to perform the relevant function is the extent to which that person has the characteristics and meets the prescribed conditions to ensure that he will professionally, legally, safely and stably perform tasks within its competence. The members of the Management Board must together have the professional knowledge, skills and experience necessary for the independent and autonomous management of the Bank's business, and in particular for understanding the Bank's business and significant risks. Members of the Bank's Management Board must perform full-time management of the Bank and be employed by the Bank. The Supervisory Board may, by its decision, recall the President and members of the Management Board when there is an important reason for this, and the President and members of the Management Board are entitled to make written resignations. The Bank’s Statute can only be changed by the decision of the General Meeting. Decision is approved if voted by 3/4 of the equity holders. A proposed Decision on amendments to the Statue is submitted by the Management Board to the Supervisory Board, which is authorized to accept the proposal and submit it to the General Assembly for consideration. By the decision of the General Assembly of 10 May 2021, the Bank's Management Board was authorized to acquire the Bank's own shares on the organized securities market during the period from the date of the General Assembly decision to the next regular General Assembly of the Bank in 2022. relates to the acquisition of treasury shares together with treasury shares already held by the Bank may not exceed 1% of the share capital. By the same Decision of the General Assembly, the Management Board is authorized to dispose of its own shares outside the regulated market for the purpose and in accordance with regulatory requirements related to variable remuneration in accordance with the internal Revenue Policy. In February 2022, the Bank acquired a total of 341 HPB-R-A treasury shares in accordance with the Treasury Repurchase Program. Prior to the acquisition, the Bank held 795 treasury shares without rights, and after the said acquisition it held a total of 1,136 treasury shares without voting rights. The release of this number of treasury shares was carried out in accordance with the General Assembly Decision on authorizing the Bank's Management Board to acquire and dispose of treasury shares from May 2021 and the Treasury Repurchase Program from January 2022 until the next regular General Assembly of the Bank in 2022 . Following the transfer, the Bank has no more treasury shares in its treasury account. Supervisory Board Members and Activities In accordance with the Bank's Statute, the Supervisory Board may have a maximum of seven members elected and recalled by the General Assembly. Only a person who meets the requirements prescribed by The Companies Act, the Credit Institutions Act and the relevant bylaws, ie who has obtained the prior consent of the Croatian National Bank to perform the function of a member of the Supervisory Board may be elected a member of the Supervisory Board. The members of the Supervisory Board must together have the expertise, skills and experience necessary for independent and autonomous supervision of the Bank's operations, and in particular for understanding the Bank's operations and significant risks. The suitability of an individual member of the Bank's Supervisory Board to perform the relevant function is the extent to which that person has the characteristics and meets the prescribed conditions to ensure that he will professionally, legally, safely and stably perform tasks within its competence. 68 The powers of the Supervisory Board are regulated by the Companies Act, the Credit Institutions Act, the Decision on the management system and the Bank's Articles of Association. In the period from 1.1. to 12.8.2021 the Supervisory Board of the Bank consisted of three members, as follows: • mr.oec. Marijana Miličević, President • dr.sc. Željko Lovrinčević, Vice-president • mr.sc. Marijana Vuraić Kudeljan, Member The members of the Supervisory Board of the Bank were appointed at the General Assembly held on May 29, 2017 for a term of 4 years and their mandate began on August 12, 2017 upon obtaining the CNB's prior approval in accordance with the terms of the Credit Institutions Act. In the period from 13.8. to 31.12.2021 the Supervisory Board of the Bank consisted of three members, as follows: • mr.oec. Marijana Miličević, President • prof.dr.sc. Mislav Ante Omazić, Vice-president • mr.sc. Marijana Vuraić Kudeljan, Member Members of the Supervisory Board of the Bank were appointed at the General Assembly held on May 10, 2021. for a term of 4 years, and their term began on 13.8.2021. after obtaining the prior consent of the CNB in accordance with the conditions of the Credit Institutions Act. The members of the Supervisory Board are not the shareholders of the Bank. Meetings of the Supervisory Board are usually held once a quarter (quarterly), and more often if necessary, and at least once every six months. The Supervisory Board may make decisions on important and urgent issues without holding a meeting, in which case the members express themselves in writing, by telephone, fax or e-mail. In 2021, 11 regular meetings of the Supervisory Board were held, at which many issues related to the Bank's operations were discussed. All members of the Supervisory Board were present at the regular sessions. Due to exceptional and extraordinary circumstances due to the aftermath of the earthquake in the center of Zagreb and the COVID-19 virus pandemic, and in order to implement the necessary measures to avoid gatherings and personal contacts, the Supervisory Board decided 108 times outside the meeting by e- mail. situations when individual decisions had to be made promptly, most of which referred to the Supervisory Board's approval of the Bank's exposure to individual clients in accordance with legal regulations, as well as other decisions that required the Supervisory Board's consent. Board has following committees: Audit Committee, Risk Committee, Remuneration Committee and Nomination Committee. Audit Committee In the period from 1.1. to 12.8.2021 the Audit Committee consisted of three members, as follows: • dr.sc. Željko Lovrinčević, President • Zlatko Benčić, Vice-president • Ivana Radeljak Novaković, Member In the period from 13.8. to 31.12.2021 the Audit Committee of the Bank consisted of three members, as follows: • dr.sc. Željko Lovrinčević, President • Ivana Radeljak Novaković, Vice-president • Prof. dr. sc. Mislav Ante Omazić, Member 69 The majority of the members of the Audit Committee are independent of the Bank. In 2021, 11 regular meetings of the Audit Committee were held, which were attended by all members. Issues within the competence of the Supervisory Board were discussed at the sessions. The Audit Committee assisted the Supervisory Board in performing its duties related to overseeing the financial reporting process, the audit process (including the recommendation to the General Assembly for the selection of the external auditor), the effectiveness of the internal audit system, discussing annual work plans and internal audit related to this area. In addition to regular sessions, the Audit Committee decided outside the sessions 5 more times by e-mail, in situations when it was necessary to promptly make certain decisions/conclusions within its competence. Risk Committee In the period from 1.1. to 12.8.2021 the Risk Committee was composed of three members: • mr.sc. Marijana Vuraić Kudeljan, President • mr.oec. Marijana Miličević, Member • dr.sc. Željko Lovrinčević, Member In the period from 13.8. to 31.12.2021 the Risk Committee of the Bank consisted of three members: • mr.sc. Marijana Vuraić Kudeljan, President • mr.oec. Marijana Miličević, Member • Prof. dr. sc. Mislav Ante Omazić, Member In 2021, the Risk Committee held 6 regular sessions attended by all members. At the sessions of the Risk Committee, issues within its competence were discussed in accordance with the Law on Credit Institutions and its bylaws. In addition to regular sessions, the Risk Committee decided outside the sessions 7 more times by e-mail, in situations when certain decisions / conclusions within its competence had to be made promptly. Remuneration Committee In the period from 1.1. to 12.8.2021 the Remuneration Committee was composed of three members as follows: • mr.oec. Marijana Miličević, President • mr.sc. Marijana Vuraić Kudeljan, Member • dr.sc. Željko Lovrinčević, Member In the period from 13.8. to 31.12.2021 the Remuneration Committee of the Bank consisted of three members: • mr.oec. Marijana Miličević, President • mr.sc. Marijana Vuraić Kudeljan, Member • Prof. dr. sc. Mislav Ante Omazić, Member In 2021, the Remuneration Committee held 3 regular meetings, which were attended by all members. At the sessions of the Remuneration Committee, issues within its competence were discussed in accordance with the Law on Credit Institutions and its bylaws. In addition to regular meetings, the Remuneration Committee decided outside the sessions 3 more times by e-mail, in situations when certain decisions / conclusions within its competence had to be made promptly. Nomination Committee In the period from 1.1. to 12.8.2021 Nomination Committee was composed of three members as follows: • mr.oec. Marijana Miličević, President • dr.sc. Željko Lovrinčević, Member • mr.sc. Marijana Vuraić Kudeljan, Member 70 In the period from 13.8. to 31.12.2021 Nomination Committee of the Bank consisted of three members: • mr.oec. Marijana Miličević, President • mr.sc. Marijana Vuraić Kudeljan, Member • Prof. dr. sc. Mislav Ante Omazić, Member In 2021, the Nomination Committee held 2 regular meetings, which were attended by all members. At the meetings of the Nomination Committee, issues within its competence were discussed in accordance with the Law on Credit Institutions and its bylaws. In addition to the regular meetings, Nomination Committee decided outside the sessions 8 more times by e-mail, in situations when certain decisions/conclusions within its competence had to be made promptly. Management Board Members and Activities The privileges, duties and responsibilities of the Bank's Management Board in managing and representing the Bank are determined by the Companies Act, the Credit Institutions Act, the Bank's Statute and the Rules of procedure of the Bank's Management Board activities. The Management Board of the Bank, in accordance with the needs of business processes, establishes permanent and occasional committees and commissions. The Bank's standing committees are the Credit Committee, the Assets and Liabilities Management Committee and the Operational Risk Management Committee. In the period from 1.1. to 11.9.2021 year, the Management Board consisted of three members, namely: • mr.sc. Marko Badurina, President of the Management Board • Ivan Soldo, Member of the Management Board • Anto Mihaljević, Member of the Management Board. Pursuant to the Decision of the Supervisory Board of 2 June 2021, on 9 September 2021 the Croatian National Bank gave its consent to the current members of the Bank's Management Board to perform the function of President and members of the credit institution's board for a two-year term starting on 12 September 2021. In the period from 12.9. to 31.12.2021 the Management Board consisted of three members, as follows: • mr.sc. Marko Badurina, President of the Management Board • Ivan Soldo, Member of the Management Board • Anto Mihaljević, Member of the Management Board. Members of the Management Board are not the shareholders of the Bank. Overview of the Diversity Policy for the members of the Management Board and the Supervisory Board of the Bank The diversity policy for the members of the Management Board and the Supervisory Board, adopted by the General Assembly of the Bank, aims to establish the necessary standards that ensure diversity and representation of both sexes in management and supervisory functions, ie the Management Board and the Supervisory Board. The average target level of representation of the currently underrepresented gender - female - in the Bank's governing body is determined by the percentage of at least 33.3% that the Bank aims to achieve in the five-year period from 2021 to 2026, which is currently met at the overall level. governing body. In the reporting period, the Bank's Supervisory Board consists of two members and one member, which makes the composition diverse by gender, given that the percentage of female representation is 66.7%, which is above the target level of at least 30% female representation in the Supervisory Board. 71 In the reporting period, the Bank's Management Board consists of the President of the Management Board and two members, which currently does not meet the criteria of gender diversity, given that the percentage of female gender is 0.0%, which is below the target level of 20%. in the Management Board of the Bank. During 2021, the balance of the Supervisory Board and the Management Board was established according to the criteria of skills, experience, competencies and age, which is evident from the CVs of the Supervisory Board and the Management Board published on the Bank's website (www.hpb.hr). The fact that the Croatian National Bank took into account the positive results of the assessment of suitability on an individual and collective basis for the members of both bodies during the procedure of deciding on the prior consent for the performance of a particular relevant function. The Bank is aware of the importance of promoting diversity and non-discrimination policies in the workplace and in employment, so the representation of women is relatively high among key management (detailed in the Human Resources Management section of Hrvatska poštanska banka), and continues to strive any basis in the management of the Bank. Overview of diversity policy In accordance with the Code of Ethics, the Bank appreciates and respects the natural and cultural differences between people. All employees are equal regardless of gender, age, nationality, ethnic origin, religion, language, social, economic status and other discriminatory factors. Accordingly, in 2021, the General Assembly of the Bank adopted the Diversity Policy for the members of the Management Board and the Supervisory Board of the Bank. All employees have the same opportunity for success in the Bank and their position depends solely on the performance and performance of each individual. There is no discrimination by sex, age or any other basis in procedure of selecting members of the Management Board, Supervisory Board or other bodies. The Bank has relatively high percentage of female managers, as well as people of different age groups, educational orientation, knowledge and skills and specific work experience. The Bank will keep this policy of gender, age and professional diversity, where the number of key management has decreased over the years through organizational improvements. In this way, the strategy of achieving the goals of diversity is implemented, which is based on the development of inclusiveness in the management of the Bank, ie the promotion of opportunities for advancement at all levels, regardless of gender. With regard to employee remuneration and working conditions, in order to achieve equal opportunities for both sexes, the Bank's management insists on striking a balance between private and business life, with the aim of creating a healthy and comfortable working environment. All employees have an equal opportunity to succeed in the Bank, and their position depends solely on the work results and performance of each individual. The collective experience of members of the Bank's key management consists of a balanced combination of the necessary knowledge and skills to fulfill the responsibilities of all functions and achieve the Bank's objectives. Structure of the Bank's key management by gender 2018 - 2021 Key management structure by gender No during 2018 Share during 2018 No during 2019 Share during 2019 No during 2020 Share during 2020 No during 2021 Share during 2021 Male 30 50.85% 19 47.50% 20 57.15% 17 54.83% Female 29 49.15% 21 52.50% 15 42.85% 14 45.17% 72 Hrvatska poštanska banka organizational structure The Bank's operations are organized through 25 organizational units - 13 sectors and 12 offices, as follows: 73 The Bank's organizational unites are divided into 4 basic business areas including: 1. Professional support to the Management Board, 2. Profit centers, 3. Operating business support, 4. Risk, collection and financial management. Business area functionally and technologically connects certain Bank's organization units to ensure efficient management and business organization. Professional support to the Management Board implies groups of tasks whose purpose is to provide the Management Board with professional support in achieving business goals and organizing and managing the Bank. Professional support to the Management Board is consisted of: • Internal audit office, • Management Board office, • Compliance division, • Organization and project management office, • Human resources management office, • Marketing office, • Corporate security office, • The service quality management office, • Legal affairs office, • Asset procurement and management office, • Assets and liabilities management office, • Strategic development office, • Service development and sales personnel office. Internal audit office is the Bank’s organizational unit that evaluates internal control and risk management system, compliance function and performs IT audit. Management Board office is an organizational unit that provides support in the work of permanent authorities and committees of the Bank, and provides professional support in the management of corporate communications of the Bank and members of the HPB Group. Compliance division is an organizational unit that takes care of the compliance of the Bank's operations with regulations, manages the system of personal data protection and privacy protection, the system of fraud prevention and the system of prevention of money laundering and terrorist financing in the Bank. Organization and project management office is an organizational unit that analyzes and improves the organization and business processes and manages projects. Human resources management office is an organizational unit of the Bank that is engaged in recruiting, developing and rewarding employees of the Bank and regulating labor legal relations with employees and government authorities. Marketing office is an organizational unit of the Bank that prepares and implements marketing and promotional activities for the Bank. Corporate security office is an organizational unit of the Bank that takes care of the security of the Bank's information system, people and assets. 74 The service quality management office is an organizational unit of the Bank that manages the quality of the Bank's service to its clients through continuous implementation of measuring and researching customer satisfaction and proposing improvements to build up the quality of service. Legal affairs office is an organizational unit of the Bank that provides legal support to all organizational units of the Bank. Asset procurement and management office is an organizational unit of the Bank that manages the procurement of goods and services, general affairs and registration and archives of the Bank, current business and investments and maintenance of the Bank's operating assets and manages assets taken in exchange for uncollected receivables. Assets and liabilities management office is an organizational unit of the Bank that manages assets and liabilities, open currency items, market risk positions and liquidity risk positions. Strategic development office is the organizational unit of the Bank in charge of business development of the Bank and HPB Group, the process of strategic planning and control of the implementation of the strategic plan of the Bank and HPB Group. Service development and sales personnel office is an organizational unit of the Bank in charge of supporting the development and improvement of the service model and sales staff to organizational units that enter into business relations and do business with retail clients and small and medium enterprises. Profit center represent related groups of transactions organized into organizational units in which all products and services of the Bank are sold. Profit centers are consisted of: • Retail department, • SME department, • Large corporate and public sector department, • Financial markets department. Retail department is an organizational unit of the Bank that operates on the market and provides banking and financial services to the retail clients on market principles, coordinates the work of regional retail centers and branches of the Bank and the company Hrvatska pošta d.d./Croatian post p.l.c. as a distribution channel. SME department is an organizational unit of the Bank that operates on the market and establishes business relations with the Bank's clients in the area of business with small and medium-sized enterprises on market principles. Large corporate and public sector department is an organizational unit of the Bank that operates on the market and establishes business relations with the Bank's clients in the area of business with large corporates and the public sector on market principles. Financial markets department is an organizational unit of the Bank that trades in financial instruments on behalf and for the account of the Bank, manages liquidity and foreign exchange position of the Bank and provides investment services and investment activities and related services within the Bank's activities. Operating business support represent related groups of operations organized into organizational units in which support is provided for the sale of products and services and the overall operations of the Bank. Operating business support is consisted of following departments: • Products and Delivery Processes management, • Direct Banking. • Business Support, • Information Technology, 75 Products and Delivery Processes management is an organizational unit that provides efficient processes, products and services that will meet the needs of customers and business and sales goals of the Bank. Direct Banking is an organizational unit responsible for the smooth operation and development of all direct distribution channels of products and services of the Bank and members of the HPB Group and card business (ATM, POS, WEB, e-Branch, mBanking and eBanking) Business support is an organizational unit of the Bank that provides operational support to organizational units of the profit centers, performs domestic and foreign payment operations, cash management and supplies the business network of the Bank and Croatian Post with cash. Information Technology is an organizational unit of the Bank that provides IT support to all organizational units of the Bank. Risk, collection and finance management represent groups of operations organized into organizational units in which risk management, collection of the Bank's receivables and financial management are performed. Risk, collection and financial management is consisted of following departments: • Credit risk management, • Strategic risk and risk control management, • Collection management, • Finance management. Credit risk management is an organizational unit of the Bank that performs the function of taking risks and manages the process of determining the creditworthiness of clients and assessing the credit risk of placements in the process of approving placements. Strategic risk and risk control management is an organizational unit of the Bank that manages strategic risks, analyzes and controls all types of risks to which the Bank is exposed or could be exposed in its operations, in order to reduce potential exposure to all types of risks and ensure stability and efficiency of operations. Collection management is an organizational unit of the Bank that performs receivables restructuring and activities of early and forced collection of receivables. Finance management is an organizational unit of the Bank which manages the Bank’s accounting system, performs regulatory reports, financial controls and develops management reporting system. 76 Human resource management in HPB During 2021, the Bank continued to develop positive practices in human resource management in accordance with the Bank's strategy and corporate values. The continuous development of the Bank's operations in accordance with the defined strategy is supported by the employment of expert employees in the digital domains of operations and the development of the competencies of existing employees in order to be able to successfully respond to the needs of the market and clients. Significant progress in the development of the Bank's employees was achieved through the introduction of the Knowledge Nursery model and more intensive use of digital online learning platforms. The launch of the Data Nursery, which aims to improve the data-analytical competencies of employees, emphasizes independent learning and encourages the development of personal development plans of employees. During 2021, a model of key competencies was developed that reflects the corporate values related to the vision and mission of the Bank, and a model of managerial competencies was additionally defined. The biggest step forward in defining professional competencies was made within the IT sector, where the methodology for determining key positions and employees was developed, which is the basis for talent management and a positive step towards systematic management of progress. For the purpose of promoting the Bank as a desirable employer and more efficient employment of IT profiles of employees, a plan of employer branding activities was prepared at the beginning of the year. Valuable insights were obtained through a survey conducted in the IT sector and more intensive cooperation was achieved with faculties in the technical domain. In order to improve the organizational climate, culture and engagement, an organizational vitality survey was conducted, the results of which were presented to all employees. Improvement measures have been designed to be implemented in the coming years at the Bank level. The conducted research is important because it represents the beginning of systematic management of organizational climate, culture and engagement. Human resource management processes have been further improved and digitized. A completely new digital system for the employment process has been implemented and the process for the introduction of a new information system for human resource management has been launched. During 2021, the process of improving the performance management system for all employee and managerial positions of the Bank continued with the aim of encouraging the organization's focus on achieving results and building a culture of excellence. Employee remuneration policies have been revised, rules and pay adjustment cycles have been defined to ensure employer attractiveness and high employee engagement in challenging market conditions. Having in mind the necessity of responsible and business sustainable management of employee costs, the model of regular, monthly management reporting of the Bank's management on key indicators related to human resources such as total cost and number of employees, voluntary and involuntary turnover, absences, etc. was implemented. In order to facilitate and more efficient implementation, the process of proposing and implementing organizational changes and related changes in employment contracts and employee compensation has been structured. The Bank is in the process of renewing the "Employer Partner" certificate and continues to further improve the human resources management process. Overview of the movement of the number of employees in the Bank 2017 – 2021 No. of employees 31.12.2017 31.12.2018 31.12.2019 31.12.2020 31.12.2021 Based on the working hours 842 1,036 1,063 1,275 1,279 At the end of the period 1,122 1,118 1,252 1,301 1,289 All positions in the Bank are located in the Republic of Croatia. 77 Structure of employees in Hrvatska poštanska banka by gender as of 31.12.2021: Educational structure of employees in a Bank 2017 – 2021 Employees with high or higher education have a dominant share in the educational structure, depending on the complexity of the job and workplace. Qualification 31.12.2017 31.12.2018 31.12.2019 31.12.2020 31.12.2021 Master's degree/doctorate 14 12 19 27 45 University degree 475 473 539 566 550 Higher education 187 193 203 210 211 High school education 444 439 490 497 482 Semi-skilled, skilled and highly skilled 1 1 1 1 1 Total 1,122 1,118 1,252 1,301 1,289 Number of employees in Hrvatska poštanska banka by years of service as of 31.12.2021: Male; 27% Female; 73% 220 531 373 150 15 0-9 10-19 20-29 30-39 40-49 78 Subsidiaries operations HPB Invest Ltd HPB Invest Ltd (hereinafter referred to as the Company) is a company established for the purpose of establishing and managing UCITS funds. HPB Invest d.o.o. on 31.12.2020 manages 6 open-end investment funds with a public offering (HPB Short-term Kuna bond fund, HPB Short-term euro bond fund, HPB Bond fund, HPB Bond plus fund, HPB Global fund and HPB Equity fund). Total assets of open-end investment funds with a public offering managed by HPB Invest Ltd as at 31 December 2021 amounts to HRK 913 million (2020: HRK 899 million). The average assets in 2021 amounted to HRK 892 million, and in the previous year HRK 885 million. Due to low yields on bonds and the emergence of higher inflation rates around the world, the HPB Bond Fund had a negative yield and this led to a further decline in its assets. On the other hand, there was an increase in assets in riskier funds, due to clients' search for higher potential returns. The company, despite difficult market conditions, had no problems with customer payments and ended the year with a positive result. The asset structure of the funds under management is as follows: Fund Asset under management HRK '000 Yield as at 31.12.2021 in % HPB Equity fund 34,069 18.56% HPB Global fund 98,194 16.12% HPB Short-term Kuna bond fund 363,076 0.18% HPB Bond fund 289,955 -2.82% HPB Short-term euro bond fund 25,951 0.60% HPB Bond Plus fund 101,526 0.51% Market share of HPB Invest as at 31.12.2021 is 4.35%, which represent a decrease compared to the previous year when market share was 5.09% At the end of 2021, the Company had 12 employees. Development plan HPB Invest Ltd, a UCITS fund management company, will continue to be committed to professional asset management and high-quality service, in order to ensure the preservation and sustainable growth of the value of their financial assets to its clients. With continuous investment in the development policy of the Company, which includes continuous professional, personnel, organizational and technological improvements, with increasingly demanding legal and regulatory harmonization of operations, HPB Invest Ltd will provide in the long run an attractive range of funds and investment products, which with professional management and appropriate returns can meet all the needs of investors, depending on their investment goals, investment horizon and risk appetite. Risk exposure The Company specifically monitors and measures the following risks: credit risk, liquidity risk, operational risk, conflict of interest risk and reputational risk. These risks form the overall risk profile of the Company. The Company has taken a conservative stance in managing its assets by investing them exclusively in bank deposits, debt securities, money market instruments and money market funds. For this reason, the risk profile of the Company is low, i.e. 1. 79 At the reporting date, the Company was not exposed to significant market risk and liquidity risk. The majority of the Company's exposure to credit risk at the statement of financial position date arises from the fair value of the instrument whose positive value at reporting date is presented in the statement of financial position. The Company is exposed to operational risk through its regular operations. The Company manages operational risk by reporting quarterly to the Company's Management Board on events that may qualify as operational risk for the Company. Risks that may affect the Company's regular operations are the risk of a decrease in assets under management due to the withdrawal of client funds and the risk of a decrease in assets under management due to a decline in the value of assets. The Company gives special importance to the internal control system in order to be able to monitor the efficiency of operations, compliance with legal regulations, monitoring and detection of risks to which the Company is exposed. HPB-nekretnine Ltd HPB-nekretnine Ltd (hereinafter the Company) is a real estate company established in August 2005 and is wholly owned by HPB d.d. The share capital of the Company amounts to HRK 4,760,800. The Company's core business activities are (1) real estate appraisal and related engineering services such as financial supervision, (2) real estate consulting and mediation services, and (3) real estate operations and management. HPB-nekretnine Ltd assets as at 31 December 2021 amounts to HRK 10.83 million, and the net profit realized in the previous year is HRK 586 thousand. At the end of 2021, the Company had 14 employees. Development plan In the next period, the emphasis will be on raising the efficiency and quality of service for clients of Hrvatska poštanska banka d.d. The Company will build its development and business policy on specific services, such as expert supervision and the preparation of expert opinions, thus contributing to the visibility and synergistic effect of the HPB Group's operations. At the same time, with an active approach to external clients, we plan to generate additional income for the Company. Risk exposure The most significant types of financial risks to which the Company is exposed are market risk and liquidity risk. Market risk implies a difficult to predict volume of demand for specific services of the Company given the uncertainty in the real estate market caused by the earthquake and COVID-19 pandemic. Market risk refers to the inability of tenants to pay rents as well as the possibility of reducing the demand for real estate appraisal services, and related liquidity risk due to the high share of services in the Company's products. The Company manages risks in accordance with the prescribed policies and procedures of Hrvatska poštanska banka p.l.c. The company owns two properties, one in Osijek and the other in Vinkovci. Business premises in Osijek are leased to Hrvatska poštanska banka d.d. Ownership of real estate in Vinkovci represents a risk in business because it is a share of ownership 322/900 in an office building with a total area of about 10,000 m2, which is in poor construction condition. The conclusion of the Agreement on the sale of business premises of the branch of Hrvatska poštanska banka d.d. is currently underway. in Vinkovci, and public tenders are being prepared with the aim of selling other business premises. 80 Responsibilities of the Management Board for the preparation and approval of the Annual financial statements Management Board is responsible for preparation of consolidated and separate financial statements of Hrvatska poštanska banka p.l.c. (hereinafter “the Bank”) for each financial year that give a true and fair view of the financial position of the Group and the Bank and their results and cash flows in accordance with applicable standards, and is responsible for keeping the proper accounting records required for the preparation of these financial statements at any given time. The Management Board is also responsible for the whole annual report of the Group, as well as the forms of financial statements prepared in accordance with the Decision of the Croatian National Bank on the structure and content of bank's annual financial statements (Official Gazette 42/18, 122/20 and 119/21). The Management Board has overall responsibility for taking such measures to safeguard the assets of the Bank and the Group and to prevent and detect fraud and other irregularities. Management Board is responsible for selecting appropriate accounting policies that comply with applicable accounting standards and for their consistent application; making reasonable and prudent judgments and estimates; and preparing the financial statements on an going concern basis unless it is inappropriate to presume that the Bank will continue in business. The Management Board is obliged to submit the Annual report to the Supervisory Board for approval, which includes the annual financial statements. If the Supervisory Board gives consent to the financial statements, they are approved by the Management Board and the Supervisory Board of the Bank. The Management Board is responsible for preparation and contents of the annual report in accordance with the Accounting Act (Official Gazette 78/15,134/15, 120/16, 116/18, 42/20 and 47/20). Consolidated and separate financial reports presented on pages 90 to 221, as well as Forms drafted in line with CNB Decision on Forms and Contents of Bank Financial Reports (Official Gazette 42/18, 122/20 and 119/21), outlined on pages 222 to 235, were approved by the Management Board on March 30, 2022 and have been submitted for acceptance to the Supervisory Board. As a sign of confirmation, financial reports are signed by persons authorized for representation, as follows: Signed on behalf of Hrvatska poštanska banka, p.l.c. Marko Badurina President of the Management Board Ivan Soldo Member of the Management Board Anto Mihaljević Member of the Management Board 81 This page is intentionally left blank. Registrirano kod Trgovačkog suda u Zagrebu pod brojem 080044149 OIB 76394522236 Tel: +385 1 2395 741 Fax: +385 1 2303 691 E-mail: bdo-croatia@bdo.hr BDO Croatia d.o.o. 10000 Zagreb Radnička cesta 180 82 Independent Auditor’s Report To the shareholders of Hrvatska poštanska banka d.d., Zagreb Audit report on the separate and consolidated annual financial statements Opinion We have audited the separate annual financial statements of Hrvatska poštanska banka d.d., (“the Bank”) and the consolidated annual financial statements of the Bank and its subsidiaries (“the Group”), which include the separate and consolidated statements of financial position of the Bank and the Group as at 31 December 2021, separate and consolidated income statements and other comprehensive income, the separate and consolidated statements of cash flows and the separate and consolidated statements of changes in equity for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying annual financial statements presents a true and fair view of the financial position of the Bank and the Group as at 31 December 2021, and of their respective financial performance and cash flows for the year then ended in accordance with the with statutory accounting requirements for banks in Croatia. Basis for Opinion We performed the audit in accordance with the International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the annual financial statements section of our Independent Auditor’s report. We are independent of the Bank and the Group in accordance with the Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those which were, in our professional judgment, of the utmost importance for our audit of the separate and consolidated annual financial statements of the current period and include most significant recognized risks of significant misstatement as a result of error or fraud with the greatest impact on our audit strategy, the allocation of our available resources and the time spent by the engaged audit team. We have dealt with these matters in the context of our audit of the separate and consolidated annual financial statements as a whole and in forming our opinion about them, and we do not give a separate opinion on these matters. We have determined that the following matter was key audit matter and should be published in our Independent Auditor's report. BDO Croatia d.o.o. 83 Key audit matters (continued) Impairment of loans and advances to customers As at 31 December 2021, in the consolidated financial statements gross loans and advances to customers amounted to HRK 15,805 million, related impairment allowance of HRK 1,553 million and impairment loss recognised in the income statement of HRK 56 million (31 December 2020: gross loans and advances: HRK 16,304 million, impairment allowance: HRK 1,581 million, impairment loss recognised in the income statement: HRK 141 million). As at 31 December 2021, in the separate financial statements gross loans and advances to customers amounted to HRK 15,805 million, impairment allowance of HRK 1,553 million and impairment loss recognised in the income statement of HRK 56 million (31 December 2020: gross loans and advances: HRK 16,304 million, impairment allowance: HRK 1,581 million, impairment loss recognised in the income statement: HRK 141 million). Key audit matter How we addressed the key audit matter We focused on this area due to the significance of the amounts involved in the separate and consolidated financial statements and also because of the nature of the judgements and assumptions that the management is required to make. impairment allowance represent management's best estimate of risk of default and the expected credit losses within the loans and advances at the reporting date. Management makes judgments about the future and various items in the separate and consolidated financial statements are subject to estimation uncertainty. The estimates required for credit loss allowances for loans and advances to customer represent significant estimates. The key areas of judgement associated with credit loss allowances for loans and advances to customers are the identification of loans that are deteriorating, the assessment of significant increase in credit risk, forecasts of future cash flows as well as expected proceeds from the realization of collateral and the determination of the expected credit losses of loans and advances to customer which are all inherently uncertain. The impairment allowance is measured as either 12-month expected credit loss or lifetime expected credit loss, depending on whether there has been a significant increase in credit risk since initial recognition. In order to address the risks associated with impairment allowances for expected credit losses on loans and receivables from customers, identified as key audit matter, we have designed audit procedures that allowed us to obtain sufficient appropriate audit evidence for our opinion. Our audit procedures in this area included, among others: • reviewing the methodology of the Bank and the Group for the calculation of the expected credit loss and assessing its compliance with the requirements of International Financial Reporting Standards 9: Financial Instruments (“IFRS 9”), • obtaining an understanding of the provisioning process, IT applications used therein, as well as key data sources and assumptions for data used in the expected credit loss model, • assessing and testing of IT control environment for data security and access, • evaluating the design, implementation and operational effectiveness of controls in credit risk management and lending processes, and tested key controls related to the approval, recording and monitoring of loans and advances, BDO Croatia d.o.o. 84 Key audit matters (continued) Key audit matter How we addressed the key audit matter For individually significant loans or exposures that are exceeding HRK 1 million individually and for which there has been a default (non-revenue exposures), the impairment assessment is based on the knowledge of each individual borrower and often on estimation of the fair value of the related collateral. Related impairment allowance are determined on an individual basis by means of a discounted cash flows analysis. Impairment allowance for performing exposures and non-performing retail exposures as well as non-performing corporate exposures below HRK 1 million individually (together “collective impairment allowance”) are determined by modelling techniques. Historical experience, identification of exposures with a significant deterioration in credit quality, forward-looking information and management judgment are incorporated into the model assumptions. The Bank is continuously recalibrating the model parameters which also requires our increased attention in the audit. Related disclosures accompanying the annual financial statements For additional information see notes 1 (Significant accounting policies) and 3 (Accounting estimates and judgements in applying accounting policies) and notes 11 (Loans and advances to customers) and 2.1. (credit risk section of the note 2 Financial risk management policies). • testing the design, implementation and operational effectiveness of selected key controls in the areas of customer rating, as well as the controls relating to the identification of loss events and default, appropriateness of classification of exposures between performing and non- performing and their segmentation into homogenous groups, calculation of days past due, collateral valuations and calculation of the impairment allowance, • testing, on a sample basis, whether the definition of default and the staging criteria were consistently applied in accordance with relevant policies, • evaluating the overall modelling approach of calculation of expected credit losses (ECLs), including the calculation of main risk parameters and macroeconomic factors (probability of default (PD), loss given default (LGD) and exposure at default (EAD)), • testing the adequacy of individual loan loss allowances, on a sample basis, with focus on those with the greatest potential impact on the financial statements due to their magnitude and risk characteristics, as well as lower value items, which we independently assessed as high-risk, • conducting an evidentiary test of the selected sample to assess the correctness of the loan classification, • in certain cases, we used our own judgment to determine the parameters for calculating impairment losses on loans and compared our calculations with the impairment of the value calculated by the Bank, • critically evaluating the impact of COVID- 19 pandemic on impairment allowances for expected credit losses and assessing the local regulatory framework impacted by COVID-19 pandemic, • evaluating the accuracy and completeness of the financial statement disclosures. BDO Croatia d.o.o. 85 Other information in the Annual Report Management is responsible for other information. Other information include information included in the Annual Report but, do not include the separate and consolidated annual financial statements and our Independent auditor's report on them. Our opinion on the separate and consolidated annual financial statements does not include other information and, except to th e extent otherwise explicitly stated in our report, we do not express any kind of assurance conclusion with on them. In relation with our audit of the separate and consolidated annual financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the separate and consolidated annual financial statements or with our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information we are required to report that fact. In this sense, we do not have anything to report. The Management Board is responsible for compiling the Management Board Report for the Bank and the Group as an integral part of the Bank's and the Group's Annual Report. With respect to the Management Board Report of the Bank and of the Group and the Statement on the Implementation of Corporate Governance Code, we also performed procedures required by the Accounting Act in Croatia (“Accounting Act”). Those procedures include considering whether: • the Management Board Report of the Bank and of the Group has been prepared in accordance with the requirements of Articles 21 and 24 of the Accounting Act; • the specific information in the Statement on the Implementation of Corporate Governance Code required by Article 22, paragraph 1, items 3 and 4 of the Accounting Act (“relevant sections of the Implementation of Corporate Governance Code”) has been prepared in accordance with the requirements of Article 22 of the Accounting Act; and • the Statement on the Implementation of Corporate Governance Code includes the information specified in Article 22, paragraph 1, items 2, 5, 6 and 7 of the Accounting Act. Based on the work that we performed during the audit of the financial statements and procedures above, in our opinion: • the information given in the Management Board Report of the Bank and of the Group and the relevant sections of the Statement on the Implementation of Corporate Governance Code as part of the Annual report of the Bank for the financial year for which the financial reports have been prepared are in accordance, in all significant determinants, with the separate and consolidated annual financial statements of the Bank and of the Group set out on pages 90 to 221 on which we expressed our opinion as stated in the Opinion section above; • the information given in the Management Board Report of the Bank and of the Group and the relevant sections of the Statement on the Implementation of Corporate Governance Code is prepared in accordance with the requirements of Articles 21, 22 and 24 of the Accounting Act, respectively; • the Statement on the Implementation of Corporate Governance Code includes the information specified in Article 22 paragraph 1, items 2, 5, 6 and 7 of the Accounting Act. In addition, in light of the knowledge and understanding of the entity and its environment obtained in the course of the audit, we are also required to report if we have identified material misstatements in the Annual Report. We have nothing to report in this respect. BDO Croatia d.o.o. 86 Responsibilities of Management and those charged with Governance for the Annual Financial Statements The Management is responsible for the preparation of annual financial statements that give a true and fair view in accordance with the legal accounting regulations applicable to banks in the Republic of Croatia, and for such internal controls that the Management determines necessary to enable the preparation of separate and consolidated annual financial statements that are free from material misstatement, whether due to fraud or error. In preparing the separate and consolidated annual financial statements, the Management is responsible for assessing the Bank’s and the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Bank or the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Bank’s and the Group’s financial reporting process. Auditor’s Responsibility for the Audit of the Annual Financial Statements Our objectives are to obtain reasonable assurance about whether the separate and consolidated annual financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a higher level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users made based on these annual financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • identify and assess the risks of material misstatement of the separate and consolidated annual financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s and the Group’s internal control. • evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Management of the Bank. • make conclusion on the appropriateness of Management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s and the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the separate and consolidated annual financial statements or if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern. BDO Croatia d.o.o. 87 Auditor’s Responsibility for the Audit of the Annual Financial Statements (continued) • evaluate the overall presentation, structure and content of the separate and consolidated annual financial statements, including the disclosures, and whether the separate and consolidated annual financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also give a statement to those charged with governance that we have acted in accordance with relevant ethical requirements regarding independence and that we will communicate with them on all relationships and other issues that can reasonably be considered to affect our independence as well as, where applicable, about related protections. Among the matters we are communicating with those charged with governance, we determine those matters that are of utmost importance in auditing the annual financial statements for the current period and are therefore key audit matters. We describe these matters in our independent auditor’s report unless the law or regulations prevents public disclosure or when, in exceptionally rare circumstances, we decide that the matter should not be reported in our independent auditor’s report as it can reasonably be expected that the negative effects of the announcement will surpass the welfare of public interest in such disclosure. Report on other legal requirements On 1 October 2021, the General Assembly of the Bank appointed us to conduct an audit of the Bank’s separate and consolidated annual financial statements for the year 2021. At the date of this Independent Auditor's Report, we have been continuously engaged in performing the statutory audit of the Bank's annual financial statements since 2020, which makes two years in total. In the audit of the Bank's separate and consolidated annual financial statements for 2021, we have determined the following materiality levels for the financial statements as a whole: • for the separate annual financial statements: HRK 52 million • for the consolidated annual financial statements: HRK 52 million which represents approximately 2% of the of the Bank's or Group's net assets for the year 2021. We chose net assets as the benchmark because, in our view, it is the benchmark against which the performance of the Bank and the Group is commonly measured by users and is a generally acceptable benchmark. Our audit opinion is consistent with the additional report for the Bank's auditing board, prepared in accordance with the provisions of Article 11 of Regulation (EU) No. 537/2014. During the period between the initial date of the audited separate and consolidated annual financial statements of the Bank for the year 2021 and the date of this Report, we did not provide the Bank and the Group with prohibited non-assurance services and we did not provide internal control or risk management procedure design and implementation services in the business year prior to the aforementioned period related to the preparation and/or control of financial information or the design and implementation of financial information technological systems and we have maintained independence in relation to the Bank during the performance of the audit. BDO Croatia d.o.o. 88 Report on other legal requirements (continued) Pursuant to the Decision on the structure and contents of annual financial statements published by Croatian National Bank (OG 42/18 and 122/20), the Bank’s Management prepared forms presented on pages 222 to 235 (hereinafter „the Forms“). The financial information in the Forms is derived from the separate and consolidated financial statements set out on pages 90 to 221 on which we expressed our opinion as stated in the section Opinion above. Report based on the requirements of the ESEF Regulation Auditor's assurance report on the compliance of annual separate and consolidated financial statements (hereinafter: financial statements), prepared pursuant to the provision of Article 462, paragraph 5 of the Capital Market Act (Official Gazette, nos. 65/18, 17/20 and 83/21) by applying the Delegated Regulation (EU) 2018/815 establishing a single electronic reporting format for issuers (hereinafter: the ESEF Regulation). We conducted the engagement with expressing reasonable assurance as to whether the financial statements prepared for the purposes of public disclosure pursuant to Article 462, paragraph 5 of the Capital Market Act, which are contained in the electronic file hrvatskapostanska-2021-12-31-hr in all material aspects prepared in accordance with the requirements of the ESEF Regulation. Responsibilities of Management and those charged with governance The Bank's Management is responsible for the preparation and content of the financial statements in accordance with the ESEF Regulation. In addition, the Bank's Management is responsible for maintaining a system of internal controls that reasonably assures the preparation of financial statements without material non-compliance with the reporting requirements of the ESEF Regulation, whether due to fraud or error. The Management of the Bank is also responsible for: • public disclosure of the financial statements contained in the annual report in a valid XBRL format, and • selection and use of XBRL codes in accordance with the requirements of the ESEF Regulation. Those in charge of governance are responsible for overseeing the preparation of financial statements in the ESEF format as part of the financial reporting process. Auditor's responsibilities It is our responsibility to express a conclusion, based on the audit evidence gathered, as to whether the financial statements are free from material non-compliance with the requirements of the ESEF Regulation. We conducted this reasonable assurance engagement in accordance with International Standard on Assurance Engagements (ISAE) 3000 (revised) - Assurance engagements other than audits or reviews of historical financial information. BDO Croatia d.o.o. 89 Report based on the requirements of the ESEF Regulation Procedures performed The nature, timing and extent of the procedures selected depend on the auditor's judgment. Reasonable assurance is a high level of assurance. However, it does not assure that the scope of testing will reveal all significant (material) non-compliance with the ESEF Regulation. As part of the selected procedures, we have performed the following activities: • we have read the requirements of the ESEF Regulation, • we have gained an understanding of the Bank's internal controls relevant to the application of the requirements of the ESEF Regulation, • we have identified and assessed the risks of material non-compliance with the ESEF Regulation due to fraud or errors; and • based on that, we have planned and designed procedures for responding to assessed risks and for obtaining reasonable assurance for the purpose of expressing our conclusion. The aim of our procedures was to assess whether: • the financial statements, which are included in the separate and consolidated annual report, are prepared in the valid XHTML format, • the information contained in the separate and consolidated financial statements required by • ESEF Regulation, are labelled and all labels meet the following requirements: • XBRL markup language was used, • the elements of the basic taxonomy listed in the ESEF Regulation with the closest accounting meaning were used, unless an additional element of taxonomy has been created in accordance with Annex IV ESEF Regulations, • the labels comply with the common labelling rules under the ESEF Regulation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Conclusion In our opinion, based on the procedures performed and the evidence obtained, the financial statements presented in ESEF format, contained in the above-mentioned electronic file and based on the provision of Article 462, paragraph 5 of the Capital Market Act prepared for the purposes of public disclosure, in all material respects are in line with the requirements of the ESEF Regulation for the year ended 31 December 2021. Our conclusion is not an opinion on the truthfulness and fair presentation of the financial statements presented in electronic form. In addition, we do not express our assurance in other information published with documents in ESEF format. The partner engaged in the audit of the Bank's and Group's annual financial statements for the year 2021 resulting in this Independent auditor's report is Ivan Čajko, certified auditor. Zagreb, 30 March 2022 BDO Croatia d.o.o. Radnička cesta 180 10000 Zagreb For signatures, please refer to the original Croatian auditor's report, which prevails. Consolidated Statement of Financial Position as at 31 December 2021 90 Consolidated Statement of Financial Position in HRK '000 Notes 31.12.2021 31.12.2020 ASSETS Cash and Amounts Due from Banks 5 6,192,555 3,684,942 Mandatory Reserve with Croatian National Bank 6 1,326,442 1,219,157 Loans and Receivables from Banks 7 289,837 379,399 Financial Assets at Fair Value through Profit and Loss 8 625,986 758,106 Financial Assets at Fair Value through Other Comprehensive Income 9 4,601,297 4,158,035 Financial Assets at Amortized Cost 10 453 1,975 Loans and Receivables from Customers 11 14,251,800 14,722,770 Assets Held for Sale 12 9,200 - Property, Equipment with right of use 14 248,636 259,000 Investment Property 15 67,642 73,430 Intangible Assets 16 93,381 91,231 Tax Prepayment 637 2,714 Other Assets 18 124,656 113,019 TOTAL ASSETS 27,832,522 25,463,778 LIABILITIES Financial Liabilities at Fair Value through Profit and Loss 19 - 21 Deposits from Banks 20 28,025 96,635 Customer Deposits 21 23,412,844 21,110,846 Borrowings 22 1,396,886 1,466,641 Provisions for Liabilities and Expenses 23 88,080 116,424 Deferred Tax Liabilities, Net 17 26,282 23,483 Income tax liability 35,887 - Other Liabilities 24 187,771 170,825 TOTAL LIABILITIES 25,175,775 22,984,875 EQUITY Share Capital 25 1,214,775 1,214,775 Treasury shares 25 (477) (477) Reserves for treasury shares 25 4,477 4,477 Statutory Reserve 25 40,010 30,907 Other Reserves 25 657,992 576,064 Fair Value Reserve 25 212,651 242,231 Revaluation Reserve 25 27,543 22,744 Retained Earnings 25 499,776 388,181 TOTAL EQUITY 2,656,747 2,478,902 TOTAL LIABILITIES AND EQUITY 27,832,522 25,463,778 The significant accounting policies and other notes on pages 100-221 form an integral part of these financial statements. Consolidated Profit and Loss Account for the year ended 31 December 2021 91 Consolidated Profit and Loss Account The significant accounting policies and other notes on pages 100-221 form an integral part of these financial statements. Notes 2021 HRK '000 2020 HRK '000 Interests and Similar Income 26 556,257 585,463 Interests and Similar Expense 27 (32,149) (48,236) Net Interest Income 524,108 537,227 Fees and Commissions Income 28 490,053 456,855 Fees and Commissions Expense 29 (291,606) (275,141) Net Fees and Commissions Income 198,447 181,714 Net Gains/(Losses) from Financial Instruments at Fair Value through Profit and Loss 30 25,694 (16,369) Net gains from Financial Instruments at Fair Value through Other Comprehensive Income 31 - 35,036 Net Gains from Dealing in Foreign Currencies 57,476 54,812 Other Operating Income 32 24,784 18,219 Trading and Other Income 107,954 91,698 Operating Income 830,509 810,639 General and Administrative Expenses 33 (450,102) (442,985) Other expenses (22) - Depreciation and Amortization 14,15,16 (67,823) (76,630) Impairment Losses on Loans and Receivables from Customers and Other Assets (65,810) (121,364) Provisions for Liabilities and Expenses 23 (307) 58,910 Total Expenses and Provisions (584,064) (582,069) PROFIT BEFORE TAX 246,445 228,570 Income Tax expense 35 (43,820) (45,186) PROFIT FOR THE YEAR 202,625 183,384 Consolidated Statement of Other Comprehensive Income for the year ended 31 December 2021 92 Consolidated Statement of Other Comprehensive Income 2021 HRK '000 2020 HRK '000 Profit for the Year 202,625 183,384 Other Comprehensive Income Items that will not be reclassified subsequently to profit or loss: Revaluation Reserve 6,411 (7,533) Equity instruments in assets carried at other comprehensive income - net change in fair value (1,553) (6,402) Change in actuarial gains (3,219) 1,826 Income Tax Relating to Items That Will Not Be Reclassified Subsequently (1,612) 1,511 27 (10,598) Items that may be reclassified subsequently to profit or loss: Unrealized loss from Assets Valued through Other Comprehensive Income (31,302) (56,213) Sale of Financial Assets Valued through Other Comprehensive Income - (32,521) Income Tax Relating to Items That May Be Reclassified Subsequently 6,493 16,795 (24,809) (71,939) Other Comprehensive Loss for the Year, net of tax (24,782) (82,538) Total Comprehensive Income for the Year 177,845 100,847 2021 HRK '000 2020 HRK '000 Profit/ (Loss) for the Year 202,625 183,384 The Bank’s Owners 202,625 183,384 Earnings per share HRK 100.12 HRK 90.61 From active and discontinued parts of Business: Basic (in HRK per share) HRK 100.12 HRK 90.61 Diluted (in HRK per share) HRK 100.12 HRK 90.61 The significant accounting policies and other notes on pages 100-221 form an integral part of these financial statements. Consolidated Statement of Changes in Equity and Reserves for the year ended 31 December 2021 93 Consolidated Statement of Changes in Equity and Reserves Group Share Capital Own Shares Reserve for Own Shares Other Reserves Fair Value Reserve Revaluation Reserve Retained Earnings Total HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 Balance at 1 January 2020 (as previously reported) 1,214,775 (477) 4,477 535,085 314,658 659 307,543 2,376,720 Corrected - - - - 4,088 28,108 (30,859) 1,337 Balance at 1 January 2020 1,214,775 (477) 4,477 535,085 318,746 28,767 276,683 2,378,056 Revaluation Reserve - - - - - (7,533) - (7,533) Equity instruments in assets carried at other comprehensive income - net change in fair value - - - - (6,402) - - (6,402) Change in the Fair Value of Financial Assets at Fair Value through Other Comprehensive income - - - - (56,213) - - (56,213) Sale of Financial Assets at Fair Value through Other Comprehensive Income - - - - (32,521) - - (32,521) Change in actuarial gains/losses - - - - 1,826 - - 1,826 Deferred Tax - - - - 16,795 1,511 - 18,306 Net profit for the period 01.01. - 31.12.2020 - - - - - - 183,384 183,384 Total Comprehensive Income for 2020 - - - - (76,515) (6,023) 183,384 100,847 Distribution of 2019 Profit - Transfer to Statutory and Other Reserves - - - 71,887 - - (71,887) - Balance at 31 December 2020 1,214,775 (477) 4,477 606,971 242,231 22,744 388,181 2,478,902 Balance at 1 January 2021 1,214,775 (477) 4,477 606,971 242,231 22,744 388,181 2,478,902 Revaluation Reserve - - - - - 6,411 - 6,411 Equity instruments in assets carried at other comprehensive income - net change in fair value - - - - (1,553) - - (1,553) Changes in Fair Value of Financial Assets at fair Value through Other Comprehensive Income - - - - (31,302) - - (31,302) Sale of Financial Assets at Fair Value through Other Comprehensive Income - - - - - - - - Change in actuarial gains/losses - - - - (3,219) - - (3,219) Deferred Tax - - - - 6,493 (1,612) - 4,882 Net loss for the period 01.01. - 31.12.2021 - - - - - - 202,625 202,625 Total Comprehensive Income for 2021 - - - - (29,580) 4,799 202,625 177,845 Distribution of 2020 Profit - Transfer to Statutory Reserves and other reserves - - - 91,031 - - (91,031) - Balance as at 31 December 2021 1,214,775 (477) 4,477 698,002 212,651 27,543 499,776 2,656,747 The significant accounting policies and other notes on pages 100-221 form an integral part of these financial statements. Consolidated Statement of cash flow as at 31 December 2021 94 Consolidates Cash Flow Statement The significant accounting policies and other notes on pages 100-221 form an integral part of these financial statements. HRK '000 Notes 01.01. – 31.12.2021 01.01. – 31.12.2020 Cash Flows from Operating Activities Profit/ (Loss) Before Taxation 246,445 228,570 Adjusted by: - Depreciation and Amortization 14,15,16 67,823 76,081 - Foreign Exchange (Gains)/Losses 32 7,593 8,625 - Net Impairment Losses on Loans and Receivables from Customers and Other assets 65,806 121,364 - (gains) / losses on provisions for liabilities and charges 23 307 (58,910) - Net change on Financial Assets at Fair Value 30 (83,170) (82,104) - Net interest income (524,111) (537,335) - Dividend income (2,044) (3,293) Changes in Operating Assets and Liabilities Loans and Receivables from Banks (4,727) (133,106) Mandatory CNB Reserves (107,285) 339,050 Financial Assets at Fair Value through Profit and Loss 172,074 (46,059) Financial Assets at amortized cost 1,534 2,307 Financial Assets at fair value through other comprehensive income - 226,249 Loans and Receivables from Customers 441,654 (1,481,630) Other assets (19,452) (7,500) Deposits from Banks (69,619) 84,628 Customer Deposits 2,030,484 1,295,683 Other Liabilities 236,376 (11,488) Interest charged 484,505 509,425 Interest paid (30,807) (31,426) Net Cash (Outflow)/ Inflow from Operating Activities Before Tax 2,913,386 499,131 Income Tax Paid 2,077 (461) Net Cash (Outflow)/ Inflow from Operating Activities 2,915,463 498,670 Cash Flows from Investing Activities Net purchase of Property, Equipment and Intangible Assets (47,114) (28,845) Disposal of Financial Assets Valued through fair value at profit and loss and Other Comprehensive Income 50,800 656,072 Acquisition of Financial Assets Valued through fair value at Other Comprehensive Income (419,725) (388,780) Dividends Received 2,044 3,293 Net Cash flow from Investing Activities (413,995) 241,740 Cash Flows from Financing Activities Increase in Borrowings 373,212 744,561 Repayments of Borrowings (430,491) (422,027) Lease repayments under IFRS 16 (24,419) (18,682) Net Cash flow from Financing Activities (81,698) 303,852 Effect of Foreign Exchange Differences on Cash and Cash Equivalents - - Net (Decrease)/ Increase in Cash and Cash Equivalents 2,419,770 1,044,262 Cash and Cash Equivalents at the Beginning of the Year 38 4,081,581 3,037,319 Cash and Cash Equivalents at the End of the Year 38 6,501,351 4,081,581 Separate Statement of Financial Position as at 31 December 2021 95 in HRK '000 Notes 31.12.2021 31.12.2020 ASSETS Cash and Amounts Due from Banks 5 6,192,515 3,684,902 Mandatory Reserve with Croatian National Bank 6 1,326,442 1,219,157 Loans and Receivables from Banks 7 289,837 379,399 Financial Assets at Fair Value through Profit and Loss 8 625,986 758,106 Financial Assets at Fair Value through Other Comprehensive Income 9 4,601,297 4,158,035 Financial Assets at Amortized Cost 10 453 1,975 Loans and Receivables from Customers 11 14,251,800 14,722,770 Assets Held for Sale 12 9,200 - Investments in subsidiaries 13 9,761 9,761 Property, Equipment with right of use 14 248,110 258,356 Investment Property 15 60,629 65,993 Intangible Assets 16 93,319 91,039 Tax Prepayment 541 2,639 Other Assets 18 123,297 111,635 TOTAL ASSETS 27,833,187 25,463,766 LIABILITIES Financial Liabilities at Fair Value through Profit and Loss 19 - 21 Deposits from Banks 20 28,025 96,635 Customer Deposits 21 23,422,089 21,118,434 Borrowings 22 1,396,886 1,466,641 Provisions for Liabilities and Expenses 23 88,015 116,424 Deferred Tax Liabilities, Net 17 26,282 23,483 Income tax liability 35,887 - Other Liabilities 24 185,572 169,023 TOTAL LIABILITIES 25,182,757 22,990,662 EQUITY AND RESERVES Share Capital 25 1,214,775 1,214,775 Treasury shares 25 (477) (477) Reserves for treasury shares 25 4,477 4,477 Statutory Reserve 25 40,010 30,907 Other Reserves 25 657,992 576,064 Fair Value Reserve 25 212,651 242,231 Revaluation Reserve 25 27,543 22,744 Retained Earnings 25 493,459 382,384 TOTAL EQUITY 2,650,430 2,473,104 TOTAL LIABILITIES AND EQUITY AND RESERVES 27,833,187 25,463,766 The significant accounting policies and other notes on pages 100-221 form an integral part of these financial statements. Separate Profit and Loss Statement for the year ended 31 December 2021 96 Separate Profit and Loss Statement The significant accounting policies and other notes on pages 100-221 form an integral part of these financial statements Notes 2021 HRK '000 2020 HRK '000 Interests and Similar Income 26 556,257 585,564 Interests and Similar Expense 27 (32,146) (48,229) Net Interest Income 524,111 537,335 Fees and Commissions Income 28 482,976 450,156 Fees and Commissions Expense 29 (290,100) (273,889) Net Fees and Commissions Income 192,877 176,267 Net (Losses) / Gains from Financial Instruments at Fair Value through Profit and Loss 30 25,694 (16,369) Gains from Financial Instruments at Fair Value through Other Comprehensive Income 31a - 35,036 Net Gains from Dealing in Foreign Currencies 31b 57,476 54,812 Other Operating Income 32 21,053 12,016 Trading and Other Income 104,223 85,496 Operating Income 821,211 799,097 General and Administrative Expenses 33 (442,399) (433,877) Depreciation and Amortization 14, 15, 16 (67,020) (75,816) Impairment Losses on Loans and Receivables from Customers and Other Assets 34 (65,810) (121,364) Provisions for Liabilities and Expenses 23 (307) 58,910 Total Expenses and Provisions (575,536) (572,147) PROFIT BEFORE TAX 245,675 226,950 Income Tax (Expense)/ Income 35 (43,568) (44,888) PROFIT FOR THE YEAR 202,107 182,062 Separate Statement of Other Comprehensive Income for the year ended 31 December 2021 97 Sep 2021 HRK '000 2020 HRK '000 Profit for the Year 202,107 182,062 Other Comprehensive Income Items that will not be reclassified subsequently to profit or loss: Revaluation Reserve 6,411 (7,533) Equity instruments in assets carried at other comprehensive income - net change in fair value (1,553) (6,402) Change in actuarial (losses)/gains (3,219) 1,826 Income Tax Relating to Items That Will Not Be Reclassified Subsequently (1,612) 1,509 27 (10,600) Items that may be reclassified subsequently to profit or loss: Unrealized loss from Assets Valued through Other Comprehensive Income (31,302) (56,213) Sale of Financial Assets Valued through Other Comprehensive Income - (32,521) Income tax that may be reclassified subsequently 6,493 16,796 (24,809) (71,938) Other Comprehensive Loss for the Year (24,782) (82,538) Total Comprehensive Income for the Year 177,326 99,524 arate Statement of Other Comprehensive Income 2021 HRK '000 2020 HRK '000 Profit/ (Loss) for the Year 202,107 182,062 The Bank’s Owners 202,107 182,062 Earnings per share HRK 99.86 HRK 89.96 From active and discontinued parts of Business: Basic (in HRK per share) HRK 99.86 HRK 89.96 Diluted (in HRK per share) HRK 99.86 HRK 89.96 The significant accounting policies and other notes on pages 100-221 form an integral part of these financial statements Separate Statement of Changes in Equity and Reserves for the year ended 31 December 2021 98 Separate Statement of Changes in Equity and Reserves Bank Share Capital Own Shares Reserve for Own Shares Other Reserves Fair Value Reserve Revaluation Reserve Retained Earnings Total HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 Balance at 1 January 2020 (as previously reported) 1,214,775 (477) 4,477 535,084 318,746 659 296,947 2,370,212 Corrected - - - - - 28,108 (24,739) 3,368 Balance at 1 January 2020 1,214,775 (477) 4,477 535,084 318,746 28,767 272,208 2,373,580 Revaluation Reserve - - - - - (7,533) - (7,533) Equity instruments in assets carried at other comprehensive income - net change in fair value - - - - (6,402) - - (6,402) Change in the Fair Value of Financial Assets at Fair Value through Other Comprehensive income - - - - (56,213) - - (56,213) Sale of Financial Assets at Fair Value through Other Comprehensive Income - - - - (32,521) - - (32,521) Change in actuarial gains/losses - - - - 1,826 - - 1,826 Deferred Tax - - - - 16,796 1,509 - 18,305 Net profit for 2020 - - - - - - 182,062 182,062 Total Comprehensive Income for 2020 - - - - (76,514) (6,024) 182,062 99,524 Distribution of 2019 Profit - Transfer to Statutory and Other Reserves - - - 71,887 - - (71,887) - Balance at 31 December 2020 1,214,775 (477) 4,477 606,971 242,231 22,744 382,384 2,473,104 Balance at 1 January 2021 1,214,775 (477) 4,477 606,971 242,231 22,744 382,384 2,473,104 Revaluation Reserve - - - - - 6,411 - 6,411 Equity instruments in assets carried at other comprehensive income - net change in fair value - - - - (1,553) - - (1,553) Changes in Fair Value of Financial Assets at fair Value through Other Comprehensive Income - - - - (31,302) - - (31,302) Sale of Financial Assets at Fair Value through Other Comprehensive Income - - - - - - - - Change in actuarial gains/losses - - - - (3,219) - - (3,219) Deferred Tax - - - - 6,493 (1,612) - 4,882 Net profit for 2021 - - - - - - 202,107 202,107 Total Comprehensive Income for 2021 - - - - (29,580) 4,799 202,107 177,326 Distribution of 2020 Profit - Transfer to Statutory Reserves and other reserves - - - 91,031 - - (91,031) - Balance as at 31 December 2021 1,214,775 (477) 4,477 698,002 212,651 27,543 493,459 2,650,430 The significant accounting policies and other notes on pages 100-221 form an integral part of these financial statements. Separate Cash Flow Statement For the year ended 31 December 2021 99 Separate Cash Flow Statement The significant accounting policies and other notes on pages 100-221 form an integral part of these financial statements. Notes 2021 HRK ‘000 2020 HRK ‘000 Cash Flows from Operating Activities Profit/ (Loss) Before Taxation 245,675 226,950 Adjusted by: - Depreciation and Amortization 14,15,16 67,020 75,816 - Foreign Exchange (Gains)/Losses 32 7,593 8,625 - Net Impairment Losses on Loans and Receivables from Customers and Other assets 65,804 121,364 - (gains) / losses on provisions for liabilities and charges 23 307 (58,910) - Net change on Financial Assets at Fair Value 30 (83,170) (82,104) - Net interest income (524,111) (537,335) - Dividend income (2,044) (3,293) Changes in Operating Assets and Liabilities Loans and Receivables from Banks (4,727) (133,106) Mandatory CNB Reserves (107,285) 339,050 Financial Assets at Fair Value through Profit and Loss 172,074 (46,059) Financial Assets at amortized cost 1,534 2,307 Financial Assets at fair value through other comprehensive income - 226,249 Loans and Receivables from Customers 441,654 (1,481,336) Other assets (19,526) (7,854) Deposits from Banks (69,619) 84,628 Customer Deposits 2,032,140 1,297,428 Other Liabilities 236,166 (11,324) Interest charged 484,505 509,425 Interest paid (30,807) (31,426) Net Cash (Outflow)/ Inflow from Operating Activities Before Tax 2,913,183 499,096 Income Tax Paid 2,098 (430) Net Cash (Outflow)/ Inflow from Operating Activities 2,915,281 498,666 Cash Flows from Investing Activities Net purchase of Property, Equipment and Intangible Assets (47,009) (28,845) Disposal of Financial Assets Valued through profit and loss and through Other Comprehensive Income 50,800 656,072 Acquisition of Financial Assets Valued through Comprehensive Income (419,725) (388,780) Dividends Received 2,044 3,293 Net Cash flow from Investing Activities (413,890) 241,740 Cash Flows from Financing Activities Increase in Borrowings 373,287 744,561 Repayments of Borrowings (430,567) (422,027) Lease repayments under IFRS 16 (24,343) (18,682) Net Cash flow from Financing Activities (81,622) 303,852 Effect of Foreign Exchange Differences on Cash and Cash Equivalents - - Net (Decrease)/ Increase in Cash and Cash Equivalents 2,419,770 1,044,258 Cash and Cash Equivalents at the Beginning of the Year 38 4,081,541 3,037,284 Cash and Cash Equivalents at the End of the Year 38 6,501,311 4,081,541 Notes to the Financial statements for the year ended 31 December 2021 100 Notes to the Financial Statements 1. SIGNIFICANT ACCOUNTING POLICIES Hrvatska Poštanska Bank P.L.C. Zagreb is a joint stock company incorporated and domiciled in the Republic of Croatia, Jurišićeva 4, Zagreb. The Bank is the parent of the Hrvatska Poštanska Bank Group (“the Group). The Bank has control over following subsidiaries that make the HPB Group: Industry State Ownership as of 31 December 2021 % HPB Invest d.o.o. Investment Funds Management Croatia 100.00 HPB Nekretnine d.o.o. Real Estate Agency and Construction Croatia 100.00 An overview of investments in HPB subsidiaries is presented in note 13, while the consolidation basis is described in note 1, item e). These financial statements comprise separate and consolidated financial statements of the Bank as defined in IFRS 10 "Consolidated Financial Statements" and International Accounting Standard 27 "Separate Financial Statements". These financial statements were approved by the Management Board on March 30, 2022 for submission to the Supervisory Board. The main accounting policies applied in the preparation of these financial statements are summarized below. Where accounting policies coincide with the accounting principles of International Financial Reporting Standards, in the description of the Group's accounting policies, individual Standards may be referred to, and unless otherwise stated, these are the Standards that were in effect at 31 December 2021. The accompanying financial statements are prepared in accordance with statutory requirements and only as general information and are not intended for any particular purpose or transaction. Therefore, users are advised not to rely exclusively on them in making any decisions, and to conduct further examinations prior to making a decision. Notes to the Financial statements for the year ended 31 December 2021 1. SIGNIFICANT ACCOUNTING POLICIES (continued) 101 a) Statement of Compliance These financial reports are prepared in accordance with the legal requirements applicable to accounting for banks .in the Republic of Croatia. Legal accounting regulations for banks in the Republic of Croatia is based on International financial reporting standard (“IFRS“) and special regulations for banks adopted by Croatian National Bank (“the CNB“. In these financial statements as at 31 December 2021 balances are not materially incompliant with balances in accordance with IFRS. The principal differences between the accounting regulations of the CNB and recognition and measurement requirements of International Financial Reporting Standards are as follows: • Suspended interest represents already accrued unpaid interest on asset for which individual impairment has been recognized. For the part of the exposure for which the passage of time of default is longer than two years the Bank and the Group carry out the full impairment of accrued unpaid interest through profit and loss, suspend the following accrual in the statement of financial position and present the interest in the off-balance up until the customer makes the payment in cash. The stated is not in accordance with the IFRS 9 „Financial instruments“ which requires the interest income from impaired financial assets to be accrued using the method of the effective interest rate. • In line with CNB Decision on classification of exposures into risk stages and the manner in which credit losses are determined which was put into force at 1 January 2018 („Decision on exposure classification“), CNB prescribes minimum provision for impairment loss for certain exposures for which impairment has been specifically recognized, that may be different from an impairment loss calculated in accordance with IFRS. • In line with the Decision on exposure classification the CNB prescribes the minimum impairment factors/haircuts and collection deadlines for each collateral type for purposes of estimating future cash flows on the basis of collection through collateral. The stated future cash flows can be different from the future cash flows calculated in accordance with the IFRS. • In line with the Decision on exposure classification the CNB prescribes minimum total exposure impairment of risk sub-stages A-1 and A-2, which can be different from the impairment loss calculated in accordance with the IFRS. • In line with the CNB’s Decision on Provisions for Court Cases against the Credit Institution of March 31, 2010 there are minimum requirements for the provisions for court cases the credit institution is obliged to fulfill. In line with the Decision a credit institution must diversify court cases into risk categories depending on the loss probability and form provisions accordingly. However, in certain cases required reserves may differentiate from the ones calculated in accordance with the IFRS. CNB Decision entered into force as at 1 January 2020 modified the accounting framework. In accordance with the article 21 (2) Decision on exposure classification no minimum total exposure impairment of risk sub-stages A-1 and A- 2, which can be different from the impairment loss calculated in accordance with the IFRS is defined. Bank has determined that other abovementioned differences in methodology which are still existing as at 31 December 2021 do not deviate in any material respect from amounts determined in accordance with IFRS (deviation as at 31 December 2021 amounts to approximately HRK 15 million). Significant accounting policies applied in preparation of these financial statements are set out hereafter. Notes to the Financial statements for the year ended 31 December 2021 1. SIGNIFICANT ACCOUNTING POLICIES (continued) 102 a) Basis of preparation These financial reports represent the general-purpose financial reports of the Bank and Group. Financial reports are prepared for the reporting period from 1 January 2020 to 31 December 2021. The financial reports are prepared on the fair value basis for financial assets and liabilities at fair value through profit or loss, at fair value through other comprehensive income, derivative financial instruments and property and repossessed assets except those for which a reliable fair value measurement is not available. Other financial assets and liabilities, and non-financial assets and liabilities, are stated at revaluation model, amortized or historical cost. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Bank and Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account as they value the asset or liability at the measurement date. Fair value for measurement and/ or disclosure purposes in these consolidated and separate financial reports is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IFRS 16 and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 or value in use in IAS 36. In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement, which are described as follows: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; • Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and • Level 3 inputs are unobservable inputs for the asset or liability. In preparing the financial reports, management is required to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities and disclosure of commitments and contingencies at the reporting date, as well as amounts of income and expense for the period. Estimates and underlying assumptions are based on historical experience and various other factors that are believed to be reasonable under current circumstances, the results of which form the basis of making the judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on a regular basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods. Judgments made by management in the application of applicable standards that have significant effects on financial reports and estimates with a significant risk of material adjustment in the next year are discussed in Note 3. Notes to the Financial statements for the year ended 31 December 2021 1. SIGNIFICANT ACCOUNTING POLICIES (continued) 103 b) Basis of preparation (continued) New Standards, Interpretation and Changes of Published Standards (I) New and changed International Financial Reporting Standards are referred to the reporting period The accounting policies applied during the preparation of these financial statements are consistent with those applied when preparing the Group's and the Bank's annual consolidated and separate financial statements as at 31 December 2020, except for the adoption of new standards applicable from 1 January 2021. The Group and the Bank have not previously adopted any other standards, amendments or interpretations that have been published but are not yet in force. First application of new amendments to existing standards in force for the current reporting period In the current reporting period, the following amendments to existing standards are in force, published by the International Accounting Standards Board (“IASB”) and adopted by the European Union: COVID-19 - Concessions after 30 June 2021 (Amendments to IFRS 16) - extended period of application of the exemption until 30 June 2022 (effective for annual periods beginning on or after 1 April 2021) ; Reference interest rate reform - Phase 2 introduces amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 and is not mandatory until annual periods beginning on or after 1 January 2021. The adoption of these amendments to existing standards did not result in significant changes in the financial statements of the Group and the Bank. Standards and amendments to existing standards published by the IASB and adopted in the European Union, but not yet in force At the date of approval of these financial statements, the following amendments to existing standards issued by the IASB and adopted by the European Union have been issued but are not effective: Annual improvements to IFRS 2018-2020 - effective for annual periods beginning on or after 1 January 2022); IAS 37 Provisions, Contingent Liabilities and Contingent Assets (Amendment - Harmful Contracts - Contract Performance Cost): The amendments define which should be included in an entity's assessment of the harmfulness of a contract (effective for annual periods beginning on or after 1 January 2022). ); IAS 16 Property, Plant and Equipment (revised - Pre-Interected Revenue): The amendment reduces the reduction in acquisition costs for the proceeds from the sale of the plant and equipment in operation for its intended use. Instead of the current practice, the entity will also recognize income and expenses generated by trial operation through the income statement or annual loss (effective for periods beginning on or after 1 January 2022); IFRS 3 “Business Combinations” - link to the conceptual reporting framework (effective for annual periods beginning on or after 1 January 2022); Notes to the Financial statements for the year ended 31 December 2021 1. SIGNIFICANT ACCOUNTING POLICIES (continued) 104 b) Basis of preparation (continued) New standards and amendments to existing standards published by the IASB but not yet adopted in the European Union IFRS currently adopted in the European Union do not differ significantly from the regulations adopted by the International Accounting Standards Board (IASB), except for the following new standards and amendments to existing standards, the adoption of which has not yet been decided by the European Union. the effective date listed below apply to IFRSs issued by IASB): IFRS 17 - Insurance Contracts IAS 1 Presentation of Financial Statements (Amendment - Classification of Liabilities in the Short and Long Term) IAS 1 Presentation of Financial Statements and IFRS Statement of Practice 2 (Amendment - Disclosure of Accounting Policies) IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (Amendment - Definition of Accounting Estimates) IAS 12 Income Taxes (Amendment - Deferred Tax on Assets and Liabilities Arising from a Single Transaction The above changes are effective for annual periods beginning on or after 1 January 2022. The Group expects that the adoption of these new standards and amendments to existing standards will not lead to significant changes in the Group's financial statements in the period of the first application of the standards. c) Functional and Presentation Currency The Bank’s and Group financial reports are presented in Croatian Kuna (HRK), which is the functional currency. Amounts are rounded to the nearest thousand (unless otherwise stated). d) Changes in the presentation or classification of items within the financial statements In 2021, the Bank made reclassifications to certain financial statements items related to historical periods. The item Provisions for employees was reclassified from Note 24. Other liabilities in Note 23. Provisions for liabilities and charges and the item Net profit / loss on foreign exchange differences from revaluation of monetary assets and liabilities was transferred from Note 32. Other operating income within Note 30. Net gains on securities at fair value through profit or loss. The effects of reclassification are shown below: Notes to the Financial statements for the year ended 31 December 2021 1. SIGNIFICANT ACCOUNTING POLICIES (continued) 105 Effect on the statement of financial position as at December 31, 2021: (in ‘000 HRK) Bank Balance on 31.12.2020 Balance on 31.12.2020 - before reclassification Effects of reclassification - after reclassification LIABILITIES Provisions for liabilities and expenses • Provisions for employees - 2,166 2,166 Other expenses • Provisions for employees 2,166 (2,166) - STATEMENT OF PROFIT OR LOSS Net gains on securities at fair value through profit or loss • Net foreign exchange gain / loss on revaluation of monetary assets and liabilities - (8,625) (8,625) Other operating income • Net foreign exchange gain / loss on revaluation of monetary assets and liabilities (8,625) (8,625) - Group LIABILITIES Provisions for liabilities and expenses • Provisions for employees - 2,166 2,166 Other expenses • Provisions for employees 2,166 (2,166) - STATEMENT OF PROFIT OR LOSS Net gains on securities at fair value through profit or loss • Net foreign exchange gain / loss on revaluation of monetary assets and liabilities - (8,625) (8,625) Other operating income • Net foreign exchange gain / loss on revaluation of monetary assets and liabilities (8,625) (8,625) - In 2020, the Bank made reclassifications to certain financial statements items related to historical periods. More accurate distribution of investment between property and land on the location Jurišićeva 4, Zagreb in accordance with appraisals performed by independent appraiser in 2017. The effects of the correction are shown below: Notes to the Financial statements for the year ended 31 December 2021 1. SIGNIFICANT ACCOUNTING POLICIES (continued) 106 Effect on the statement of financial position as at December 31, 2019: (in ‘000 HRK) Bank Balance on 31.12.2019 Balance on 31.12.2019 - before reclassification Effects of reclassification - after reclassification ASSET Property and Equipment • Building and Land 119,453 4,108 123,561 Deferred Tax Asset, Net 3,839 5,058 8,897 LIABILITIES Deferred Tax Liability, Net - 5,798 5,798 EQUITY • Revaluation reserve 318,746 28,108 346,854 • Retained Earnings 296,947 (24,739) 272,208 STATEMENT OF PROFIT OR LOSS Depreciation and Amortization Building and Land 3,501 847 4,348 Group ASSET Property and Equipment • Building and Land 131,232 4,108 135,340 Deferred Tax Asset, Net 3,839 5,058 8,897 LIABILITIES Deferred Tax Liability, Net - 5,798 5,798 EQUITY • Revaluation reserve 314,658 28,108 342,766 • Retained Earnings 307,542 (24,739) 282,803 STATEMENT OF PROFIT OR LOSS Depreciation and Amortization Building and Land 3,415 847 4,262 Notes to the Financial statements for the year ended 31 December 2021 107 e) The basis for consolidation The financial statements are presented for the Bank and the Group. The Group's financial statements consist of the consolidated financial statements of the parent company and its subsidiaries over which it has control: HPB Nekretnine doo, Real Estate Company, HPB Invest doo, Investment Fund Management Company. All subsidiaries are 100% owned by their parent company, which are also based in Croatia. As part of consolidation, assets, liabilities, equity, revenues and expenses between Group members are eliminated entirely. Subsidiaries Subsidiaries are all the companies managed by the Bank. Subsidiaries are consolidated, i.e. they cease to be consolidated from the moment the Bank acquires or loses control over them. Income and expense of subsidiaries acquired or disposed of during the year are included in the consolidated income statement and other comprehensive income from the date on which the Bank acquired control until the date of termination of control. Income and expenses of JABA are included in the consolidated profit and loss account from the acquisition date. In separate financial reports of the Bank, investments into subsidiaries are stated at acquisition cost less impairment, if any. Accounting policies of subsidiaries are adjusted as needed to ensure accordance with the Group’s policies. Business combinations Investment cost method is used for posting acquisitions of companies by the Group. Acquisition cost of subsidiaries is measured at fair value of given assets, equities issued and arisen, or liabilities assumed at the date of exchange. Acquired recognizable assets and liabilities and assumed contingent liabilities in business combinations are initially measured at fair value at acquisition date, no matter the amount of minority interest. Excess of acquisition costs over Group share of fair value of acquired recognizable net assets, including intangible assets, result in goodwill. If acquisition cost is lower than fair value of net assets of the acquired subsidiary, the difference is recognized directly in the profit and loss account. Acquisition date is defined as a date at which the acquirer gains control over the acquired. Legal mergers In the case of legal mergers of Group companies, the pooling method applies, the balances of the merging entity are transferred at net book values from the consolidated financial statements to the successor entity, and no adjustments to prior periods are required. Notes to the Financial statements for the year ended 31 December 2021 108 f) Interest Income and Expense Interest income and expense are recognized in the Profit and loss (“P&L”) report as they accrue for all interest bearing financial instruments, including those measured at amortized cost, at fair value through other comprehensive income, using the effective interest rate method. Such income and expense are presented as interest and similar income or interest expense and similar charges in the P&L report. Interest income and expense also includes fee and commission income and expense in respect of loans provided to customers or borrowings from other banks, premium or discount amortization, and other differences between the initial carrying amount of an interest-bearing financial instrument and its value at maturity, recognized on a basis of effective interest rate. Interest income and expense on all trading assets and liabilities are presented as interest income or expense. For financial assets measured at amortized cost, calculation the effective interest rate is based on gross book value, with the exemption of the following: (a) purchased or originated credit impaired financial assets. For such financial assets the entity applies to the amortized cost of financial assets on initial recognition the effective credit impaired interest rate; (b) financial assets that is neither purchased nor originated credit impaired financial assets, but afterwards became credit impaired financial assets. For such financial assets the subject in the following reporting periods to the amortized cost of financial assets applies the effective interest rate Modification of contracted cash flows If contracted cash flows from financial assets were to be renegotiated or modified in some other manner, whereby such new deal or modification do not lead to derecognition of the financial assets, the Bank and the Group recalculate gross book value of the financial assets and in the profit and loss recognize the gain or loss. Gross book value of financial assets is recalculated as present value of renegotiated or modified contracted cash flows discounted by initial effective interest rate of the financial assets (for purchased or originated credit impaired financial assets discounted by effective credit impaired interest rate) or if necessary by credit impaired effective interest rate. Book value of modified financial assets is impaired by arisen costs or fees, which are depreciated during the remaining period of the modified financial assets. When the modification of conditions or modification of contracted future cash flows leads to derecognition of existing financial assets and at the same time there are impairment indicators of new financial assets, it represents the purchased or originated credit impaired financial assets (so called POCI). Once classified into the POCI category, the assets remain in it for its remaining lifetime. g) Fees and Commissions Income and Expense Fee and commission income and expense arise on financial services provided by the Bank and received by the Bank, and mainly comprise fees related to domestic and foreign payments, the issue of guarantees and letters of credit, credit card business and other services provided by and to the Bank and the Group. Fee and commission income and expense are recognized in the P&L report when the related service is performed. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognized as an adjustment to the effective interest rate on the loan. Commitment fees in relation to facilities where draw down is not probable are recognized over the term of the commitment. Loan syndication fees are recognized as revenue when the syndication has been completed and the Bank and Group has retained no part for itself, or has retained a part at the same effective interest rate as the other participants. Portfolio and other management advisory and service fees are recognized based on the applicable service contracts. Asset management fees related to investment fund management are recognized on an accrual basis over the period in which the service is provided. The same principle is applied for custody services that are continuously provided over an extended period of time. Notes to the Financial statements for the year ended 31 December 2021 109 h) Dividend income Dividend income on equity investments is recognized in the P&L report when the right to receive dividends is established. i) Gains Less Losses from Financial Instruments at Fair Value in P&L and Financial Instruments Measured at Fair Value through Other Comprehensive Income Gains less losses from financial instruments at fair value through profit or loss include unrealized and realized gains and losses arising from derivative financial instruments, trading debt securities and other financial instruments designated at fair value through profit or loss. Gains less losses from financial instruments at fair value through other comprehensive income include realized gains and losses from financial instruments measured at fair value through other comprehensive income. Financial assets measured at fair value through other comprehensive income are tested at the end of every reporting period in order to determine the existence of indicators of potential impairment. Financial assets are impaired if there is objective evidence that estimated future cash flows were impacted by one or more events after initial recognition of the financial instrument. Objective impairment evidence may include: • Significant financial difficulties for issuer or other contract party, or • Contract breach, for example late payments or non-payment of principal and interest, or • Likely bankruptcy start or financial restructuring of the debtor, or • Disappearance of active market for concerned financial assets due to financial difficulties. Any subsequent increase in fair value after impairment is recognized in other comprehensive income. In relation with debt securities classified at reporting date at fair value though other comprehensive income (previously available for sale), impairment can subsequently be reversed in the profit and loss account if there is evidence there exists objective evidence of increase of fair value in relation with the event that arises after recognition of impairment. j) Gains Less Losses Arising from Dealing in Foreign Currencies Gains less losses from dealing in foreign currencies include unrealized and realized gains and losses arising from spot dealings in foreign currencies. k) Foreign Currencies Transactions in foreign currencies are translated into HRK at the rate of exchange applicable at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into HRK at the foreign exchange rate applicable at that date. Foreign exchange differences arising on translation are recognized in the P&L report. Non-monetary assets and liabilities denominated in foreign currency that are stated at fair value are translated in HRK at the foreign exchange rates applicable at the dates when the fair values were determined. Non-monetary assets and items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction and are not recalculated. The fair value of financial assets through other comprehensive income denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of the reporting period. The foreign exchange gains and losses that are recognized in profit or loss are determined based on the amortized cost of the monetary asset. Other foreign exchange gains and losses are recognized in other comprehensive income. The official middle exchange rate as of December 31, 2021 was: 7.517174 = 1 EUR; 6.643548 = 1 USD; 7.248263 = 1 CHF. The official middle exchange rate as of December 31, 2020 was: 7.536898 = 1 EUR; 6.139039 = $ 1; 6. 948371 = 1 CHF. Notes to the Financial statements for the year ended 31 December 2021 110 l) Financial Instruments i) Classification The Bank classifies all financial assets in terms of asset management business model, which is measured as follows: • Amortized cost • Fair value through other comprehensive income (FVOCI) • Fair value through profit and loss account (FVPL). Financial liabilities, except for loans granted at interest rate lower than market rates, financial guarantee-based liabilities and financial liabilities measured at FVPL are measured at amortized cost The classification depends on the intent of the financial instruments’' acquisition. The Board determines the classification of the financial instruments at initial recognition. Business model assessment The Bank and the Group determine business models in a manner that best reflects management of financial assets group in order to achieve the business purpose. Business models of the Bank and the Group are not determined at individual level of each instrument, but at aggregate level of the group of the financial instruments. Business model assessment is based on reasonably expected scenarios. If cash flows after initial recognition are realized in a manner different than the initially expected, the Bank and the Group do not change the classification of the remaining financial assets held in that business model, but in the future include new information into the assessment of newly approved or purchased financial assets. In accordance to IFRS 9, the Bank and the Group classify its financial assets in accordance with the following business models: • Business model with the purpose of holding the assets in order to collect contractual cash flows Financial assets held within this business model are managed with the intent to generate cash flows by collecting contractual payments during the instrument's lifetime. The Bank and the Group manage the assets within the portfolio in order to collect certain cash flows (instead of managing the entire portfolio yield that is realized by holding and also by selling the assets). • Business model with the purpose of collecting cash flows and also by selling the financial assets Within this business model the Bank and the Group hold financial assets, which purpose is to collect contracted cash flows and also to sell the financial assets. Within this business model the key management personnel makes the decision that the goal of the business model is realized by collecting cash flows and also by selling the financial assets. One of the goals of the business model is managing daily needs related to liquidity in order to keep a certain interest yield profile or that the duration of the financial assets corresponds to duration of liabilities financed by those assets. • Other business models Financial assets are measured at fair value through profit and loss account if they are not held within the business model with the intent of holding financial assets to collect contracted cash flows or within the business model with the intent of collecting contracted cash flows and also by selling financial assets. The business model which consequently has measurement at fair value through profit and loss account is the one within the Bank and the Group manage the financial assets with the intent of generating cash flows by selling the assets. The Bank and the Group make decision based on fair value of the assets and manage it in order to realize the fair value. Notes to the Financial statements for the year ended 31 December 2021 111 l) Financial instruments (continued) i) Classification (continued) Financial Markets Sector acquires different types of financial assets, whereby the intent for their acquisition is not unambiguous. Within the context of the IFRS 9 application the model of acquisition of financial assets and its placement within business models will be allocated between Financial Markets Sector and Assets and Liabilities Management Office. Financial Markets Sector when deciding the acquisition of financial assets can place the stated into one of three business models as defined by IFRS 9. Financial Markets Sector more closely describes with the Internal act conditions and manner of acquiring financial assets and its placement into each category in accordance with the chosen business model. Assets and Liabilities Management committee makes decisions, on recommendation of Assets and Liabilities Management Office, on financial assets acquisitions within the business model holding to collect and sale. Investments related to this business model will arise from the Bank's investments into financial assets with the intent of liquidity management – general strategy. Transactions related to the stated business model are carried out by Financial Markets Sector by directive from Assets and Liabilities Management Office. The Bank places financial instruments within this business model mainly with the purpose of keeping regulatory obligations and prescribed ratios or liquidity reserves in accordance with internal and external limits. Solely Payments of Principal and Interest test (so called SPPI test) As the next step of the classification process the Bank and the Group asses contracted conditions of financial assets in order to conclude whether the stated assets have contracted cash flows which are solely payments of principal and interest on unpaid amount of the principal. For purposes of applying this test, the 'principal'' is fair value of financial assets at initial recognition, however that amount of the principal can be changed during the financial assets' lifetime (i.e. in case of paying off the principal). The interest covers the fee for time value of cash, for credit risk related to unpaid amount of the principal during certain period and other basic risks and loan costa and also for profit margin. In order to assess the SPPI test result, the Bank and the Group apply assessment and take into consideration important factors such as the currency of financial assets. However, if contracted cash flows of financial assets are not solely payments of principal and interest on unpaid amount of the principal, such financial assets are subsequently measured at fair value through profit and loss account. Financial assets and financial liabilities This category contains two subcategories: financial instruments held for trading (including derivative financial instruments) and financial instruments the Board had initially recognized at fair value through profit and loss account, or those that have to be recognized at fair value through profit and loss account in accordance with IFRS 9. The Bank recognizes financial assets and liabilities at fair value through profit and loss account when: • Assets and liabilities are managed, measured or are internally presented at fair value, • Accounting mismatch is eliminated or significantly reduced by recognition, which would otherwise arise, or • Assets and liabilities contain certain derivative which significantly changes cash flows which would otherwise arise from the contract. Financial assets at fair value through profit and loss account include equity securities, debt securities, shares in investment funds and derivative financial instruments held for trading. Financial assets held for trading relate to assets purchased or issued mainly for transactions which realize profit in a short-term. Changes in fair value of these assets are recognized through net income from trading. Notes to the Financial statements for the year ended 31 December 2021 112 l) Financial instruments (continued) i) Classification (continued) Financial assets at amortized cost The Bank and the Group measure financial assets at amortized cost if both following conditions are met: • Financial assets are held within business model with the intent of holding financial assets in order to collect contracted cash flows • Based on contracted terms of financial assets for certain dates, cash flows arise which are solely payments of principal and interest on unpaid amount of the principal. Financial assets at amortized cost of the Bank and the Group arise when the Bank and the Group approve cash instruments to customers with no intention of trading with those receivables and include loans and receivables from banks, loans and receivables from customers, as well as mandatory reserve at Croatian National Bank and debt securities. Financial assets at fair value through other comprehensive income Financial assets are measured at fair value through other comprehensive income only if both following conditions are met: • Financial assets are held within business model with the intention of collecting contracted cash flows and also by selling the financial assets • Based on contract terms of financial assets on certain dates arise cash flows which are solely payments of principal and interest on unpaid amount of the principal. Gains and losses from financial assets measured at fair value through other comprehensive income are recognized through other comprehensive income, except for gains or losses from impairment and gains and losses from exchange rate differences, up to derecognition of financial assets or its reclassification. If financial assets were derecognized, the cumulative gains or losses previously recognized through other comprehensive income are reclassified from equity into profit and loss account as reclassification adjustment. Interests calculated by the effective interest rate are recognized in the profit and loss account. Assets measured at fair value through other comprehensive income cover debt securities. Investments in an equity instruments which are neither held for trading nor contingent consideration recognized by an acquirer in a business combination to which IFRS 3 applies, Bank may, at initial recognition, make an irrevocable election to present subsequent changes in the fair value in other comprehensive income. The election is possible for each separate investment. Subsequent changes in the fair value will be presented in other comprehensive income without option of recycling to profit or loss statement. For these equity instruments Bank will in profit or loss statement recognize dividends from that investments if the entity's right to receive payment of the dividend is established, it is probable that the economic benefits associated with the dividend will flow to the entity and the amount of the dividend can be measured reliably Other financial liabilities Other financial liabilities cover all financial liabilities not measured at fair value through profit and loss account. Notes to the Financial statements for the year ended 31 December 2021 113 l) Financial instruments (continued) ii) Recognition and Derecognition Purchases and sales of financial assets and financial liabilities at fair value through profit or loss, and financial assets held to maturity and available for sale, are recognized on the settlement date. Loans and receivables and financial liabilities at amortized cost are recognized when advanced to borrowers or received from lenders. The Bank and Group derecognizes financial instruments (in full or part) when the rights to receive cash flows from the financial instrument have expired or when it loses control over the contractual rights over financial instrument. This occurs when the Bank and Group transfers substantially all the risks and rewards of ownership to another business entity or when the rights are realized, surrendered or have expired. At full derecognition of financial assets, the difference between book value (determined at derecognition date) and received consideration is recognized in the profit and loss account. The Bank and Group derecognize financial liabilities only when the financial liability ceases to exist, i.e. when it is discharged, cancelled or has expired. If the terms of a financial liability change, the Bank will cease recognizing that liability and will instantaneously recognize a new financial liability, with new terms and conditions. Realized gains and losses from the disposal of financial instruments are calculated by using the weighted average cost method. iii) Initial and Subsequent Measurement Financial assets and liabilities are recognized initially at fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. After initial recognition, the Bank and Group measures financial instruments at fair value through profit or loss and financial assets measured at amortized cost and financial assets at fair value through other comprehensive income. Instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are initially recognized at acquisition cost and are subsequently measured applying internal models of fair value estimation. Loans and receivables and held to maturity investments and financial liabilities not designated at fair value through profit or loss are measured at amortized cost. iv) Determination of Fair Value of Financial Instruments The fair value of quoted financial assets in an active market is based on their closing price. If there is no active market for the financial instrument, or if, due to any other reason, the fair value cannot be reliably measured by the market price, the Bank and Group uses an internal evaluation model for fair value estimation. Such models include the use of prices achieved in recent transactions, by reference to similar financial instruments, and discounted cash flow analysis, making maximum use of market inputs and relying as little as possible on entity-specific inputs. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimate and the discount rate is a market rate. The fair value of non-traded derivatives is estimated at the amount that the Bank and Group would receive or pay to terminate the contract at the reporting date, taking into account current market conditions, its own credit risk and the current creditworthiness of the counterparties. v) Reclassifications When, and only when, an entity changes its business model for managing financial assets it shall reclassify all affected financial assets. Bank does not reclassify financial liabilities. Reclassifications between categories depend on the category in which the financial instrument was initially recognized. If the Bank reclassifies financial assets in accordance it will apply the reclassification prospectively from the reclassification date. The Bank will not restate any previously recognized gains, losses (including impairment gains or losses) or interest. If the Bank reclassifies a financial asset out of the amortized cost measurement category and into the fair value through profit or loss measurement category, its fair value is measured at the reclassification date. Any gain or loss arising from a difference between the previous amortized cost of the financial asset and fair value is recognized in profit or loss. Notes to the Financial statements for the year ended 31 December 2021 114 l) Financial instruments (continued) v) Reclassifications (continued) If an entity reclassifies a financial asset out of the fair value through profit or loss measurement category and into the amortized cost measurement category, its fair value at the reclassification date becomes its new gross carrying amount. If an entity reclassifies a financial asset out of the amortized cost measurement category and into the fair value through other comprehensive income measurement category, its fair value is measured at the reclassification date. Any gain or loss arising from a difference between the previous amortized cost of the financial asset and fair value is recognized in other comprehensive income. The effective interest rate and the measurement of expected credit losses are not adjusted as a result of the reclassification. If an entity reclassifies a financial asset out of the fair value through other comprehensive income measurement category and into the amortized cost measurement category, the financial asset is reclassified at its fair value at the reclassification date. However, the cumulative gain or loss previously recognized in other comprehensive income is removed from equity and adjusted against the fair value of the financial asset at the reclassification date. As a result, the financial asset is measured at the reclassification date as if it had always been measured at amortized cost. This adjustment affects other comprehensive income but does not affect profit or loss and therefore is not a reclassification adjustment. The effective interest rate and the measurement of expected credit losses are not adjusted as a result of the reclassification. If an entity reclassifies a financial asset out of the fair value through profit or loss measurement category and into the fair value through other comprehensive income measurement category, the financial asset continues to be measured at fair value. If an entity reclassifies a financial asset out of the fair value through other comprehensive income measurement category and into the fair value through profit or loss measurement category, the financial asset continues to be measured at fair value. The cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment at the reclassification date. m) Specific Financial Instruments Cash and Cash Equivalents Cash and cash equivalents comprise cash balances on hand, cash deposited with CNB, placements with other banks with original maturities of three months or less, and items in course of collection. Derivative Financial Instruments The Bank and Group uses derivative financial instruments to hedge economically its exposure to currency risk and interest rate risk arising from operating, financing and investing activities. In accordance with its investment policies, the Bank and Group does not hold or issue derivative financial instruments for the purpose of speculative trading. Hedge accounting has not been applied and consequently, all derivative agreements are classified as financial instruments at fair value through profit or loss. Derivative financial instruments include foreign currency agreements, forward agreements, futures and other financial derivatives and are initially recognized at fair value which is the value of consideration paid to acquire the instrument less transaction costs. Subsequent to initial recognition, derivatives are measured at fair value. The fair value is determined based on the quoted market price or, if more appropriate, based on the discounted cash flow. All derivative instruments are presented as assets if their fair value is positive and as liabilities if their fair value is negative. Some hybrid contracts contain both a derivative and a non-derivative component. In such cases, the derivative component is termed as an embedded derivative. Except as required to the contrary by the CNB, when the economic characteristics and risks of embedded derivatives are not closely related to those of the host contract and when the hybrid contract is not itself carried at fair value through profit or loss, the embedded derivative is treated as a separate derivative and classified at fair value through profit or loss with all unrealized gains and losses recognized in the P&L report, unless there is no reliable measure of their fair value. Changes in the fair value of derivatives are included in gains less losses arising from trading with securities Notes to the Financial statements for the year ended 31 December 2021 115 m) Specific Financial Instruments (continued) Treasury Bills and Debt Securities Treasury bills and debt securities that the Bank and Group holds for the purpose of short-term profit taking are classified as at fair value through profit or loss or as financial assets at fair value through other comprehensive income and are carried at fair value. Treasury bills and debt securities that the Bank has the intent and ability to hold to maturity are classified as held to maturity assets. Equity Securities and Investments in Open-End Investment Funds Equity securities and investments in open-ended investment funds are classified as at fair value through profit or loss or as assets at fair value through other comprehensive income. Placements with Banks Placements with banks are classified as loans and receivables and measured at amortized cost less impairment losses. Loans and Receivables from Customers Loans and receivables from customers are presented net of impairment losses. Purchased loans that the Bank and Group has the intent and ability to hold to maturity are classified as held to maturity assets. In accordance with CNB requirements, the amortization of any discounts included within impairment losses is presented in impairment losses. Investments in Subsidiaries In the Bank’s separate financial reports, investments in subsidiaries are recorded at cost, except for H1 Telekom plc. which is, as assets held for sale, recorded at the lower of carrying amount and fair value. Borrowings Interest-bearing borrowings are recognized initially at fair value, less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between proceeds (net of transaction costs) and redemption value being recognized in the P&L report over the period of the borrowings as interest. The amount is subsequently reduced by not deferred portion of the fee paid at the point of loan approval. Repurchase Agreements and Linked Transactions The Bank and Group enters into purchases (sales) of investments under agreements to resell (repurchase) essentially identical investments, or in a series of linked sales and buy-back transactions at a certain future date at a fixed price. The amounts paid are recognized in loans and advances to either banks or customers. The receivables are shown as collateralized by the underlying security. Investments sold under repurchase agreements continue to be recognized in the report of financial position and are measured in accordance with the accounting policy for the relevant financial asset at amortized cost or at fair value, as appropriate. The proceeds from the sale of the investments are presented as liabilities to either banks or customers. The difference between the sale and repurchase amount is recognized on an accrual basis over the period of the transaction and is included in interest income or expense. Notes to the Financial statements for the year ended 31 December 2021 116 n) Corporate tax Corporate tax expense represents the sum of the tax currently payable and deferred tax. Current tax payable is based on taxable profit for the year. Taxable profit differs from ‘profit before tax’ as reported in the P&L report and report of other comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Bank's current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in financial reports and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Bank is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period 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 realized, based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Bank and Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. The measurement of deferred tax liabilities and assets reflects the amount that the Bank and Group expects, at the end of the financial reports date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are not discounted and are classified in the report of financial position as non-current assets and/ or non-current liabilities. Deferred tax assets are recognized only to the extent that it is probable that the related tax benefit will be realized. At each reporting date, the Bank and Group reviews the unrecognized potential tax assets and the carrying amount of the recognized tax assets. Notes to the Financial statements for the year ended 31 December 2021 117 o) Property and Equipment Recognition and Measurement Property and equipment are tangible assets that are held for use in the supply of services or other administrative purposes. An item of property whose fair value can be measured reliably is subsequently carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluation is made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the reporting date. The fair value of land and buildings is determined by the independent professional valuator. Any revaluation increase arising on the revaluation of such land and buildings is recognized in other comprehensive income and accumulated in equity, except to the extent that it reverses a revaluation decrease for the same asset previously recognized in profit or loss, in which case the increase is credited to profit or loss to the extent of the decrease previously expensed. A decrease in the carrying amount arising on the revaluation of such land and buildings is recognized in profit or loss to the extent that it exceeds the balance, if any, held in the properties revaluation reserve relating to a previous revaluation of that asset. Depreciation is recognized in the P&L report on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Land is not depreciated. Equipment is measured at cost, less accumulated depreciation and accumulated impairment losses. The estimated useful lives are as follows: 2021 2020 Buildings 40 years 40 years Computers 3 years 3 years Furniture and Equipment 2-4 years 3-4 years Motor Vehicles 5 years 5 years Other Assets 10 years 10 years Other assets refer to air conditioning and heating equipment Depreciation methods and useful lives are reassessed at reporting date. Gains and losses on disposal are determined by comparing the proceeds with the carrying amount and are included in the Profit and Loss Statement. p) Investment property Investment property include the Bank's investments in real estate with the intention of selling the same and / or earning from the lease. Real estate investments are initially recognized at cost, including transaction costs. All investments in real estate are valued at fair value. The fair value of such assets is estimated annually on the basis of an independent valuer's estimate, and any gain or impairment loss from the change in fair value is recognized in the income statement as occurred. An investment property shall be derecognized on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. Notes to the Financial statements for the year ended 31 December 2021 118 q) Intangible Assets Intangible assets are carried at cost less accumulated amortization and impairment. Development costs are capitalized if all the requirements specified in IAS 38 "Intangible Assets" are met. The Bank and Group intends to capitalize internal employee project costs in the future under a condition of meeting requirements by the IAS 38. Durability of the mentioned intangible assets will correspond to the estimated useful life and its future economic benefits. Amortization is provided on a straight-line basis over the estimated useful life of an intangible asset. Maintenance costs are recognized as an expense when they are incurred. Depreciation methods and useful lives are reassessed at reporting date. Gains and losses on disposal are determined by comparing the proceeds with the carrying amount and are included in the Profit and Loss Statement. Amortization of intangible assets is provided on a straight-line basis over the estimated useful life of an asset as follows: 2021 2020 Leasehold Improvements 4-10 years 4-10 years Software 3-10 years 3-10 years Licenses 3-10 years 3-10 years * Leasehold improvements are amortized in line with the duration of lease contract, average period of amortization is 5 to 7 years. r) Impairment of Non-Financial Assets The recoverable amount of property and equipment, investment property and intangible assets is the higher of the asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (“cash-generating units”). In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or cash-generating unit. Non-financial assets that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount and to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized. s) Non-Current Assets Held for Sale The Bank and Group initially recognize (classify) non-current assets as assets held for sale if its value be through sale, rather than used for the purpose of conducting business activities through depreciation. Such assets are classified at the lower of carrying amount or fair market value less costs to sell. Subsequent measurement of assets held for sale is carried at the lower of carrying value and the current fair market value less costs to sell. In case of events that may extend the period to perform the sale of the property does not preclude the classification of assets as held for sale if the circumstances beyond the control of the Bank and Group occur and if there is evidence that the Bank and Group will continue in line with the plans to continue selling the same. Notes to the Financial statements for the year ended 31 December 2021 119 s) Non-Current Assets Held for Sale (continued) The Bank and Group does not perform depreciation of assets held for sale. Impairment losses arising on the subsequent measurement of assets is recorded in the P&L report of the Bank and Group. Subsequent gains from increase in the fair value of previously impaired assets will be recognized in the P&L report at the time of sale. If it is determined that the non-current assets classified as held for sale do not meet the criteria for initial recognition of the Bank and Group does not recognize those assets as assets held for sale. Bank and Group does not recognize assets held for sale in the event that such property is sold. Gain or loss on sale of assets held for sale are recognized in the P&L report. t) Repossessed asset in exchange for uncollected receivables The Bank and Group initially recognize repossessed asset in accordance with IAS 40 “Investment Property” and account for it as described in part Investment property. In case that repossessed asset will be intended for sale and it meet the criteria of relevant IFRS 5 “Non-current Assets Held for Sale”, the asset will be recognized and accounted for as long-term tangible asset held for sale. Only exceptionally, if repossessed asset will be used in regular business activities of the Bank and the Group, it can be decided, at acquisition, that the asset will be put in use and accounted for in accordance with IAS 16 “Property, plant and equipment”, as described in part Property and Equipment. u) Provisions for Liabilities and Expenses The Bank and Group recognize a provision when it has a present obligation as a result of a past event, and when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and if a reliable estimate can be made of the obligation. Provisions are also made for off-balance sheet credit risk exposures on a portfolio basis. Provision for liabilities and charges represent the best estimate of the expenditures needed to settle the present obligation at the reporting date. The management determines the adequacy of the provision based upon reviews of individual items, recent loss experience, current economic conditions, the risk characteristics of the various categories of transactions and other pertinent factors. Provisions are released only for such expenditure in respect of which provision are recognized at initial recognition. If the outflow of economic benefits to settle the obligations is no longer probable, the provision is reversed. v) Leases The contract is, or contains, lease if it conveys the right to use an underlying asset for the defined period of time in exchange for consideration. For such contracts the Bank recognizes right-of-use asset and lease liability. Leases where the Bank and the Group are lessors in which they retain all the risks and awards related to the ownership, comprise all the tangible and intangible asset at purchase cost less accumulated depreciation or amortization. Rent income from operating lease is recognized in profit or loss statement using straight-line method during the lease period. Initial costs, directly related to the operating lease contract, the Bank recognizes over time in line with the recognition of rent income. For the duration of a lease contract, the Bank recognizes depreciation or amortization and impairment losses on the leased asset aligned with the amortization method applicable for the similar asset owned by the Bank. For lease contracts where the Bank is a lessee, lease liability is measured at the present value of future lease payments, discounted at incremental discount rate of the lessee at the date of initial recognition. Lease liability is recognized in contracted currency. Notes to the Financial statements for the year ended 31 December 2021 120 v) Leases (continued) On the other hand, the Bank as a lessee recognizes Right-of-Use Asset (RoU) at the date of initial recognition by which the right to use the underlying asset is measured at the amount of present value of future lease payments adjusted for any accruals and prepayments related to the lease contract recognized in the statement of financial position immediately before the date of initial recognition. The Right-of-Use Asset is recognized in Bank’s functional currency and is depreciated on a straight-line bases over lease term. Subsequent measurement of the lease liability includes an increase in book value to reflect interest on the lease obligation and a decrease in value that reflects the lease payments. Bank opted for the practical expedient in terms of IFRS 16 “Leases” (i.e. Lease Liability and Right-of-Use Asset recognition) in the following cases: • Short-term leases and • Leases of low-value items. In these cases, lease payments are recognized as an expense over the lease term. The Bank decided to opt for the low-value items expedient and identified, based on the IASB opinion presented in the Basis of conclusion, that the order of magnitude would be USD 5,000 (value of underlying asset). Bank has opted for the expedient for the intangible asset as well. VAT is excluded from the calculation of the Right-of-Use Asset and the Lease Liability. Lease liability is measured at the present value of future lease payments (not paid at that date), discounted at the interest rate implicit in the lease if it can be readily determined. Otherwise, the Bank uses its incremental borrowing rate. Incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow: • the funds to obtain asset of a similar value to the right-of-use asset; • over a similar term; • with a similar security; • in similar economic environment. The Bank discloses the information about lease contracts in which it acts as a lessee, separately in the financial statements which comprise the following: a) Depreciation charge for the right-of-use asset b) The interest expense on the lease liability c) Expenses related to the short-term leases (these expenses do not have to include expenses related to contracts with lease period shorter or equal to one month) d) Expenses related to the leases of low-value items. Notes to the Financial statements for the year ended 31 December 2021 121 w) Employee Benefits Defined Pension Contributions The Bank and Group pays contributions to pension-insurance funds on a mandatory, contractual basis. The Bank and Group has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expense when they are due. Provisions for Severance Payments and Jubilee Awards In calculating provisions for severance payments and jubilee awards, the Bank and Group discounts expected future cash flows in respect of the liabilities, using discount rates that, in opinion of the Bank's management, best represent the time value of money. Actuarial gains or losses are recognized in other comprehensive income, whereas interest expense and current period employee expenses are recognized in profit or loss statement. x) Share Capital and Reserves Share Capital and Reserves Share capital is denominated in Croatian Kuna and stated at nominal value. The amount of fees paid on repurchase of share capital, including directly attributable costs, is recognized as a deduction from equity and classified as treasury shares. Dividends Dividends are recognized as a liability in the period in which they are declared. Retained Earnings/ Accumulated Losses All income for the year, retained after appropriations, is transferred to reserves, in accordance with the decision of the General Assembly. Loss for the period is charged on the accumulated retained earnings. Any remaining loss is allocated in accordance with the regulations applicable to trading companies in the Republic of Croatia. Earnings per Share The Bank presents earnings or loss per share data for its ordinary shares. Earnings/ loss per share is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the period. y) Contingencies and Commitments In the ordinary course of business, the Bank and Group enters into credit related commitments which are recorded in off-balance sheet accounts and primarily include guarantees, letters of credit and undrawn loan commitments. Such financial commitments are recorded in the Bank’s and Group’s report of financial position if and when they become payable. Notes to the Financial statements for the year ended 31 December 2021 122 z) Funds Managed for and on Behalf of Third Parties The Bank and Group manages funds for and on behalf of corporate and retail customers. These amounts do not represent the Bank's and Group's assets and are excluded from the report of financial position. For the services rendered, the Bank and Group charges a fee which is recognized in the P&L report on an accrued basis. The Bank’s subsidiary also manages six open-end funds with public offering (short-term bond: HPB Cash Fund, HPB Eurocash Fund, bond: HPB Bond Fund, mixed: HPB Global Fund, HPB Bond Fund Plus and equity fund: HPB Equity Fund). Investment funds assets that is managed by the Bank is not part of consolidated reports of the Group. The investment of the parent company in the investment funds of the parent company are stated at fair value through profit and loss. aa) Segment reporting A segment is a distinguishable component of the Bank and Group that is engaged either in providing products or services (business segment) which achieves economic benefits or costs, including the transactions with other parts of the Bank and Group. The Group did not use internal transfer prices in determining the success of the segments. The Group identified four major segments: banking with legal entities - divided into two sub-sectors (business with large companies and the public sector, small and medium-sized businesses), banking with physical persons, financial markets (including treasury and investment banking with custody) and direct banking. The description of business segments and their financial review is presented in Note 4 to these financial statements. Group’s operations, its total assets as well as the majority of its clients are based in Croatia. Notes to the Financial statements for the year ended 31 December 2021 123 2. RISK MANAGEMENT This note details the Bank's and Group risk exposures as well as the methods applied by the management to identify, measure and manage those risks for the purpose of preserving capital. The most important types of financial risk to which the Bank is exposed are credit risk, liquidity risk, interest rate risk in the Bank’s non-trading book, market risk and operational risk. Market risk includes currency risk, interest rate risk and price risk. An integrated system of risk management is established at the Bank and Group level by introducing a set of policies, procedures and manuals, determining the limits of risk levels acceptable to the Bank and monitoring their implementation. The limits are set with respect to the amount of regulatory capital and are applied to all types of risk. Additionally, the Bank sets limits for annual potential losses measured by Value-at-Risk techniques for its market risk exposure. The responsibility for determining the framework of the Bank’s and Group risk management lies with the Bank’s Management Board which has delegated the risk management tasks to the Assets and Liabilities Management Committee, Credit Committee and Operational Risk Management Committee. 2.1 Credit risk The Bank is subject to credit risk through its lending and investing activities and in cases where it acts as an intermediary on behalf of customers or other third parties. The risk that counterparties to financial instruments might default on their obligations is monitored on an ongoing basis. To manage the level of credit risk, the Bank evaluates debtors' creditworthiness, and in order to minimize credit risk, obtains appropriate collateral. At reporting date, the Bank’s credit risk exposure to derivative financial instruments classified as at fair value through profit or loss is presented by the positive fair value of these instruments, as recorded in the report of financial position. Notional amounts disclosed in the notes to the financial reports do not represent the amounts to be exchanged by the parties in derivative transactions and do not measure the Bank’s exposure to credit or market risks. The amounts to be exchanged are based on the terms of the derivatives. The Bank is exposed to credit risk primarily through loans and receivables from customers. The amount of credit exposure in this regard, as well as held to maturity debt securities recognized at amortized cost, is represented by the carrying amounts of the assets on the balance sheet. In addition, the Bank is exposed to the credit risk through off- balance sheet items, i.e. through commitments arising from unused facilities and guarantees issued, as disclosed in Note 39. Credit risk management comprises assessment of placements’ credit risk, subsequent monitoring, supervision, and evaluation of recoverability of placements and off-balance sheet commitments, as well as formation of required impairments and provisions for identified losses on placements and off-balance sheet commitments, and reporting to the Management Board of the Bank. Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.1. Credit risk (continued) 124 Assessment of the individual credit risk exposure comprises the following: • debtors' creditworthiness, • debtors' timeliness in meeting their obligations, • collateral quality. Monitoring of credit risk includes continuous assessment whether elements exist which would indicate a deterioration of the client’s financial position, the client’s exposure to currency risk or an increase in risk due to the decrease of collateral value. 2.1.1. Classification of Exposures in Risk Stages The Bank classifies placements into risk stages depending on the expected loss in the amount of the principal of the placement, and in accordance with the Decision on Classification of Exposures into Risk Stages and the manner of determining credit losses. All placements that the Bank estimate are not in the default status are classified into risk stage A. Moreover, in accordance with IFRS 9, the Bank places into sub-stage A-1 the placements for which it is determined that after initial recognition the credit risk of each customer’s exposure had not significantly increased, and into sub-stage A-2 the placements for which it is determined that after initial recognition the credit risk of customer’s exposure had significantly increased. The Bank for these exposures carries out corresponding impairments and make provisions of exposure in the amount equal to expected credit losses in a 12-month period for sub-stage A-1, that is expected credit losses during lifetime for sub-stage A-2. Placements that the Bank estimates are partly recoverable are classified into risk stage B, depending on the loss percentage: into sub-stage B1 (loss is estimated at below 30% of nominal carrying value of the placement), into sub-stage B2 (loss is estimated at between 30% and 70% of nominal carrying value of the placement), and into sub-stage B3 (loss is estimated at above 70%, but below 100% of nominal carrying value of the placement). Placements estimated to be fully irrecoverable are classified into risk stage C. 2.1.2. Placement Impairment Policy The impairment estimation of the Bank is based on the International Financial Reporting Standard 9 (IFRS 9), whereby the Bank analyzes quantitative and qualitative information. Credit risk analysis is comprehensive, and it is based on multiple indicators, i.e. is a certain indicator important and could its importance compare with other indicators depending on the type of product, financial assets' features, customer etc. However, some indicators are impossible to determine on individual instrument level and in such case the Bank estimates the indicators for certain parts of financial instruments portfolio. Furthermore, credit quality analysis predicts for every reporting date the comparison of credit quality of financial instrument at the moment of recognition and at the moment of initial recognition or acquisition, all with the intention of determining if the criteria for classification into ''Stage 2'' were met. The Bank differentiates the criteria in order to mark significant increase of credit risk in accordance with different exposure portfolios: Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.1. Credit risk (continued) 125 2.1.2. Placement Impairment Policy (continued) a) Exposure portfolio towards retail o Existence of due debt over 30 days o Customer blockade longer than 10 days o Exposure belongs to the debtor for whom early warning signals have been identified o Approved profit restructured exposure b) Exposure portfolio towards legal persons o Existence of due debt over 30 days o Customer blockade longer than 10 days o Decrease in financial position o Exposure belongs to the debtor for whom early warning signals have been identified o Approved profit restructured exposure c) Exposure portfolio towards central states and banking financial institutions o Change (decrease) in customer’s credit rating In addition, while estimating expected losses an important element is also including future factors through macroeconomic scenarios. Key data for measuring expected credit losses are the following variables: o Probability of default (PD) o Loss given default (LGD) o Exposure at default (EAD). Expected credit losses for exposures (ECL) in ''Stage 1'' are calculated as product of 12-month PD, LGD and EAD-a. Expected credit losses for exposures (ECL) in ''Stage 2'', that is lifetime expected credit losses are calculated as product of lifetime PD, LGD and EAD discounted at reporting date. In 2021, new client-level PD models for the retail and business segment were developed and implemented. The PD model for entrepreneurs was adopted by the Decision of the Management Board in June, and the PD model for the population segment in December 2021. When calculating the lifelong PD for the retail and business segment, the Bank models the risk parameter PD based on transition matrices. The lifetime PD value is the cumulative value of the PD risk parameter limit values depending on the exposure tenor. Exposures to financial institutions and central governments use an external investment rating approach. The LGD risk parameter is modeled based on the analysis of transactions with default status for exposures to legal entities and individuals. The modeling of the LGD risk parameter for exposures to central governments and financial institutions is based on historical collection rates published by credit rating agencies. Considering the criteria it applies when estimating the recoverable amount of placements, the Bank divides placements into placements that belong to the portfolio of small loans and placements that do not belong to the portfolio of small loans. Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.1. Credit risk (continued) 126 2.1.2. Placement Impairment Policy (continued) Small loans portfolio placements are total placements and off-balance liabilities to one customer or group of related persons for which the total balance is in the gross amount (without impairment or provision) at estimation date lower than HRK 1,000,000.00. Modeling of the EAD risk parameter, that is exposure at default depends on the profile of repayment. Calculation of exposure at default is generated monthly and summed annually where necessary. When estimating expected credit losses for off-balance liabilities, conversion factor 1 is used. Individual Assessment The recoverable amount of placements that are not classified within the small loan portfolio of the Bank is estimated on an individual basis according to the following criteria: • debtors' creditworthiness, • debtors' timeliness in meeting their obligations, and • collateral quality. In this respect, credit rating of the debtor and/ or other parties in the loan business (guarantors, co-debtors etc.) is taken into account, as well as days-past-due in debt settlement and type and appraised value of the available collateral. By taking this into consideration, as well as other available information, including info on significant increase in credit risk, the Bank estimates loan recoverability by evaluating future cash flows arising from the placement, which are discounted and compared with placement’s book value. Required impairments are determined in this way. Bank complies with regulations from Decision on the Classification of Placements and Off-Balance Sheet Liabilities of Credit Institutions with respect to procedures for restructured placements, placements whose repayment is based on collateral, placements that are not secured by adequate collateral, as well as other regulations regarding eligibility of collateral and appropriate discount factors used for impairment calculations. From the beginning of 2021, the Bank, in accordance with regulatory provisions contained in the Decision on Amendments to the Decision on Implementation of Regulation (EU) No. 575/2013 in the field of valuation of assets and off-balance sheet items and calculation of regulatory capital and capital requirements and Guidelines on changing the definition of default the obligation under Article 178 of Regulation (EU) No 575/2013) applies materiality thresholds of HRK 750 for the population and HRK 3,750 for the non-population, with a relative threshold of 1% for all segments. In addition, in July 2021, the Bank introduced changes in the recognition of non-compliance status for households, where it raised the recognition from the product level to the customer level. Portfolio Based Assessment The Bank estimates the recoverable amount of exposures that are classified on a portfolio basis by having regard principally to the debtors' timeliness in meeting their obligations. In arriving at the recoverable amount, the present value of future cash flows from the placements is estimated by reducing the principal by reference to the loan type and the number of days in default. The following tables present the classification of exposures into risk categories and the allocation of the corresponding impairment losses as a percentage of gross principal. Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.1. Credit risk (continued) 127 2.1.2. Placement Impairment Policy (continued) Group % Loans and Receivables from Customers Impairment Allowance Loans and Receivables from Banks Impairment Allowance Financial Assets valued at Amortized cost Impairment Allowance Balances with the CNB Impairment Allowance Fees Receivables Impairment Allowance 2021 Stage 1 78.35 8.76 99.83 66.76 - - 100.00 - 51.52 1.86 Stage 2 8.08 7.00 - - 100.00 100.00 - - 2.92 - Stage 3 13.56 84.24 0.17 33.24 - - - - 45.56 98.14 % Loans and Receivables from Customers Impairment Allowance Loans and Receivables from Banks Impairment Allowance Financial Assets valued at Amortized cost Impairment Allowance Balances with the CNB Impairment Allowance Fees Receivables Impairment Allowance 2020 Stage 1 82.27 10.88 99.87 65.76 56.96 22.74 100.00 - 51.17 1.46 Stage 2 4.68 5.09 - - - - - - 3.65 - Stage 3 13.05 84.03 0.13 34.24 43.04 77.26 - - 45.19 98.54 Bank % Loans and Receivables from Customers Impairment Allowance Loans and Receivables from Banks Impairment Allowance Financial Assets valued at Amortized cost Impairment Allowance Balances with the CNB Impairment Allowance Fees Receivables Impairment Allowance 2021 Stage 1 78.35 8.76 99.83 66.76 - - 100.00 - 48.90 1.83 Stage 2 8.08 7.00 - - 100.00 100.00 - - 3.08 - Stage 3 13.56 84.24 0.17 33.24 - - - - 48.02 98.17 % Loans and Receivables from Customers Impairment Allowance Loans and Receivables from Banks Impairment Allowance Financial Assets valued at Amortized cost Impairment Allowance Balances with the CNB Impairment Allowance Fees Receivables Impairment Allowance 2020 Stage 1 82.27 10.88 99.87 65.76 56.96 22.74 100.00 - 48.98 1.46 Stage 2 4.68 5.09 - - - - - - 3.81 - Stage 3 13.05 84.03 0.13 34.24 43.04 77.26 - - 47.21 98.54 Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.1. Credit risk (continued) 128 Maximum Exposure to Credit Risk before Consideration of Collateral The table below shows the maximum exposure of the Group and Bank to credit risk as at December 31, 2021 and December 31, 2020, not considering the collateral, if any. The exposures presented below are net of impairment losses and provisions. Maximum Exposure Note Group Bank 2021 2020 2021 2020 HRK '000 HRK '000 HRK '000 HRK '000 Giro Account with the CNB and Other Banks 5 6,192,555 3,684,942 6,192,515 3,684,902 Mandatory Reserve with the CNB 6 1,326,442 1,219,157 1,326,442 1,219,157 Loans to and Receivables from Banks 7 289,837 379,399 289,837 379,399 Investments measured at amortized cost 10 453 1,975 453 1,975 Loans and Receivables from Customers 11 14,251,800 14,722,770 14,251,800 14,722,770 Fees Receivable 18 11,840 11,995 10,560 10,937 Off-Balance Sheet Exposure 39 2,676,993 2,330,948 2,676,993 2,330,948 Undisbursed Lending Commitments 2,176,448 1,932,285 2,176,448 1,932,285 Guarantees 490,658 388,819 490,658 388,819 Other Contingent Liabilities 9,888 9,844 9,888 9,844 Total Credit Exposure 24,749,920 22,351,186 24,748,600 22,350,087 Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.1. Credit risk (continued) 129 2.1.3. Assets Exposed to Credit Risk Group 2021 Loans and Receivables from Customers Loans to and Receivables from Banks Financial Assets Valued at Amortized cost Balances with the Croatian National Bank Fees Receivable HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 Stage 1 12,383,527 290,841 - 5,680,727 11,056 Stage 2 1,277,553 - 459 - 627 Stage 3 2,143,783 500 - - 9,776 Total Gross 15,804,863 291,341 459 5,680,727 21,459 Expected losses (1,308,291) (500) - - (9,440) Portfolio based expected losses (244,773) (1,004) (5) - (179) Total expected losses (1,553,064) (1,504) (5) - (9,619) Total 14,251,800 289,837 453 5,680,727 11,840 Purchased or issued credit impaired financial assets (POCI) for the Group and the Bank in 2021 for the Group and the Bank amounts to HRK 153,660 thousand. 2020 Loans and Receivables from Customers Loans to and Receivables from Banks Financial Assets Valued at Amortized cost Balances with the Croatian National Bank Fees Receivable HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 Stage 1 13,412,293 380,360 1,191 3,465,642 10,965 Stage 2 763,210 - - - 782 Stage 3 2,128,229 500 900 - 9,684 Total Gross 16,303,732 380,860 2,092 3,465,642 21,431 Expected losses (1,328,426) (500) (90) - (9,296) Portfolio based expected losses (252,537) (960) (26) - (140) Total expected losses (1,580,962) (1,460) (116) - (9,436) Total 14,722,770 379,399 1,975 3,465,642 11,995 Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.1. Credit risk (continued) 130 2.1.3. Assets Exposed to Credit Risk (continued) Bank 2021 Loans and Receivables from Customers Loans to and Receivables from Banks Financial Assets Valued at Amortized cost Balances with the Croatian National Bank Fees Receivable HRK’000 HRK’000 HRK’000 HRK’000 HRK’000 Stage 1 12,383,527 290,841 - 5,680,727 9,955 Stage 2 1,277,553 - 459 - 627 Stage 3 2,143,783 500 - - 9,776 Total Gross 15,804,863 291,341 459 5,680,727 20,358 Expected losses (1,308,291) (500) - - (9,619) Portfolio based expected losses (244,773) (1,004) (5) - (179) Total expected losses (1,553,064) (1,504) (5) - (9,798) Total 14,251,800 289,837 453 5,680,727 10,560 Purchased or issued credit impaired financial assets (POCI) for the Group and the Bank in 2021 for the Group and the Bank amounts to HRK 153,660 thousand. 2020 Loans and Receivables from Customers Loans to and Receivables from Banks Financial Assets Valued at Amortized cost Balances with the Croatian National Bank Fees Receivable HRK’000 HRK’000 HRK’000 HRK’000 HRK’000 Stage 1 13,412,293 380,360 1,191 3,465,642 10,047 Stage 2 763,210 - - - 782 Stage 3 2,128,229 500 900 - 9,684 Total Gross 16,303,732 380,860 2,092 3,465,642 20,513 Expected losses (1,328,426) (500) (90) - (9,436) Portfolio based expected losses (252,537) (960) (26) - (140) Total expected losses (1,580,962) (1,460) (116) - (9,576) Total 14,722,770 379,399 1,975 3,465,642 10,937 Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.1. Credit risk (continued) 131 2.1.3. Assets Exposed to Credit Risk (continued) In accordance with applicable acts, the Bank utilizes the following common types of collateral: bank guarantees; HAMAG-BICRO (Croatian Agency for SMEs, Innovation and Investments) and other corporate guarantees; bills of exchange accepted by a bank; pledged property and equipment; insurance policies; pledged shares, bonds, commercial papers, and units in open-ended investment funds; assignment of receivables (cessions) from corporate clients and the Government; pledged concessions; pledged industrial and intellectual property; and other common financial execution instruments, such as bills of exchange and promissory notes. Collateral value is reviewed along the lines of internal policies and procedures, and in accordance with good business practice, current market trends as well as the Decision on Classifying Placements and Off-Balance Sheet Liabilities of Credit Institutions. Collateral value in the table below relates to recorded collateral value based on valuation made by certified appraisers without adjustments for discount factors but excluding burdens listed before the Bank and limiting to the amount of exposure which it collateralizes. Bank Asset Type Collateral Type 2021 2020 HRK '000 HRK '000 Loans to and Receivables from Customers Deposits 76,668 87,493 Debt Securities - 28,264 Guarantees and Warranties of the Republic of Croatia 2,288,253 2,035,886 Real Estate –Non-Business Purposes 4,031,315 3,643,135 Real Estate – Business Purposes 1,534,826 1,779,371 Movable Property (equipment, supplies, vehicles, ships etc.) 201,549 212,055 Equity Investments (Single-Stocks and Funds) 77,352 101,454 Land 252,880 233,352 Total 8,462,843 8,121,010 Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.1. Credit risk (continued) 132 2.1.3. Assets Exposed to Credit Risk (continued) Below is presented an overview of due and not yet due receivables aging structure based on days-past-due, with regard to the principal of the loans: Group in HRK '000 Total Undue Exposure to Credit Risk Days Past Due 1-30 Days Past Due 31-60 Days Past Due 61-90 Days Past Due 91-180 Days Past Due 180+ 31 December 2021 Government 3,432,439 3,428,402 4,038 - - - - Other Corporate Clients 3,948,535 3,087,858 188,064 131 - 1,498 670,984 Retail 8,423,889 7,823,825 7,185 2,444 2,369 7,949 580,118 Total 15,804,864 14,340,086 199,287 2,574 2,369 9,447 1,251,101 31 December 2020 Government 4,003,232 3,997,277 5,946 - - - 9 Other Corporate Clients 4,322,249 3,534,704 24,191 4,343 78 1,524 757,409 Retail 7,978,251 7,439,481 9,413 4,041 2,809 4,567 517,940 Total 16,303,732 14,971,462 39,550 8,385 2,887 6,091 1,275,358 Bank in HRK '000 Total Undue Exposure to Credit Risk Days Past Due 1-30 Days Past Due 31-60 Days Past Due 61-90 Days Past Due 91-180 Days Past Due 180+ 31 December 2021 Government 3,432,439 3,428,402 4,038 - - - - Other Corporate Clients 3,948,535 3,087,858 188,064 131 - 1,498 670,984 Retail 8,423,889 7,823,825 7,185 2,444 2,369 7,949 580,118 Total 15,804,864 14,340,086 199,287 2,574 2,369 9,447 1,251,101 31 December 2020 Government 4,003,232 3,997,277 5,946 - - - 9 Other Corporate Clients 4,322,249 3,534,704 24,191 4,343 78 1,524 757,409 Retail 7,978,251 7,439,481 9,413 4,041 2,809 4,567 517,940 Total 16,303,732 14,971,462 39,550 8,385 2,887 6,091 1,275,358 Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.1. Credit risk (continued) 133 2.1.3. Assets Exposed to Credit Risk (continued) The gross amount of fully recoverable placements, where a payment delay of more than 90 days has not been established and no impairment allowance is made on an individual basis at the date of preparation of the financial statements and the coverage of the relevant collateral at its fair value, expressed as a percentage of net loans is as follows: (a) Stage 1 – expected credit losses in 12 months (risk category A1) Group 2020 HRK '000 Government Units Companies Housing Loans Mortgage Loans Credit Cards Other Loans Total Loans and Receivables from Customers Loans to and Receivables from Banks Financial Assets valued at Amortized cost Balances with the Croatian National Bank Fees Receivable Gross Placements 3,376,744 1,844,432 4,090,787 44,432 106,088 2,921,044 12,383,527 290,841 - 5,680,727 11,056 Expected Portfolio Based Losses (37,108) (20,269) (44,955) (488) (1,166) (32,100) (136,085) (1,004) - 0 (179) Net Placements 3,339,636 1,824,163 4,045,832 43,944 104,922 2,888,944 12,247,442 289,837 - 5,680,727 10,877 Collateral Value 1,346,725 1,328,347 3,695,384 41,963 88 150,146 6,562,653 - - - - Collateral Coverage (%) 40.33 72.82 91.34 95.49 0.08 5.20 53.58 - - - - Group 2020 HRK '000 Government Units Companies Housing Loans Mortgage Loans Credit Cards Other Loans Total Loans and Receivables from Customers Loans to and Receivables from Banks Financial Assets valued at Amortized cost Balances with the Croatian National Bank Fees Receivable Gross Placements 3,900,645 2,438,584 3,636,781 36,589 115,622 3,284,072 13,412,293 380,360 1,191 3,465,642 10,965 Expected Portfolio Based Losses (50,029) (31,277) (46,645) (469) (1,483) (42,121) (172,023) (960) (26) - (140) Net Placements 3,850,616 2,407,307 3,590,136 36,120 114,139 3,241,951 13,240,270 379,399 1,165 3,465,642 10,825 Collateral Value 1,415,781 1,616,974 3,301,924 35,643 31 237,156 6,607,509 - - - - Collateral Coverage (%) 36.77 67.17 91.97 98.68 0.03 7.32 49.90 - - - - Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.1. Credit risk (continued) 134 2.1.3. Assets Exposed to Credit Risk (continued) (a) Stage 1 – expected credit losses in 12 months (risk category A1) Bank 2021 HRK '000 Government Units Companies Housing Loans Mortgage Loans Credit Cards Other Loans Total Loans and Receivables from Customers Loans to and Receivables from Banks Financial Assets valued at Amortized cost Balances with the Croatian National Bank Fees Receivable Gross Placements 3,376,744 1,844,432 4,090,787 44,432 106,088 2,921,044 12,383,527 290,841 - 5,680,727 9,955 Expected Portfolio Based Losses (37,108) (20,269) (44,955) (488) (1,166) (32,100) (136,085) (1,004) - - (179) Net Placements 3,339,636 1,824,163 4,045,832 43,944 104,922 2,888,944 12,247,442 289,837 - 5,680,727 9,776 Collateral Value 1,346,725 1,328,347 3,695,384 41,963 88 150,146 6,562,653 - - - - Collateral Coverage (%) 40.33 72.82 91.34 95.49 - 5.20 53.58 - - - - Bank 2020 HRK '000 Government Units Companies Housing Loans Mortgage Loans Credit Cards Other Loans Total Loans and Receivables from Customers Loans to and Receivables from Banks Financial Assets valued at Amortized cost Balances with the Croatian National Bank Fees Receivable Gross Placements 3,900,645 2,438,584 3,636,781 36,589 115,622 3,284,072 13,412,293 380,360 1,191 3,465,642 10,047 Expected Portfolio Based Losses (50,029) (31,277) (46,645) (469) (1,483) (42,121) (172,023) (960) (26) - (140) Net Placements 3,850,616 2,407,307 3,590,136 36,120 114,139 3,241,951 13,240,270 379,399 1,165 3,465,642 9,907 Collateral Value 1,415,781 1,616,974 3,301,924 35,643 31 237,156 6,607,509 - - - - Collateral Coverage (%) 36.77 67.17 91.97 98.68 - 7.32 49.90 - - - - Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued)) 2.1. Credit risk (continued) 135 2.1.3. Assets Exposed to Credit Risk (continued) (b) Stage 2 – lifetime expected credit losses (risk category A2) The gross balance and the coverage of those assets with collateral at fair value, presented as a percentage of net placements is as follows: Group 2021 HRK '000 Government units Companies Housing loans Mortgage loans Credit card overdrafts Other loans Total Held-to- maturity financial assets Fee receivables Gross Amount 5,931 905,760 117,085 3,267 8,323 237,187 1,277,553 459 627 Total Portfolio Based Losses (505) (77,057) (9,961) (278) (708) (20,179) (108,687) (5) - Net Amount 5,426 828,703 107,124 2,989 7,615 217,008 1,168,865 453 627 Collateral Value - 718,811 114,152 3,238 - 21,569 857,770 - - Collateral Coverage (%) - 86.74 106.56 108.33 - 9.94 73.38 - - Group 2020 HRK '000 Government units Companies Housing loans Mortgage loans Credit card overdrafts Other loans Total Fee receivables Gross Amount 9,861 480,302 55,684 1,102 3,257 213,004 763,210 782 Total Portfolio Based Losses (1,040) (50,669) (5,874) (116) (344) (22,470) (80,513) - Net Amount 8,821 429,633 49,810 986 2,913 190,534 682,697 782 Collateral Value - 396,591 53,390 1,031 - 46,924 497,936 - Collateral Coverage (%) - 92.31 107.19 104.59 - 24.63 72.94 - Bank 2021 HRK '000 Gove rnme nt units Companies Housing loans Mortgage loans Credit card overdrafts Other loans Total Held-to- maturity financial assets Fee receivables Gross Amount 5,931 905,760 117,085 3,267 8,323 237,187 1,277,553 459 627 Total Portfolio Based Losses (505) (77,057) (9,961) (278) (708) (20,179) (108,687) (5) - Net Amount 5,426 828,703 107,124 2,989 7,615 217,008 1,168,865 453 627 Collateral Value - 718,811 114,152 3,238 - 21,569 857,770 - - Collateral Coverage (%) - 86.74 106.56 108.33 - 9.94 73.38 - - Bank 2020 HRK '000 Governm ent units Companie s Housing loans Mortgage loans Credit card overdrafts Other loans Total Fee receivables Gross Amount 9,861 480,302 55,684 1,102 3,257 213,004 763,210 782 Total Portfolio Based Losses (1,040) (50,669) (5,874) (116) (344) (22,470) (80,513) - Net Amount 8,821 429,633 49,810 986 2,913 190,534 682,697 782 Collateral Value - 396,591 53,390 1,031 - 46,924 497,936 - Collateral Coverage (%) - 92.31 107.19 104.59 - 24.63 72.94 - Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued)) 2.1. Credit risk (continued) 136 2.1.3. Assets Exposed to Credit Risk (continued) (b) Stage 3 – default status (risk categories B and C) Tables below show the amount of loans with impairments, both individual and portfolio based, as well as coverage of these placements by corresponding collateral at fair value in percentage and in relation to net placements as following: Group 2021 HRK '000 Loans to Customers Loans to and Receivables from Banks Financial Assets valued at Amortized cost Fees Receivable Companies Housing Loans Mortgage Loans Credit Cards Other Loans Total Gross Amount 1,346,277 72,122 79,343 20,948 625,094 2,143,784 500 - 9,776 Total Expected Losses (724,156) (18,258) (71,481) (15,806) (478,590) (1,308,291) (500) - (9,440) Net Amount 622,121 53,864 7,862 5,142 146,504 835,493 - - 336 Collateral Value 908,143 65,943 34,131 - 34,203 1,042,420 - - - Collateral Coverage (%) 145.98 122.42 434.13 - 23.35 124.77 - - - Group 2020 HRK '000 Loans to Customers Loans to and Receivables from Banks Financial Assets valued at Amortized cost Fees Receivable Companies Housing Loans Mortgage Loans Credit Cards Other Loans Total Gross Amount 1,461,779 51,656 81,982 18,815 513,997 2,128,229 500 900 9,684 Total Expected Losses (815,137) (16,719) (71,532) (15,149) (409,888) (1,328,425) (500) (90) (9,296) Net Amount 646,642 34,937 10,450 3,666 104,109 799,804 - 810 388 Collateral Value 897,338 45,574 36,489 - 36,166 1,015,567 - - - Collateral Coverage (%) 138.77 130.45 349.18 - 34.74 126.98 - - - Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued)) 2.1. Credit risk (continued) 137 2.1.3. Assets Exposed to Credit Risk (continued) (c) Stage 3 – default status (risk categories B and C) (continued) Bank 2021 HRK '000 Loans to Customers Loans to and Receivables from Banks Financial Assets valued at Amortized cost Fees Receivable Companies Housing Loans Mortgage Loans Credit Cards Other Loans Total Gross Amount 1,346,277 72,122 79,343 20,948 625,094 2,143,784 500 - 9,776 Total Expected Losses (724,156) (18,258) (71,481) (15,806) (478,590) (1,308,291) (500) - (9,619) Net Amount 622,121 53,864 7,862 5,142 146,504 835,493 - - 157 Collateral Value 908,143 65,943 34,131 - 34,203 1,042,420 - - - Collateral Coverage (%) 145.98 122.42 434.13 - 23.35 124.77 - - - Bank 2020 HRK '000 Loans to Customers Loans to and Receivables from Banks Financial Assets valued at Amortized cost Fees Receivable Companies Housing Loans Mortgage Loans Credit Cards Other Loans Total Gross Amount 1,461,779 51,656 81,982 18,815 513,997 2,128,229 500 900 9,684 Total Expected Losses (815,137) (16,719) (71,532) (15,149) (409,888) (1,328,425) (500) (90) (9,436) Net Amount 646,642 34,937 10,450 3,666 104,109 799,804 - 810 248 Collateral Value 897,338 45,574 36,489 - 36,166 1,015,567 - - - Collateral Coverage (%) 138.77 130.45 349.18 - 34.74 126.98 - - - Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued)) 2.1. Credit risk (continued) 138 2.1.3. Assets Exposed to Credit Risk (continued) (d) Prolonged and rescheduled loans to customers Prolongation of a loan is approved to customers because of common and current financing needs of their business activities. Loans are most often rescheduled when borrowers’ business operations are disrupted, with considerable changes made to the previously agreed lending terms and conditions. Bank 2021 HRK '000 2020 HRK '000 Gross Loans to Customers Corporate 536,190 436,366 Retail 75,534 98,222 Total 611,724 534,588 2.1.4. Credit Risk Concentration by Industry An analysis of the concentration of credit risk by industry is presented in the table below: Group 2021 HRK '000 2020 HRK '000 Public administration, Defense and Compulsory Social Security 1.860.752 2,407,505 Manufacturing 1.007.873 1,106,070 Construction 1.603.574 1,779,478 Transportation and Storage 549.272 587,731 Wholesale and Retail Trade; Motor Vehicles and Motorcycles Repair 484.705 641,535 Professional, Scientific and Technical Activities 79.773 173,641 Accommodation and Food Service Activities 527.006 512,851 Agriculture, Forestry and Fishing 298.405 179,206 Information and Communications 144.897 154,581 Electricity and Gas Supply and Air-Conditioning 358.552 273,591 Arts, Entertainment and Recreation 63.418 78,080 Administrative and Auxiliary Services 77.050 55,100 Other 301.142 339,047 Total Gross Corporate Loans 7.356.419 8,288,416 Gross Retail Loans 8.323.882 7,888,303 Collateralized 8.462.843 8,121,012 Accrued Interests 124.562 127,013 Provision for Impairment Losses (1.553.064) (1,580,962) Total 14.251.800 14,722,770 Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued)) 2.1. Credit risk (continued) 139 2.1.4 Credit Risk Concentration by Industry (continued) Bank 2021 HRK '000 2020 HRK '000 Public administration, Defense and Compulsory Social Security 1.860.752 2,407,505 Manufacturing 1.007.873 1,106,070 Construction 1.603.574 1,779,478 Transportation and Storage 549.272 587,731 Wholesale and Retail Trade; Motor Vehicles and Motorcycles Repair 484.705 641,535 Professional, Scientific and Technical Activities 79.773 173,641 Accommodation and Food Service Activities 527.006 512,851 Agriculture, Forestry and Fishing 298.405 179,206 Information and Communications 144.897 154,581 Electricity and Gas Supply and Air-Conditioning 358.552 273,591 Arts, Entertainment and Recreation 63.418 78,080 Administrative and Auxiliary Services 77.050 55,100 Other 301.142 339,047 Total Gross Corporate Loans 7.356.419 8,288,416 Gross Retail Loans 8.323.882 7,888,303 Collateralized 8.462.843 8,121,012 Accrued Interests 124.562 127,013 Provision for Impairment Losses (1.553.064) (1,580,962) Total 14.251.800 14,722,770 Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 140 2.2. Liquidity Risk Liquidity risk arises in the general funding of the Bank’s activities and in the management of its positions. The main categories of liquidity risk to which the Bank is exposed are as follows: • liquidity funding risk (structural liquidity risk): risk that the Bank will not be able to meet efficiently its expected and unexpected present and future cash and collateral requirements without impacting its day-to-day operations or its own financial result, • market liquidity risk, risk that the Bank will not be able to offset its positions or liquidate positions at market price due to a market disturbance or the market being insufficiently deep. The Bank manages liquidity risk in accordance with the legal and regulatory requirements. In addition to those requirements, liquidity risk management is governed by the following internal regulations: • Risk Management Policy, • Liquidity Risk Management Manual. The system for managing liquidity risk, in line with defined polices, includes: • risk profile, estimation and measurement of liquidity risk exposure; • setting liquidity risk exposure limits during defined periods including intradaily, • ensure liquidity risk management in HRK and significant foreign currencies in the Bank's book • ensure that an adequate level of liquidity buffers is maintained • include appropriate allocation mechanisms. Liquidity risk management is realized through: • operational management of daily liquidity, • operational management of short-term liquidity, • structural liquidity management. Operational management of daily and short-term liquidity is performed through: • maintenance, planning and projecting coverage coefficient (LCR) within prescribed limit Structural liquidity management is performed through: • maintaining positions in accordance with liquidity risk exposure limits, • maintaining of Net Stable Funding Ratio (NSFR) in accordance with defined limits; • diversification of sources of funding. Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.2. Liquidity Risk (continued) 141 Strategic Risks and Risk Control Division is reporting monthly about liquidity risk and liquidity risk exposure limits during sessions of Assets and Liabilities Management Committee. The Bank submits to the Croatian National Bank a monthly regulatory report on liquidity coverage. The prescribed quantitative requirements include: the amount of liquid assets (C72), the amount of potential outflows (C73), the amount of potential inflows (C74) and the calculation of liquidity coverage (C76). The Bank maintained all positions for which the prescribed regulatory limits were set within 2021 within the prescribed regulatory limits. The Bank maintains the required reserve and the minimum required foreign currency receivables within the limits prescribed by the Decision on the required reserve and the Decision on the minimum required foreign currency receivables. The Financial Markets Sector prepares a monthly inflow and outflow plan for Board meetings. Responsibility for liquidity risk management rests with the Bank's Management Board. The Bank’s Asset and Liability Committee is authorized by the Management Board to manage liquidity risk. The Committee makes decisions and conclusions regarding liquidity management in its sessions. Each sector to which these decisions and conclusions made by the committee relate, is obliged to enact them. As a part of liquidity risk management system, authority, responsibilities and procedures in conditions of liquidity crisis are determined separately. The Bank prescribes and conducts stress tests of its liquidity. The Strategic Risk and Risk Control Division conducts stress tests taking into account Bank-specific factors (internal factors) and market factors (external factors). Stress resilience tests are conducted over the liquidity coverage ratio. The ratio of net stable sources of financing, which is an indicator of the Bank's structural liquidity, as at 31 December 2021 is 174.4% (2020: 151%). At the same time, the liquidity coverage ratio (LCR) is 183% (2020: 158%). 2.2.1. Maturity Analysis A maturity analysis of assets and liabilities, as well as equity, of the Bank and Group, based on their remaining contractual maturity, except for financial assets at fair value through profit and loss that are analyzed as current based on their classification and the Bank’s and Group’s trading intention, as at December 31, 2021 and December 31, 2020, is presented in the tables below. Although significant negligent maturity mismatches have been reported in the first analyzed periods, the Bank does not expect the outflow of deposits in contractual terms in accordance with its own historical experience and knowledge of the customers. Non-maturity assets that relate to investments in subsidiaries, real estate and equipment, investment property and intangible assets are presented in the maturity category over 3 years. While financial assets related to investments in stocks and mutual funds, also without maturity, are presented in the maturity category up to 30 days. Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.2. Liquidity Risk (continued) 142 2.2.1. Maturity Analysis (continued) Group 2021 in HRK '000 0-30 Days 31-90 Days 91-360 Days 1 to 3 Years Over 3 Years Total ASSETS Cash and Amounts Due from Banks 6,192,556 - - - - 6,192,556 Mandatory Reserve with the Croatian National Bank 1,326,442 - - - - 1,326,442 Loans to and Receivables from Banks 156,631 132,877 - 99 230 289,837 Financial Assets at Fair Value through P&L 621,352 4,634 - - - 625,986 Financial Assets at FV through OCI - 878,269 417,722 558,528 2,746,778 4,601,297 Financial Assets at Amortized Cost 294 150 9 - - 453 Loans to and Receivables from Customers 1,081,679 328,729 1,431,591 3,576,777 7,833,024 14,251,800 Assets held for sale 9,200 - - - - 9,200 Properties, Equipment and assets with the right of use - - - - 248,636 248,636 Investment Properties - - - - 67,642 67,642 Intangible Assets - - - - 93,381 93,381 Tax Prepayment - - 637 - - 637 Other Assets 105,833 6,214 12,606 2 - 124,655 TOTAL ASSETS 9,493,987 1,350,873 1,862,565 4,135,406 10,989,691 27,832,522 LIABILITIES Financial Liabilities at FV through P&L - - - - - - Deposits from Banks 28,017 8 - - - 28,025 Customer Deposits 19,300,178 1,049,245 2,353,789 619,448 90,184 23,412,844 Borrowings 2,544 31,706 107,390 263,529 991,717 1,396,886 Provisions for Liabilities and Expenses 36,994 797 15,470 25,657 9,162 88,080 Deferred tax liabilities, net - - - - 26,282 26,282 Tax Liabilities - - - - 35,887 35,887 Other Liabilities 44,636 35,419 24,414 42,524 40,778 187,771 Total Equity - - - - 2,656,747 2,656,747 TOTAL LIABILITIES, EQUITY AND RESERVES 19,412,369 1,117,175 2,501,063 951,158 3,850,757 27,832,522 MATURITY GAP (9,918,382) 233,698 (638,499) 3,184,248 7,138,934 - CUMMULATIVE MATURITY GAP (9,918,382) (9,684,684) (10,323,183 ) (7,138,935) - - OFF-BALANCE 446,292 495,720 1,064,089 170,165 758,481 2,934,747 Derivatives - 257,754 - - - 257,754 Off-Balance Contingent Liabilities 446,292 237,966 1,064,089 170,165 758,481 2,676,993 Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.2. Liquidity Risk (continued) 143 2.2.1. Maturity Analysis (continued) Group 2020 in HRK '000 0-30 Days 31-90 Days 91-360 Days 1 to 3 Years Over 3 Years Total ASSETS Cash and Amounts Due from Banks 3,684,942 - - - - 3,684,942 Mandatory Reserve with the Croatian National Bank 1,219,157 - - - - 1,219,157 Loans to and Receivables from Banks 379,281 18 - 50 50 379,399 Financial Assets at Fair Value through P&L 751,142 6,964 - - - 758,106 Financial Assets at FV through OCI - 30,426 681,070 1,251,452 2,195,087 4,158,035 Financial Assets at Amortized Cost 784 1,191 - - - 1,975 Loans to and Receivables from Customers 1,209,165 457,848 2,116,029 2,777,147 8,162,581 14,722,770 Properties and Equipment - - - - 259,000 259,000 Investment Properties - - - - 73,430 73,430 Intangible Assets - - - - 91,231 91,231 Tax Prepayment - - 2,714 - - 2,714 Other Assets 101,584 5,894 5,435 72 34 113,019 TOTAL ASSETS 7,346,055 502,341 2,805,248 4,028,721 10,781,413 25,463,778 LIABILITIES Financial Liabilities at FV through P&L - 21 - - - 21 Deposits from Banks 21,258 75,377 - - - 96,635 Customer Deposits 16,142,920 1,144,851 2,544,270 1,049,085 229,720 21,110,846 Borrowings 1,094 30,696 112,688 274,219 1,047,944 1,466,641 Provisions for Liabilities and Expenses 39,550 1,386 26,598 32,011 14,713 114,258 Deferred tax liabilities, net - - - - 23,483 23,483 Tax Liabilities - - - - - - Other Liabilities 34,642 25,093 27,922 58,393 26,941 172,991 Total Equity - - - - 2,478,902 2,478,902 TOTAL LIABILITIES, EQUITY AND RESERVES 16,239,460 1,277,424 2,711,482 1,413,708 3,821,703 25,463,778 MATURITY GAP (8,893,405) (775,083) 93,766 2,615,013 6,959,711 - CUMMULATIVE MATURITY GAP (8,893,405) (9,668,488) (9,574,722) (6,959,709) - - OFF-BALANCE 502,398 585,551 933,660 153,375 413,718 2,588,702 Derivatives - 257,754 - - - 257,754 Off-Balance Contingent Liabilities 502,398 327,797 933,660 153,375 413,718 2,330,948 Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.2. Liquidity Risk (continued) 144 2.2.1. Maturity Analysis (continued) Bank 2021 in HRK '000 0-30 Days 31-90 Days 91-360 Days 1 to 3 Years Over 3 Years Total ASSETS Cash and Amounts Due from Banks 6,192,515 - - - - 6,192,515 Mandatory Reserve with the Croatian National Bank 1,326,442 - - - - 1,326,442 Loans to and Receivables from Banks 156,631 132,877 - 99 230 289,837 Financial Assets at Fair Value through P&L 621,352 4,634 - - - 625,986 Financial Assets at FV through OCI - 878,269 417,722 558,528 2,746,778 4,601,297 Financial Assets at Amortized Cost 294 150 9 - - 453 Loans to and Receivables from Customers 1,081,679 328,729 1,431,591 3,576,777 7,833,024 14,251,800 Assets held for sale 9,200 - - - - 9,200 Investments in subsidiaries - - - - 9,761 9,761 Properties, Equipment and assets with the right of use - - - - 248,110 248,110 Investment Properties - - - - 60,629 60,629 Intangible Assets - - - - 93,319 93,319 Tax Prepayment - - 541 - - 541 Other Assets 104,771 6,019 12,507 - - 123,297 TOTAL ASSETS 9,492,884 1,350,678 1,862,370 4,135,404 10,991,851 27,833,187 LIABILITIES Financial Liabilities at FV through P&L - - - - - - Deposits from Banks 28,017 8 - - - 28,025 Customer Deposits 19,309,423 1,049,245 2,353,789 619,448 90,184 23,422,089 Borrowings 2,544 31,706 107,390 263,529 991,717 1,396,886 Provisions for Liabilities and Expenses 36,994 797 15,405 25,657 9,162 88,015 Deferred tax liabilities, net - - - - 26,282 26,282 Tax Liabilities - - - - 35,887 35,887 Other Liabilities 43,907 34,593 23,992 42,315 40,765 185,572 Total Equity - - - - 2,650,430 2,650,430 TOTAL LIABILITIES, EQUITY AND RESERVES 19,420,886 1,116,349 2,500,576 950,949 3,844,427 27,833,187 MATURITY GAP (9,928,002) 234,329 (638,206) 3,184,455 7,147,424 - CUMMULATIVE MATURITY GAP (9,928,002) (9,693,673) (10,331,879) (7,147,424) - - OFF-BALANCE 446,292 495,720 1,064,089 170,165 758,481 2,934,747 Derivatives - 257,754 - - - 257,754 Off-Balance Contingent Liabilities 446,292 237,966 1,064,089 170,165 758,481 2,676,993 Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.2. Liquidity Risk (continued) 145 2.2.1. Maturity Analysis (continued) Bank 2020 in HRK '000 0-30 Days 31-90 Days 91-360 Days 1 to 3 Years Over 3 Years Total ASSETS Cash and Amounts Due from Banks 3,684,902 - - - - 3,684,902 Mandatory Reserve with the Croatian National Bank 1,219,157 - - - - 1,219,157 Loans to and Receivables from Banks 379,281 18 - 50 50 379,399 Financial Assets at Fair Value through P&L 751,142 6,964 - - - 758,106 Financial Assets at FV through OCI - 30,426 681,070 1,251,452 2,195,087 4,158,035 Financial Assets at Amortized Cost 784 1,191 - - - 1,975 Loans to and Receivables from Customers 1,209,165 457,848 2,116,029 2,777,147 8,162,581 14,722,770 Investment in subsidiaries - - - - 9,761 9,761 Properties and Equipment - - - - 258,356 258,356 Investment Properties - - - - 65,993 65,993 Intangible Assets - - - - 91,039 91,039 Tax Prepayment - - 2,639 - - 2,639 Other Assets 100,613 5,616 5,406 - - 111,635 TOTAL ASSETS 7,345,044 502,063 2,805,144 4,028,649 10,782,867 25,463,766 LIABILITIES Financial Liabilities at FV through P&L - 21 - - - 21 Deposits from Banks 21,258 75,377 - - - 96,635 Customer Deposits 16,150,508 1,144,851 2,544,270 1,049,085 229,720 21,118,434 Borrowings 1,094 30,696 112,688 274,219 1,047,944 1,466,641 Provisions for Liabilities and Expenses 39,550 1,386 26,598 32,011 14,713 114,258 Deferred tax liabilities, net - - - - 23,483 23,483 Other Liabilities 33,795 24,988 27,702 57,764 26,941 171,190 Total Equity - - - - 2,473,104 2,473,104 TOTAL LIABILITIES, EQUITY AND RESERVES 16,246,205 1,277,319 2,711,258 1,413,079 3,815,905 25,463,766 MATURITY GAP (8,901,161) (775,256) 93,886 2,615,570 6,966,962 - CUMMULATIVE MATURITY GAP (8,901,161) (9,676,417) (9,582,531) (6,966,961) - - OFF-BALANCE 502,398 585,551 933,660 153,375 413,718 2,588,702 Derivatives - 257,754 - - - 257,754 Off-Balance Contingent Liabilities 502,398 327,797 933,660 153,375 413,718 2,330,948 Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 146 2.3. Market Risk The exposure to market risk occurs in balance sheet and off-balance sheet positions recognized at market (fair) value: • financial assets at fair value through profit and loss account, • financial assets at fair value through other comprehensive income, • positions denominated in foreign currency (including placements and liabilities linked to foreign currencies). All trading instruments are subject to market risk, which is the risk that future changes in market conditions may make an instrument less valuable or more onerous (i.e. impaired). Trading financial instruments are recognized at fair value, and all changes in market conditions directly affect trading income. The Bank manages their use of trading instruments in response to changing market conditions. Exposure to market risk is formally managed through acquisitions or disposals of financial instruments in accordance with the risk limits set in Market Risk Management Guidelines. Market risk management of the Bank is conducted in accordance with regulatory requirements, as is defined by internal policies and procedures regarding market risks which are regularly revised by the Risk Management Division. Strategic Risks and Risk Control Division daily calculates market risk exposure figures, usage of exposure to market risk limits and capital requirements for exposure to market risks. In the measurement of the market risk exposure, the Bank relies on regulations set out by the Croatian National Bank and monitors: • Capital requirement calculated by the standard method calculated in accordance with the Directive (EU) no. 575/2013 of European Parliament and Council, • Value at Risk (VaR) which represents the maximum potential loss that the Bank could incur as a result of changes in market risk factors (interest rates, exchange rate and share prices) for a period of retaining the same position for 10 days at statistical accuracy of 99%. VaR is calculated at the end of the day and does not include daily exposure arising from a change in position. To calculate VaR, a database containing 250 historical figures is used, In addition, the Bank uses the following internally prescribed measures in measuring exposure to debt instrument position risks: • Duration represent measure of the sensitivity of debt security prices to changes in interest rates, • PV01 which represents the decline of portfolio value in a scenario where interest rates increase by 0.01%. The Strategic Risk and Risk Control Division reports daily on the utilization of market risk exposure limits to the Management Board, the Financial Markets Division, the Financial Management Division and the Assets and Liabilities Management Office, and monthly to the Assets and Liabilities Management Committee. Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 147 2.3. Market Risk (continued) a) Financial assets at fair value through profit and loss account The table below shows the movements in those measures at December 31, 2020 and December 31, 2019. 2021 Position HRK’000 VaR FX Risk 15,000 (59) Debt Securities Position Risk 511,031 (2,822) Equity Securities Position Risk 24,706 (1,033) Investment Fund Position Risk 80,933 (1,998) Correlation Effect - (2,103) Market Risk (3,809) 2020 Position HRK’000 VaR FX Risk 7,543 (116) Debt Securities Position Risk 623,917 (3,855) Equity Securities Position Risk 24,254 (2,345) Investment Fund Position Risk 71,086 (3,155) Correlation Effect - (4,174) Market Risk (5,297) b) Financial assets at fair value through other comprehensive income Financial assets at fair value through other comprehensive income consist of debt and equity securities. The table below shows market value and risk value movements for the portfolio of debt and equity securities at fair value through other comprehensive income. Debt securities Market Value HRK’000 VaR HRK’000 2021 4,552,423 (18,216) 2020 4,108,988 (17,734) Equity securities Market Value HRK’000 VaR HRK’000 2021 22,021 (3,373) 2020 22,614 (5,787) Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 148 2.4. Interest Rate Risk in the Bank's Non-Trading Book Interest rate risk in the Bank’s non-trading book is a risk which can have a negative effect on economic value of the Bank’s book and earnings (net interest income), because of variation of market interest rates. The Bank manages interest rate risk in its non-trading book in accordance with the legal and regulatory requirements. In line with the Croatian National Bank’s Decision on the Management of Interest rate risk in the Bank’s and Group’s non- trading book, it is required to submit quarterly reports to the Croatian National Bank about the interest rate risk in the bank’s non-trading book. Apart from those regulations, managing interest rate risk in the Bank’s non-trading book is regulated by: • Risk Management Policy, and • Manual on Managing Interest Rate Risk in the Bank's non-trading book. The Manual defines the management process, evaluation methods and measures of exposure to interest rate risk in the Bank's non-trading book, as well as exposure limits, manner and frequency of reporting about the Bank's exposure to that The Bank and Group assesses interest rate risk in the bank’s non-trading book by observing this risk from two perspectives: • Perspective of economic value: a potential market value decrease of the Bank's non-trading book because of interest rate movements in the market, • Profit perspective: a potential decrease of net interest income because of movements in market interest rates. Perspective of Economic Value of Capital When assessing the exposure to interest rate risk arising from transactions in the book of positions that are not traded from the perspective of the economic value of capital, the Bank allocates interest-sensitive positions of the bank's book in time zones, distinguishing positions with fixed interest rate, variable interest rate and interest rate which can be changed by the decision of the Management Board (administrative interest rate) and estimates the change in the market value of the bank's book due to the simulated change in interest rates. The bank calculates the ratio of the change in the economic value of the bank's book and regulatory capital and maintains it in the ratios of the regulatory requirement. The change in the economic value of the Bank's book as at 31 December 2021 for the Bank amounted to HRK 30,825 thousand or 1.17% of regulatory capital (2020: HRK 48,266 thousand or 2.09% of regulatory capital).. Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 149 2.4. Interest Rate Risk in the Bank's Non-Trading Book (continued) Profit Perspective The prospect of earnings includes a potential decrease in net interest income in case of changes in interest rates on the market. When calculating interest rate risk from a profit perspective, the Bank applies a simulation of interest rate changes observed over a 12-month period and a potential decrease in net interest income is maintained within the limit of 12% of net interest income for the observed period (from the beginning of the year) projected to annual level. The potential change in net interest income at the end of 2021 for the Bank amounts to HRK 6,461 thousand (2020: HRK 40,740 thousand). Likewise, the Bank conducts a minimum yearly test of stress resistance based on more significant intensity of changes in interest rates. Strategic Risks and Risk Control Division reports to the Bank for the Management of Interest Rate Risk in the Bank's Book of Assets and Liabilities Management. 2.5. Foreign Exchange Risk The Bank is exposed to FX risk through transactions in foreign currencies. Foreign currency exposure arises from credit, deposit-taking, investment and trading activities. It is monitored daily in accordance with legislation and internally set limits, for each currency and for the total balance sheet denominated in or linked to foreign currency. The Bank manages their currency risk by setting principles and limits for foreign currency exposures and monitoring exposures against these limits. The Bank directs their business activities towards trying to minimize the gap between assets and liabilities denominated in or linked to a foreign currency and maintaining daily business activities within the internal and regulatory limits. The Bank is exposed to the risk of changes in the euro exchange rate to an insignificant extent. As at 31 December 2021, the amount of the Group's and the Bank's assets denominated in euros or euro-denominated currencies amounted to HRK 8,658,970 thousand (2020: the Group and the Bank HRK 7,669,193 thousand). Liabilities of the Group and the Bank denominated in euros or euro-denominated currencies amounted to HRK 8,972,187 thousand (2020: the Group and the Bank HRK 7,614,650 thousand). Therefore, a decrease in the kuna / euro exchange rate by 1% (appreciation of the kuna) would affect the Group's and the Bank's results in the amount of HRK 3,132 thousand of expenses (2020: the Group and the Bank's HRK 545 thousand of income). The amounts of total assets and liabilities of the Bank and the Group as at 31 December 2021 and 31 December 2020 in HRK and foreign currencies (amounts denominated in HRK with a foreign currency clause refer mainly to the euro) are presented in the tables below. Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.5. Foreign Exchange Risk (continued) 150 Group 2021 HRK '000 HRK HRK Linked to Foreign Currencies EUR Other Foreign Currencies Total ASSETS Cash and Amounts Due from Banks 4,753,612 - 1,125,596 313,347 6,192,555 Mandatory Reserve with the Croatian National Bank 1,326,442 - - - 1,326,442 Loans to and Receivables from Banks - - 628 289,209 289,837 Financial Assets at Fair Value through P&L 356,542 267,784 1,660 - 625,986 Financial Assets at Fair Value through OCI 2,232,973 1,260,690 1,059,152 48,482 4,601,297 Financial Assets at Amortized Cost 453 - - - 453 Loans and Receivables from Customers 9,302,542 4,899,099 38,222 11,937 14,251,800 Assets Held for Sale 9,200 - - - 9,200 Property, Equipment and Assets with right to use 248,636 - - - 248,636 Investment property 67,642 - - - 67,642 Intangible Assets 93,381 - - - 93,381 Tax Prepayment 637 - - - 637 Other Assets 118,500 0 6,139 17 124,656 TOTAL ASSETS 18,510,560 6,427,573 2,231,397 662,992 27,832,522 LIABILITIES Financial Liabilities at Fair Value through P&L - - - - - Deposits from Banks 25,468 - 671 1,886 28,025 Customer Deposits 14,212,231 71,843 8,490,859 637,911 23,412,844 Borrowings 1,002,066 296,027 98,793 - 1,396,886 Provisions for Liabilities and Expenses 88,080 - - - 88,080 Deferred Tax Liabilities, net 26,282 - - - 26,282 Income tax liability 35,887 - - - 35,887 Other Liabilities 173,372 - 13,948 450 187,770 Total Equity 2,656,747 - - - 2,656,747 TOTAL LIABILITIES AND EQUITY 18,220,133 367,870 8,604,271 640,247 27,832,522 NETO VALUTNA NEUSKLAĐENOST 290,427 6,059,703 (6,372,874) 22,745 - Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.5. Foreign Exchange Risk (continued) 151 Group 2020 HRK '000 HRK HRK Linked to Foreign Currencies EUR Other Foreign Currencies Total ASSETS Cash and Amounts Due from Banks 2,627,205 - 776,947 280,790 3,684,942 Mandatory Reserve with the Croatian National Bank 1,219,157 - - - 1,219,157 Loans to and Receivables from Banks (861) - 637 379,623 379,399 Financial Assets at Fair Value through P&L 481,091 273,662 3,353 - 758,106 Financial Assets at Fair Value through OCI 2,298,193 1,276,205 533,647 49,990 4,158,035 Financial Assets at Amortized Cost 1,975 - - - 1,975 Loans and Receivables from Customers 9,866,279 4,665,588 133,924 56,979 14,722,770 Assets Held for Sale - - - - - Property and Equipment 259,000 - - - 259,000 Investment property 73,430 - - - 73,430 Intangible Assets 91,231 - - - 91,231 Tax Prepayment 2,714 - - - 2,714 Other Assets 107,688 - 5,324 7 113,019 TOTAL ASSETS 17,027,196 6,215,455 1,453,832 767,389 25,463,778 LIABILITIES Financial Liabilities at Fair Value through P&L 21 - - - 21 Deposits from Banks 12,672 - 77,719 6,244 96,635 Customer Deposits 13,323,909 159,428 6,881,994 745,515 21,110,846 Borrowings 978,800 365,969 121,872 - 1,466,641 Provisions for Liabilities and Expenses 114,258 - - - 114,258 Deferred Tax Liabilities, net 23,483 - - - 23,483 Other Liabilities 165,064 - 7,668 259 172,991 Total Equity 2,478,902 - - - 2,478,902 TOTAL LIABILITIES AND EQUITY 17,097,110 525,397 7,089,253 752,018 25,463,778 NETO VALUTNA NEUSKLAĐENOST (69,914) 5,689,964 (5,635,421) 15,371 - Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.5. Foreign Exchange Risk (continued) 152 Bank 2021 HRK '000 HRK HRK Linked to Foreign Currencies EUR Other Foreign Currencies Total ASSETS Cash and Amounts Due from Banks 4,753,572 - 1,125,596 313,347 6,192,515 Mandatory Reserve with the Croatian National Bank 1,326,442 - - - 1,326,442 Loans to and Receivables from Banks - - 628 289,209 289,837 Financial Assets at Fair Value through P&L 356,542 267,784 1,660 - 625,986 Financial Assets at Fair Value through OCI 2,232,973 1,260,690 1,059,152 48,482 4,601,297 Financial Assets at Amortized Cost 453 - - - 453 Loans and Receivables from Customers 9,302,542 4,899,099 38,222 11,937 14,251,800 Assets Held for sale 9,200 - - - 9,200 Investments in Subsidiaries 9,761 - - - 9,761 Property and Equipment 248,110 - - - 248,110 Investment property 60,629 - - - 60,629 Intangible Assets 93,319 - - - 93,319 Tax Prepayment 541 - - - 541 Other Assets 117,142 - 6,139 16 123,297 TOTAL ASSETS 18,511,226 6,427,573 2,231,397 662,991 27,833,187 LIABILITIES Financial Liabilities at Fair Value through P&L - - - - - Deposits from Banks 25,468 - 671 1,886 28,025 Customer Deposits 14,221,428 71,843 8,490,905 637,913 23,422,089 Borrowings 1,002,066 296,027 98,793 - 1,396,886 Provisions for Liabilities and Expenses 88,015 - - - 88,015 Deferred Tax Liabilities, net 26,282 - - - 26,282 Income tax liability 35,887 - - - 35,887 Other Liabilities 171,174 - 13,948 450 185,572 Total Equity 2,650,430 - - - 2,650,430 TOTAL LIABILITIES AND EQUITY 18,220,751 367,870 8,604,317 640,249 27,833,187 NET FOREIGN EXCHANGE POSITION 290,475 6,059,703 (6,372,920) 22,742 - Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 2.5. Foreign Exchange Risk (continued) 153 Bank 2020 HRK '000 HRK HRK Linked to Foreign Currencies EUR Other Foreign Currencies Total ASSETS Cash and Amounts Due from Banks 2,627,165 - 776,947 280,790 3,684,902 Mandatory Reserve with the Croatian National Bank 1,219,157 - - - 1,219,157 Loans to and Receivables from Banks (861) - 637 379,623 379,399 Financial Assets at Fair Value through P&L 481,091 273,662 3,353 - 758,106 Financial Assets at Fair Value through OCI 2,298,193 1,276,205 533,647 49,990 4,158,035 Financial Assets at Amortized Cost 1,975 - - - 1,975 Loans and Receivables from Customers 9,866,279 4,665,588 133,924 56,979 14,722,770 Investments in Subsidiaries 9,761 - - - 9,761 Property and Equipment 258,356 - - - 258,356 Investment property 65,993 - - - 65,993 Intangible Assets 91,039 - - - 91,039 Tax Prepayment 2,639 - - - 2,639 Other Assets 106,398 (94) 5,324 7 111,635 TOTAL ASSETS 17,027,184 6,215,361 1,453,832 767,389 25,463,766 LIABILITIES Financial Liabilities at Fair Value through P&L 21 - - - 21 Deposits from Banks 12,672 - 77,719 6,244 96,635 Customer Deposits 13,331,448 159,428 6,882,040 745,518 21,118,434 Borrowings 978,800 365,969 121,872 - 1,466,641 Provisions for Liabilities and Expenses 114,258 - - - 114,258 Deferred Tax Liabilities, net 23,483 - - - 23,483 Other Liabilities 163,263 - 7,668 259 171,190 Total Equity 2,473,104 - - - 2,473,104 TOTAL LIABILITIES AND EQUITY 17,097,50 525,397 7,089,299 752,021 25,463,766 NET FOREIGN EXCHANGE POSITION (69,866) 5,689,964 (5,635,467) 15,368 - Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 154 2.6. Operational Risk Management Operational risk is inherent to all activities, processes, products and systems of the Bank. The Bank ensures appropriate operational risk management by applying procedures and a system of authorizations and responsibilities specified in detail in its internal by-laws, the Risk Management Policy and the Internal Operational Risk Management Manual as root documents. The operational risk management system has been established through appropriate bodies of the Bank and an efficient internal control system. The Bank defines operational risk as a risk of an event which, as a consequence, exposes the Bank to financial losses, with the cause being inadequate or ineffective internal processes, systems, human resources, or external influences. This definition includes legal risk. Significant operational risk is a risk of an event resulting in significant loss because of operational risk. In order to efficiently manage the overall exposure to operational risk, the Bank applies the following: • Collecting and analyzing internal data about operational risk events, • Self-assessment of risks and controls, • Assessment of information technology risk, and • Business Impact Analysis of unavailability of key business processes. The Bank assesses the outsourcing risk as an additional exposure to all significant risks arising from the fact that the Bank does not itself perform the outsourced activities, but rather that those activities are performed by external vendors; hence, the impact of outsourcing on the Bank's risk profile is assessed. The Bank assesses the impact of introducing a new product on the Bank's risk profile, which includes exposure to all significant risks. For the purpose of efficient operational risk management, the Bank has set up the Operational Risk Management Committee. Based on the reports on the Bank's exposure to operational risk, the Operational Risk Management Committee draws conclusions and makes decisions about appropriate measures necessary to undertake in order to overmaster the exposure to operational risk. The Bank applies a standardized approach to calculating the capital requirement for operational risk. 2.7. Capital Management Capital requirement calculations are based on exposures to customers classified into the prescribed exposure categories, which are then weighted according to risk depending on the exposure category of the customer (exposure to sovereign debt, to institutions, public bodies, individuals, etc.), remaining maturity, type of collateral (i.e. residential or commercial property), diversification of loans, identified number of days past due and the amount of provisions made. The Bank manages capital in line with internal capital adequacy assessment (ICAAP). It establishes significant risks to which it is exposed or estimates that it may be exposed, calculate or estimate the required capital requirements for exposure to particular risks and establish the total required (internal) capital for the current and subsequent period in accordance with the business plan. In accordance with capital requirements so expressed, capital planning is carried out whereby items of available capital are considered exclusively to items recognized for the purpose of calculating the regulatory capital. Notes to the Financial statements for the year ended 31 December 2021 2. RISK MANAGEMENT (continued) 155 2.8. Capital Management (continued) In planning capital needs it is necessary to take into account capital adequacy, i.e. regulatory capital requirements for exposures to credit, market and operational risk. Regulatory minimum rate of total capital adequacy prescribed by law on 31.12.2021 is 8 percent. The regulatory obligation to maintain the rate of protective layers of capital is prescribed for the rate of protective layer for capital preservation of 2.5 percent (2020: 2.5 percent), protective layer for structural systemic risk of 1.5 percent (2020: 1.5 percent) and a protective layer for systemically important credit institutions in the Republic of Croatia in the amount of 0.5 percent (2020: 0.5 percent). In addition, during 2021, the Bank retained a supervisory protective layer of capital in the total amount of 3.17 percent (2020: 3.17 percent). Therefore, the total regulatory requirements as of 31.12.2021. years are 15.67% (2020: 15.67%). Below is an overview of regulatory capital movements for the Bank: Bank 2021 2020 HRK '000 HRK '000 REGULATORY CAPITAL Tier-1 Capital 2,631,032 2,311,562 Common Equity Tier-1 Capital 2,631,032 2,311,562 Tier-2 Capital - - Total regulatory capital 2,631,032 2,311,562 Credit Risk Exposure Using Standardized Approach 8,427,074 8,876,005 Exposure to FX and Position Risk 326,540 275,115 Exposure to Operational risk 1,503,453 1,444,016 Exposure to Credit Value Adjustment Risk - 214 Total Risk Exposure 10,257,067 10,595,350 Total Capital Adequacy Ratio 25.65% 21.82% Notes to the Financial statements for the year ended 31 December 2021 156 3. SIGNIFICANT ACCOUNTING ESTIMATES The Group makes estimates and assumptions about uncertain events, including estimates and assumptions about the future. Such accounting assumptions and estimates are regularly evaluated and are based on historical experience and other factors such as the expected flow of future events that can be rationally assumed in existing circumstances, but nevertheless necessarily represent sources of estimation uncertainty. The estimation of impairment losses in the Group’s portfolio exposed to credit risk represents the major source of estimation uncertainty. This and other key sources of estimations uncertainty, that have a significant risk of causing a possible material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. Impairment Losses on Loans and Receivables The Group continuously monitors creditworthiness of its customers. In accordance with the requirements of the CNB, the need to reduce the value of the balance sheet and the provision for off-balance sheet exposure to credit risk is estimated quarterly for large exposures or monthly for a portfolio of exposures below HRK 700 thousand. Impairment losses are mainly recognized in relation to the net book value of loans to legal entities and households (presented in Note 11), and as provisions for liabilities and expenses arising from off-balance sheet exposures to customers, most often in the form of approved guarantees, letters of credit and approved unused loans (presented in notes 23 and 39). Impairment losses are also considered for credit exposure to banks and for other assets not carried at fair value and where the primary impairment risk is not a credit risk. Impairment policy of placements is explained in the note 2.1.2. Following tables represent the summary of impairment losses of loans to and receivables from customers, as well as provisions for off-balance sheet exposures: Group Note 2021 HRK '000 2020 HRK '000 Impairment Losses of Loans to and Receivables from Customers 11 1,553,064 1,580,962 Provisions for Off-Balance Sheet Exposures 23 39,781 57,794 Total 1,592,845 1,638,756 Bank Note 2021 HRK '000 2020 HRK '000 Impairment Losses on Loans to and Receivables from Customers 11 1,553,064 1,580,962 Provisions for Off-Balance Sheet Exposures 23 39,781 43,348 Total 1,592,845 1,624,310 Notes to the Financial statements for the year ended 31 December 2021 3. SIGNIFICANT ACCOUNTING ESTIMATE (continued) 157 Financial Assets at Amortized Cost The Group estimates creditworthiness of its customers and, in accordance with it, estimates impairment losses per balance sheet exposures and provisions for liabilities related to off-balance potential liabilities, whether exposures with no default status or exposure with default status, whereby relevant CNB regulations are taken into account which prescribe credit losses and is based on the International Financial Reporting Standard 9. Impairment policy is presented in detail in the note 2.1.2. Placement impairment policy. At the end of the year, gross value of impaired assets placed into risk categories B and C, as well as recognized impairment of these exposures, were as follows: Group 2021 2020 Gross Exposures (in HRK’000) 2,154,060 2,139,313 Impairment Loss (in HRK’000) 1,318,231 1,338,312 Impairment Rate 61.20% 62.56% Bank 2021 2020 Gross Exposures (in HRK’000) 2,154,060 2,139,313 Impairment Loss (in HRK’000) 1,318,410 1,338,452 Impairment Rate 61.20% 62.56% Any additional increase in the impairment rate by one percentage point of gross exposure as at 31 December 2021 would result in an increase in impairment loss for the Bank and the Group of HRK 21,541 thousand (2020: Bank and Group: HRK 21,293 thousand). Market Value of Pledged Property and Foreclosed Asset As disclosed above (note 2.1.3 (c)), loans and receivables from customers include exposures with a book value of HRK 2,143,784 thousand (2020: the Bank and the Group HRK 2,128,229 thousand) classified by the Group and the Bank as impaired due to the disadvantage of payment, which is secured by a pledge over real property, plant and equipment. In assessing the recoverability of pledges based on real estate in a pledge, the market value of the property in the collateral is reduced and reduced to the present value using the impairment factor and the collection deadlines in accordance with CNB regulation. Market and book value of investment property Furthermore, as disclosed in Note 15, Investment property as at 31 December 2021 includes property, plant and equipment with a gross carrying amount of HRK 172,358 thousand which represents assets acquired in exchange for outstanding receivables. Investments in real estate are initially stated at cost, including transaction costs. All real estate investments are valued at fair value. The fair value of such assets is estimated annually based on an independent appraiser's estimate, and any gain or loss arising from changes in the fair value of the investment property is recognized in the income statement in the period in which they arise. In the observed period, the Group recognized the gain on changes in the fair value of above proprety in the amount of HRK 1,903 thousand (2019: loss of HRK 8,712 thousand). The net carrying amount of foreclosed assets within the Group's Investment Property as at 31 December 2021 amounted to HRK 67,642 thousand (2020: HRK 73,430 thousand) and HRK 60,629 thousand (2020: HRK 65,993 thousand) with the Bank, respectively. Notes to the Financial statements for the year ended 31 December 2021 3. SIGNIFICANT ACCOUNTING ESTIMATE (continued) 158 Market and book value of investment property (continued) The Bank and the Group actively sell real estate taken over for uncollected receivables (classified as investment property) and in 2021 sold buildings and land in the total net amount of HRK 3,790 thousand (2020: HRK 1,595 thousand). During the reporting period, the Bank and the Group reported net gains on real estate in question in the amount of HRK 1,903 thousand (2020: loss of HRK 8,712 thousand). Following the sale of real estate, the Group and the Bank generated HRK 3,790 thousand of revenue from the sale of acquired tangible assets during the reporting period (2020: HRK 2,281 thousand of revenue). Information on real estate taken over in exchange for outstanding receivables of the Bank and the Group, classified within Investment Property, and on the hierarchy of fair value measures as at 31 December 2021 and 31 December 2020 are provided in Note 15. Investment property . The fair value of the Bank's real estate investments was determined based on value estimates from 2021, with the possible application of a discount factor of marketability for cases where this is applicable. Real estate appraisals in 2021 were performed by PBZ Nekretnine d.o.o., Zagreb nekretnine d.o.o. and HPB nekretnine d.o.o. The appraisers of these companies acted as independent appraisers, who have the necessary professional qualifications and recent experience in assessing the fair value of real estate, and have no interest in the property or interests related to the amount of appraised property at relevant locations. Fair value is assessed in accordance with the Real Estate Valuation Act (OG 78/2015) and the Ordinance on Real Estate Valuation Methods (OG 105/2015), according to legally prescribed and appropriate methods, taking into account a number of factors in determining its market value and marketability. The valuation method did not change during the year. Fair Value of Derivatives Fair value of OTC derivatives that are quoted on active market is determined using their closing market price. For derivatives that are not traded on active markets, Bank determines contractual value applying internally developed models for fair value assessment. Fair Value of Treasury Bills The Group determines the fair value of treasury bills issued by the Ministry of Finance of the Republic of Croatia using an internal model which takes into account their remaining maturity and latest available auction prices of equivalent instruments. As at December 31, 2021, the Group and the Bank had no treasury bills classified as financial assets at fair value through profit or loss (2020. -). The carrying amount of treasury bills classified as financial assets at FV through OCI for the Group and the Bank as at 31 December 2021 amounted to HRK 376,071 thousand (the Bank and the Group in 2020: HRK 188,212 thousand). Provisions for Court Cases Initiated Against the Bank and the Group In calculating provisions for court, expenses the Bank and Group discounts expected future cash flows with respect to the liabilities using the CNB’s discount rate. Taxation The Bank and Group recognizes tax liabilities in accordance with the tax laws of the Republic of Croatia. Tax returns are subject to the approval of tax authorities that are entitled to carry out subsequent inspections of taxpayers’ records. Notes to the Financial statements for the year ended 31 December 2021 3. SIGNIFICANT ACCOUNTING ESTIMATE (continued) 159 Actuarial estimates used in calculating provision for termination benefits and jubilee awards Termination benefits, jubilee awards and solidarity grants was determined using actuarial valuation using the projected unit credit method. Actuarial estimates are based on a number of relevant assumptions about discount rates, inflation rates, mortality rates, and employee turnover rates. Data from the Central Bureau of Statistics were used for mortality rates in the Republic of Croatia, while the retirement age was determined for each employee separately, taking into account his current age and total length of service and prescribed retirement conditions. The annual departure rate, ie the turnover rate, is 7.8%, while for workers over 60 years of age the turnover rate is set at 0%. To calculate the gross amount of defined benefits, the regulations from the Income Tax Act, which entered into force on 1 January 2021, were taken into account. The yield interest rate of 0.4% determined using yields on Croatian government bonds was used. The inflation rate was taken from the publication of the Croatian National Bank (Macroeconomic Trends and Forecasts) from July 2021 in the amount of 1.5%. Provisions for pension benefits, jubilee awards and solidarity assistance of the Bank as at 31 December 2021 amounted to HRK 7,163 thousand (2019: HRK 4,047 million). COVID-19 impact on business Negative impact of COVID-19 pandemic affected all areas of life and business and could be considered the most significant event of 2020 which shook up global economy. In Croatia, due to pandemic, after five years of consecutive growth, the real GDP decreased for 8.4% y-o-y in 2020. Such a strong plummet of GDP is even greater than the one in critical 2009. Besides negative macroeconomic movements and overall decrease in economic activity, implementation of citizens protection measures from virus outbreak resulted in additional extraordinary expenses for the Bank and the Group, incurred in order to ensure unobstructed continuance of doing business and employees and clients health protection. During 2020 Bank’s and Group’s management faced decision making and business management in the circumstances of exceptional uncertainty which required sharpness and courage, though resulted in various improvements in processes in terms of digitalization of business and more agile approach to processes and projects. Furthermore, in 2020 the Bank has performed noticeably successfully, outperforming last year results and incurred volume increase with decreased usage of capital and achieved most of its operational goals. Despite leaving 2020 behind us, the uncertainty regarding the further progress of the pandemic and pace of economic recovery is setting new challenges in front of management of the Bank and the Group and required further monitoring and assessing the impact on financial position and financial performance. COVID-19 support measures to clients In the retail segment, since the beginning of the pandemic, the Bank has approved measures for a total portfolio of HRK 441 million, of which part of the portfolio of HRK 336 million was released from the moratoria, part of the portfolio of HRK 30 million was returned and part of HRK 71 million from performing status to default status. On 31.12.2021. there is a remaining HRK 4 million portfolio with an active moratoria measure. In the corporate segment, since the beginning of the pandemic, the Bank has approved measures for a total portfolio of HRK 1.939 billion, of which part of the portfolio of HRK 1.163 billion came out of the moratoria, part of the portfolio of HRK 652 million was returned and the remaining 124 million kuna passed from performing status to default status. On 31.12.2021. there were no placements with an active moratoria measure resulting from covid measures. Notes to the Financial statements for the year ended 31 December 2021 3. SIGNIFICANT ACCOUNTING ESTIMATE (continued) 160 Assessment of default status and risk parameters In accordance with the Regulatory Circulars and EBA guidelines, the Bank adhered to the territorial and industrial framework in approving moratorias at the group level: • Territorial moratoria is determined as a general and equal measure for all business entities operating in the territory of the Republic of Croatia, which can prove that their business is affected by the COVID-19 pandemic, • The industrial moratoria is granted to all business entities operating in the territory of the Republic of Croatia in the tourism sector as well as to all business entities that generate 50% or more of total revenues in the period between June 1, 2020. and 30.9.2020. (for which there is an obvious seasonal impact), which can prove that their business has been affected by the onset of the COVID-19 pandemic. When approving the moratoria, the Bank did not use COVID-19 measures as an indicator of increased credit risk that would result in the reclassification of clients to a lower risk group in accordance with applicable instructions and guidelines of the regulator. Following the availability of inputs for the calculation of cash flows, the Bank analyzed the corporate clients granted the moratoria on an individual basis, within which the future classification was proposed. The same was carried out until 30.06.2021. years. The result of the comprehensive assessment (mostly due to the proclamation of the so- called UTP criteria) resulted in HRK 124 million of exposure in NPLs, resulting from previously approved moratorias on the economy segment. Despite the UTP criteria, this portfolio has good behavioral performance over the next year and certain activities (initially affected by covid) recorded a significant recovery in the second half of 2021. Assessment of expected credit loss and quantification of risk parameters The Bank has adopted comprehensive analysis of credit risk based on multiple indicators both with quantitative as well as qualitative information, where, in addition to days past due indicator, other indicators such as deterioration of financial position, early warning signals or certain concessions approved to the borrower.In addition to previous comes the table presentation of share movement in stages from which it can be seen that approved moratoria did not influence exposures from Stage 2: STAGE 31.12.2019 31.3.2020 30.6.2020 30.09.2020 30.11.2020 Stage 1 82.64% 81.67% 82.26% 82.13% 81.41% Stage 2 4.70% 5.09% 4.54% 4.53% 5.09% Stage 3 12.66% 13.24% 13.20% 13.33% 13.49% Upon the distribution of exposures to Stage 2, the maximally avoids overrides of quantitative indicators to lower amounts and does not use reverse engineering in order to realize goal shares per stage. As at 31 December 2021, the remaining moratoria amount to HRK 4 million and relate to approved moratoria on the population, while in the economy segment there are no remaining moratoriums. In the status of non-fulfillment of obligations as at 31 December 2021, a total of HRK 195 million (6.4% economy, 16.1% population) out of the total approved moratoria. Notes to the Financial statements for the year ended 31 December 2021 3. SIGNIFICANT ACCOUNTING ESTIMATE (continued) 161 Assessment of COVID-19 impacts on the value of non-financial asset Real estate owned by the Banks covers real estate held for doing business, repossessed asset for uncollected receivables and investment property. Those real estate are measured at fair value which is determined by independent external appraiser as covered in notes 14 and 15. Despite the fact that in 2020 no significant impairment which would be related to the pandemic, fair value of this category of asset should be monitored in the periods ahead due to uncertainty of subsequent reaction of real estate market on the pandemic. Additionally, negative impact on real estate fair value came from earthquakes in March and in December of 2020, in the areas of central Croatia which were hit by earthquakes. COVID-19 and financial markets movements In the period of excessive outbreak of pandemic, significant decrease in share and bond prices was noted, caused by the uncertainty and investors’ fears. However, coordinated actions of central banks resulted in restarting significant programs of bond repurchases. Through the activities of EBA and CNB the unstoppable drops in securities prices were prevented issuing additional liquidity which led to the stabilization of markets. Assessment of COVID-19 impact on the going concern Negative impact of COVID-19 pandemic is unquestionable for 2020, however successful performance of the Bank in challenging year behind us shows Bank’s readiness to properly manage crisis and adapt the business towards new settings. Taking into account all the circumstances in significant accounting estimates in these financial statements as well as taking into account the uncertainty of economic recovery the management of the Bank and the Group with reasonable certainty believes that they will continue to operate profitably in the foreseeable future. As a result, these separate and consolidated financial statements were prepared on a going concern basis. Earthquakes in 2020 Apart from the COVID-19 pandemic, which affected the entire world, 2020 in the Republic of Croatia was marked with devastating earthquakes which hit Zagreb and its surroundings in March and cities Petrinja and Sisak with their surroundings in December. The Bank suffered damages in terms of temporary closing of offices and material damages of buildings owned by the Bank which resulted in increase in rent expenses for the new office space. The damages caused by the earthquakes are measured at tens of millions of kuna but did not have material financial impact on Bank’s business in 2020. The Bank adjusted products and services to client’s needs affected by the earthquake and launched new credit line for renewal of residential real estate and opened special account for donations. With a will to help those whose homes were damaged in earthquake which hit Petrinja and large part of middle Croatia, the Bank donated one million kuna to the city of Petrinja. Notes to the Financial Statements for the year ended 31 December 2021 162 4. SEGMENT REPORTING The Group's business segments represent the primary reportable segments. The primary format is based on the Group’s management and internal reporting structure. As the Group does not allocate overhead expenses and equity to segments, segment profitability is not reported. Business Segments The Group comprises following primary reportable segments: • Corporate Banking Includes loans, deposits and other transactions and balances with corporate customers, Corporate banking is divided into two sub-segments: - Large companies and public sector - Small and medium enterprises • Retail Banking Includes loans, deposits, direct (card) business, other transactions with retail customers and uninterrupted functioning and development of all direct distribution channels of products and services of the Bank. • Financial Markets Group financing operations and the aggregate liquidity and foreign exchange risk activities in respect of borrowings, transactions with debt securities, use of derivatives and investments in liquid assets. It also includes asset management, securities custody and brokerage services. • Direct banking Includes the smooth operation and development of all direct distribution channels of the Bank's products and services and card business. The Group does not apply internal transfer prices in determining the financial results of segments. Internal transfer prices are a tool which the Group uses in reporting management. Classification of individual sectors for the purposes of notes on the results and position of segments differs from other parts of the financial reports. This primarily refers to the owner of small enterprises, who are part of Corporate Banking in the report of segmentation, while in the financial reports part of positions related to the Retail Banking. Notes to the Financial Statements for the year ended 31 December 2021 163 4. SEGMENT REPORTING (CONTINUED) Group 2020 HRK ‘000 Corporate Retail Financial Market Direct banking Unallocated Total Net Interest Income 139,224 317,836 67,048 - - 524,109 Net Fees and Commissions Income 62,453 97,193 3,390 31,924 3,486 198,447 Trading and Investment Income - - 83,170 - - 83,170 Other Income 7,744 10,563 1,190 - 5,287 24,784 Operating Income 209,422 425,592 154,798 31,924 8,774 830,510 General and Administrative Expenses (32,636) (138,468) (6,648) (38,310) (234,062) (450,124) Depreciation and Amortization - - - - (67,823) (67,823) Impairment Losses on Loans and Other Assets (4,318) (63,696) 109 - 2,095 (65,810) Provisions for Liabilities and Expenses - - - - (307) (307) Operating Expenses (36,954) (202,164) (6,539) (38,310) (300,097) (584,064) Profit Before Taxation 172,468 223,428 148,259 (6,386) (291,323) 246,446 Income Tax - - - - (43,821) (43,821) Profit for the Year 172,468 223,428 148,259 (6,386) (335,144) 202,625 Segment Assets 6,892,916 9,114,053 11,579,202 168 (655) 27,585,684 Unallocated Assets - - - - 246,837 246,837 Total Assets 6,892,916 9,114,053 11,579,202 168 246,182 27,832,522 Segment Liabilities 11,503,462 12,175,603 1,241,535 56,330 2,262 24,979,193 Unallocated Equity and Liabilities - - - - 2,853,329 2,853,329 Total Equity and Liabilities 11,503,462 12,175,603 1,241,535 56,330 2,855,591 27,832,522 Notes to the Financial Statements for the year ended 31 December 2021 164 4. SEGMENT REPORTING (CONTINUED) Group 2020 HRK ‘000 Corporate Retail Financial Market Direct banking Unallocated Total Net Interest Income 152,177 306,757 78,283 - 10 537,227 Net Fees and Commissions Income 57,082 94,487 3,356 13,565 13,224 181,714 Trading and Investment Income - - 82,104 - - 82,104 Other Income 6,121 2,601 (7,336) - 8,208 9,593 Operating Income 215,380 403,845 156,408 13,565 21,441 810,639 General and Administrative Expenses (36,011) (200,210) (6,507) (38,492) (161,764) (442,985) Depreciation and Amortization - - - - (76,630) (76,630) Impairment Losses on Loans and Other Assets (59,527) (54,899) 48 - (6,986) (121,364) Provisions for Liabilities and Expenses - - - - 58,910 (58,910) Operating Expenses (95,538) (255,109) (6,459) (38,492) (186,471) (582,069) Profit Before Taxation 119,842 148,736 149,949 (24,927) (165,030) 228,570 Income Tax - - - - (45,186) (45,186) Profit for the Year 119,842 148,736 149,949 (24,927) (210,215) 183,384 Segment Assets 7,698,261 8,238,964 9,260,208 220 23 25,197,675 Unallocated Assets - - - - 266,103 266,103 Total Assets 7,698,261 8,238,964 9,260,208 220 266,103 25,463,778 Segment Liabilities 9,696,627 11,709,847 1,364,293 39,601 3,377 22,817,957 Unallocated Equity and Liabilities - - - - 2,650,032 2,650,032 Total Equity and Liabilities 9,696,627 11,709,847 1,364,293 39,601 2,653,409 25,463,778 Notes to the Financial Statements for the year ended 31 December 2021 165 4. SEGMENT REPORTING (CONTINUED) Bank 2021 HRK ‘000 Corporate Retail Financial Market Direct banking Unallocated Total Net Interest Income 139,224 317,836 67,051 - - 524,111 Net Fees and Commissions Income 62,453 97,193 3,390 31,924 (2,084) 192,877 Trading and Investment Income - - 83,170 - - 83,170 Other Income 7,744 10,563 1,190 - 1,556 21,053 Operating Income 209,422 425,592 154,801 31,924 (527) 821,211 General and Administrative Expenses (32,636) (138,468) (6,648) (38,310) (226,338) (442,399) Depreciation and Amortization - - - - (67,020) (67,020) Impairment Losses on Loans and Other Assets (4,318) (63,696) 109 - 2,095 (65,810) Provisions for Liabilities and Expenses - - - - (307) (307) Operating Expenses (36,954) (202,164) (6,539) (38,310) (291,570) (575,536) Profit Before Taxation 172,468 223,428 148,262 (6,386) (292,097) 245,675 Income Tax (43,568) (43,568) Profit for the Year 172,468 223,428 148,262 (6,386) (335,665) 202,107 Segment Assets 6,898,833 9,114,053 11,573,245 168 - 27,586,299 Unallocated Assets - - - - 246,888 246,888 Total Assets 6,898,833 9,114,053 11,573,245 168 246,888 27,833,187 Segment Liabilities 11,503,46 2 12,175,603 1,250,780 56,330 - 24,986,175 Unallocated Equity and Liabilities - - - - 2,847,012 2,847,012 Total Equity and Liabilities 11,503,46 2 12,175,603 1,250,780 56,330 2,847,012 27,833,187 Notes to the Financial Statements for the year ended 31 December 2021 166 4. SEGMENT REPORTING (CONTINUED) Bank 2020 HRK ‘000 Corporate Retail Financial Market Direct banking Unallocated Total Net Interest Income 152,278 306,757 78,290 - 10 537,335 Net Fees and Commissions Income 57,082 94,487 3,356 13,565 7,777 176,267 Trading and Investment Income - - 82,104 - - 82,104 Other Income 6,121 2,601 (7,336) - 2,006 3,392 Operating Income 215,481 403,845 156,415 13,565 9,792 799,098 General and Administrative Expenses (36,011) (200,210) (6,507) (38,492) (152,657) (433,877) Depreciation and Amortization - - - - (75,816) (75,816) Impairment Losses on Loans and Other Assets (59,527) (54,899) 48 - (6,986) (121,364) Provisions for Liabilities and Expenses - - - - 58,910 (58,910) Operating Expenses (95,538) (255,109) (6,459) (38,492) (176,549) (572,147) Profit Before Taxation 119,943 148,736 149,956 (24,927) (166,757) 226,950 Income Tax - - - - (44,888) (44,888) Profit for the Year 119,943 148,736 149,956 (24,927) (211,645) 182,063 Segment Assets 7,704,081 8,238,964 9,254,347 220 25,197,612 Unallocated Assets - - - - 266,154 266,154 Total Assets 7,704,081 8,238,964 9,254,347 220 266,154 25,463,766 Segment Liabilities 9,696,627 11,709,847 1,371,882 39,601 - 22,817,957 Unallocated Equity and Liabilities - - - - 2,645,809 2,645,809 Total Equity and Liabilities 9,696,627 11,709,847 1,371,882 39,601 2,645,809 25,463,766 Notes to the Financial Statements for the year ended 31 December 2021 167 5. CASH AND RECEIVABLES FROM BANKS Group 2021 HRK ‘000 2020 HRK ‘000 HRK Foreign Currency Total HRK Foreign Currency Total Cash in Hand Held by the Group 301,558 1,023,258 1,324,816 268,548 519,393 787,941 Held by Other Parties 97,728 - 97,728 112,131 - 112,131 Cheques in the Course of Collection - 234 234 - 29 29 399,286 1,023,492 1,422,778 380,679 519,423 900,102 Amounts Due from Banks Current Accounts with Domestic Banks 39 1,667 1,705 40 860 900 Current Accounts with Foreign Banks - 413,785 413,785 - 537,456 537,456 Giro Account with the CNB 3,970,093 384,193 4,354,286 2,233,086 13,399 2,246,485 3,970,131 799,645 4,769,776 2,233,126 551,715 2,784,840 Total 4,369,418 1,823,136 6,192,554 2,613,805 1,071,137 3,684,943 Bank 2021 HRK ‘000 2020 HRK ‘000 HRK Foreign Currency Total HRK Foreign Currency Total Cash in Hand Held by the Group 301,558 1,023,258 1,324,816 268,548 519,393 787,941 Held by Other Parties 97,728 - 97,728 112,131 - 112,131 Cheques in the Course of Collection - 234 234 - 29 29 399,286 1,023,492 1,422,778 380,679 519,423 900,102 Amounts Due from Banks Current Accounts with Domestic Banks - 1,667 1,667 - 859 859 Current Accounts with Foreign Banks - 413,785 413,785 - 537,456 537,456 Giro Account with the CNB 3,970,093 384,193 4,354,286 2,233,086 13,399 2,246,485 3,970,093 799,645 4,769,737 2,233,086 551,714 2,784,800 Total 4,369,379 1,823,136 6,192,515 2,613,766 1,071,136 3,684,902 Notes to the Financial Statements for the year ended 31 December 2021 168 6. MANDATORY RESERVE WITH CROATIAN NATIONAL BANK Group 2021 HRK ‘000 2020 HRK ‘000 HRK Foreign Currency Total HRK Foreign Currency Total Mandatory Reserve 1,326,442 - 1,326,442 1,219,157 - 1,219,157 Total 1,326,442 - 1,326,442 1,219,157 - 1,219,157 Bank 2021 HRK ‘000 2020 HRK ‘000 HRK Foreign Currency Total HRK Foreign Currency Total Mandatory Reserve 1,326,442 - 1,326,442 1,219,157 - 1,219,157 Total 1,326,442 - 1,326,442 1,219,157 - 1,219,157 Mandatory reserve with the Croatian National Bank represents amounts held at the CNB due to a prescribed obligation by the Croatian National Bank. The reserve requirement rate amounts to 9 percent of Kuna and foreign currency deposits, loans and debt securities issued (31 December 2020: 9.0%). The rate of allocating the required minimum Kuna reserve requirement with the Croatian National Bank as at 31 December 2021 was 70% (2020: 70%), while the remaining 30% (2020: 30%) was maintained in the form of other liquid receivables. By the decision of the CNB Council the obligation to allocate the foreign currency part of the reserve has been abolished. The CNB does not pay any fees on the reserve requirements set aside. Notes to the Financial Statements for the year ended 31 December 2021 169 7. LOANS TO AND RECEIVABLES FROM BANKS Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Short-Term Placements with Foreign Banks 277,690 368,342 277,690 368,342 Total Short-Term Placements and Loans Banks 277,690 368,342 277,690 368,342 Guarantee Deposits with Foreign Banks 13,046 11,899 13,046 11,899 Total Short-Term Placements and Loans Banks 13,046 11,899 13,046 11,899 Short-Term Placements with Domestic Non-Banking Financial Institutions 500 500 500 500 Long-Term Placements with Domestic Non-Banking Financial Institutions 99 100 99 100 Long-Term Placements with Domestic Non-Banking Financial Institutions 599 600 599 600 Provisions for Impairment Losses (Non-Banking Financial Institutions) (1,504) (1,460) (1,504) (1,460) Accrued Interests Not Yet Due 6 18 6 18 Total Interests Receivable 6 18 6 18 Total 289,837 379,399 289,837 379,399 Guarantee deposits mainly relate to deposits for card operations. Movements in Impairment Allowance Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Balance at January 1 1,460 1,220 1,460 1,220 JABA migration effect 44 240 44 240 Impairment Losses on Loans to and Receivables from Banks 1,504 1,460 1,504 1,460 Balance at December 31 1,460 1,220 1,460 1,220 All placements and loans to other banks of the Group and Bank are in stage 1 and during the year there were no transfers between tiers, except for receivables from banks in the amount of HRK 500 thousand, which is in tier 3 and in previous periods a 100% impairment was carried out. Notes to the Financial Statements for the year ended 31 December 2021 170 8. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Trading Instruments Listed Debt Securities Bonds of the Ministry of Finance 483,499 619,551 483,499 619,551 Corporate bonds and commercial bills 24,861 - 24,861 - Listed Debt Securities 508,361 619,551 508,361 619,551 Listed Shares of Investment Funds 80,933 71,086 80,933 71,086 Listed Equity Securities 24,706 24,254 24,706 24,254 Not Listed Equity Securities - 20,000 - 20,000 614,000 734,892 614,000 734,892 Loans and receivables from customers - corporate 2,895 5,093 2,895 5,093 - retail 4,457 11,157 4,457 11,157 7,352 16,250 7,352 16,250 Accrued Interests Not Yet Due 4,634 6,964 4,634 6,964 Total 625,986 758,106 625,986 758,106 During 2020, the Bank reclassified investments in equity securities of Drvna Industrija Spačva d.d. in the amount of HRK 20,000 thousand from assets held for sale, given that the criteria of IFRS 5 for classification are no longer met, ie due to the current situation on the financial markets. In 2021, the said investment was sold. Notes to the Financial Statements for the year ended 31 December 2021 171 9. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Listed Debt Securities Bonds of the Ministry of Finance 3,953,844 3,807,305 3,953,844 3,807,305 Corporate Bonds 195,219 83,065 195,219 83,065 4,149,062 3,890,370 4,149,062 3,890,370 Debt Securities Not Listed Treasury Bills of the Croatian Ministry of Finance 376,071 188,212 376,071 188,212 Equity securities Not Listed - Corporate 26,669 24,095 26,669 24,095 25,669 24,095 25,669 24,095 Listed Equity Securities - Corporate 22,021 22,614 22,021 22,614 - Non-Banking Financial Institutions 2,215 3,352 2,215 3,352 Provisions for Impairment Losses on Equity Securities (1,033) (1,033) (1,033) (1,033) 23,204 24,933 23,204 24,933 Accrued Interests Not Yet Due 27,292 30,426 27,292 30,426 Total 4,601,297 4,158,035 4,601,297 4,158,035 Notes to the Financial Statements for the year ended 31 December 2021 172 9. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (CONTINUED) Movement in Impairment Allowance for Financial Assets at Fair Value through Other Comprehensive Income Group and Bank 2021 2020 HRK ‘000 HRK ‘000 Individually Expected Losses Portfolio Based Expected Losses Total Individually Identified Losses Portfolio Based Losses Total At January 1 1,033 14,802 15,835 1,033 14,225 15,258 Increase Impairment Losses - 6,410 6,410 - 577 577 At December 31 1,033 21,212 22,245 1,033 14,802 15,835 All financial assets of the Group and the Bank that are measured at fair value through other comprehensive income are in stage 1 and there has been no transfer between stages in the year. Notes to the Financial Statements for the year ended 31 December 2021 173 10. FINANCIAL ASSETS AT AMORTISED COST Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Corporative Bonds 300 900 300 900 Bills of Exchange 158 1,191 158 1,191 458 2,091 458 2,091 Provisions for Impairment Losses - (90) - (90) Portfolio Based Impairment for Identified Losses (5) (26) (5) (26) Total 453 1,975 453 1,975 Movement in Impairment Allowance for Financial Assets at Amortized Cost Group and Bank 2021 2020 HRK ‘000 HRK ‘000 Expected losses Portfolio Based Expected Losses Total Identified losses Portfolio Based Identified Losses Total Balance at January 1 90 26 116 150 152 302 Increase/ (Decrease) of Impairment Losses (90) (21) (111) (60) (126) (186) Balance at December 31 (0) 5 5 90 26 116 Notes to the Financial Statements for the year ended 31 December 2021 174 10. FINANCIAL ASSETS AT AMORTISED COST (CONTINUED) Group and Bank HRK'000 Stage 1 Stage 2 Stage 3 Total Balance at 1 January 2021 1,191 - 900 2,091 Arisen or purchased new assets – derecognized or paid off assets (including derecognition) (1,191) 460 (900) (1,631) Balance at 31 December 2021 - 460 - 460 Expected Credit Losses at 1 January 2021 (26) - (90) (116) Arisen or purchased new assets – derecognized or paid off assets (including derecognition) 26 (5) 90 111 Expected Credit Losses at 31 December 2021 - (5) - (5) Group and Bank HRK'000 Stage 1 Stage 2 Stage 3 Total Balance at 1 January 2020 2,665 432 1,500 4,603 Arisen or purchased new assets – derecognized or paid off assets (including derecognition) (1,473) (432) (600) (2,505) Balance at 31 December 2020 1,191 - 900 2,091 Expected Credit Losses at 1 January 2020 (105) (47) (150) (302) Arisen or purchased new assets – derecognized or paid off assets (including derecognition) 78 47 60 186 Expected Credit Losses at 31 December 2020 (26) - (90) (116) Notes to the Financial Statements for the year ended 31 December 2021 175 11. LOANS TO AND RECEIVABLES FROM CUSTOMERS Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Short-Term Loans Corporate 1,261,430 1,700,285 1,261,284 1,700,285 Retail 948,040 950,314 948,040 950,314 Total Short-Term Loans 2,209,470 2,650,600 2,209,324 2,650,600 Long-Term Loans Corporate 6,094,990 6,588,130 6,094,990 6,588,130 Retail 7,375,842 6,937,989 7,375,842 6,937,989 Total Long-Term Loans 13,470,832 13,526,119 13,470,832 13,526,119 Accrued Interests Due 114,910 111,729 114,910 111,729 Accrued Interests Not Yet Due 9,652 15,285 9,652 15,285 Total Gross Loans 15,804,864 16,303,732 15,804,718 16,303,732 Provisions for Impairment Losses (1,308,291) (1,328,007) (1,308,291) (1,328,007) Portfolio Based Impairment Allowance for Identified Losses (244,772) (252,955) (244,772) (252,955) Total 14,251,800 14,722,770 14,251,654 14,722,770 Total Impairment Allowance and Provisions as a Percentage of Gross Loans to Customers 9,83% 9,77% 9,83% 9,77% Notes to the Financial Statements for the year ended 31 December 2021 176 11. LOANS AND RECEIVABLES FROM CUSTOMERS (CONTINUED) Movements in Impairment Allowance Movements in the impairment allowance on loans to and receivables from customers were as follows: Group 2021 2020 HRK ‘000 HRK ‘000 Individually Expected Losses Portfolio Based Expected Losses Total Individually Identified Losses Portfolio Based Losses Total Balance at January 1 1,328,007 252,955 1,580,962 1,338,102 198,147 1,536,249 Increase/(decrease) of Impairment Losses 66,324 (8,015) 58,309 86,878 54,200 141,079 Net Foreign Exchange Loss (342) (168) (510) 1,487 608 2,095 Write-Offs (111,221) - (111,221) (103,035) - (103,035) Other 25,523 - 25,523 4,575 - 4,575 Balance at December 31 1,308,291 244,772 1,553,063 1,328,007 252,955 1,580,962 Bank 2021 2020 HRK ‘000 HRK ‘000 Individually Expected Losses Portfolio Based Expected Losses Total Individually Identified Losses Portfolio Based Losses Total Balance at January 1 1,328,007 252,955 1,580,962 1,338,102 198,147 1,536,249 Increase/(decrease) of Impairment Losses 66,324 (8,015) 58,309 86,878 54,200 141,079 Net Foreign Exchange Loss (342) (168) (510) 1,487 608 2,095 Write-Offs (111,221) - (111,221) (103,035) - (103,035) Other 25,523 - 25,523 4,575 - 4,575 Balance at December 31 1,308,291 244,772 1,553,063 1,328,007 252,955 1,580,962 Notes to the Financial Statements for the year ended 31 December 2021 177 11. LOANS AND RECEIVABLES FROM CUSTOMERS (CONTINUED) Expected credit losses analysis for the Group and Bank in 2021 was as follows: HRK'000 Stage 1 Stage 2 Stage 3 Total Balance at 1 January 2021 13,412,293 763,209 2,128,229 16,303,730 Arisen or purchased new assets 3,112,066 340,339 64,966 3,517,371 Derecognized or paid off assets (including derecognition) (3,353,479) (297,794) (248,863) (3,900,136) Transfer into Stage 1 64,536 (57,579) (6,957) - Transfer into Stage 2 (647,041) 678,510 (31,469) - Transfer into Stage 3 (206,621) (148,394) 355,015 - Modification based changes (do not result with derecognition) 1,908 (592) (5,644) (4,329) Write-offs (134) (145) (111,494) (111,773) Balance at 31 December 2021 12,383,527 1,277,552 2,143,784 15,804,864 Expected credit losses at 1 January 2021 (172,023) (80,512) (1,328,426) (1,580,961) Arisen or purchased new assets (26,956) (16,060) (8,355) (51,371) Derecognized or paid off assets (including derecognition) 50,150 13,799 58,705 122,654 Transfer into Stage 1 (5,534) 4,785 749 - Transfer into Stage 2 19,784 (21,488) 1,705 - Transfer into Stage 3 5,313 13,964 (19,277) - Change in expected credit loss (6,819) (23,174) (124,613) (154,606) Write-offs - - 111,221 111,221 Expected credit losses at 31 December 2021 (136,085) (108,687) (1,308,291) (1,553,064) Of which purchased or issued credit impaired financial assets (POCI) for the Group were as follows: HRK'000 POCI Balance at 1 January 2021, net 176,014 Arisen or purchased new assets 690 Collected (excluding write-offs) (22,950) Other (93) Balance at 31 December 2021, net 153,660 Notes to the Financial Statements for the year ended 31 December 2021 178 11. LOANS AND RECEIVABLES FROM CUSTOMERS (CONTINUED) Expected credit losses analysis for the Group and Bank in 2021 was as follows: HRK'000 Stage 1 Stage 2 Stage 3 Total Balance at 1 January 2020 12,185,916 717,261 1,972,093 14,875,271 Arisen or purchased new assets 3,964,983 96,120 284,714 4,345,818 Derecognized or paid off assets (including derecognition) (2,458,640) (123,525) (206,077) (2,788,242) Transfer into Stage 1 216,072 (190,405) (25,667) - Transfer into Stage 2 (295,938) 352,279 (56,341) - Transfer into Stage 3 (194,719) (88,238) 282,956 - Modification based changes (do not result with derecognition) (4,883) 397 1,099 (3,386) Write-offs (498) (682) (124,549) (125,729) Balance at 31 December 2020 13,412,293 763,209 2,128,229 16,303,732 Expected credit losses at 1 January 2020 (130,939) (66,894) (1,338,416) (1,536,249) Arisen or purchased new assets (45,860) (5,443) (40,870) (92,174) Derecognized or paid off assets (including derecognition) 16,897 2,594 35,954 55,445 Transfer into Stage 1 (12,102) 10,714 1,388 - Transfer into Stage 2 8,144 (9,970) 1,827 - Transfer into Stage 3 3,144 9,657 (12,801) - Change in expected credit loss (11,306) (21,172) (78,542) (111,020) Write-offs - - 103,035 103,035 Expected credit losses at 31 December 2020 (172,023) (80,513) (1,328,426) (1,580,962) Of which purchased or issued credit impaired financial assets (POCI) for the Group were as follows: HRK'000 POCI Balance at 1 January 2020, net 95,653 Arisen or purchased new assets – derecognized or paid off assets (including derecognition) 114,768 Collected (34,407) Write-offs - Balance at 31 December 2020, net 176,014 Notes to the Financial Statements for the year ended 31 December 2021 179 12. ASSETS HELD FOR SALE During 2021, the Bank reclassified investments in real estate in the amount of HRK 9,200 thousand (Note 15) to assets held for sale Investment into assets held for sale by asset type was as follows: Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Equity Stakes – net 9,200 - 9,200 - Total as of December 31 9,200 - 9,200 - Movement in Asset held for sale was as follows: Group Bank 2021. HRK ‘000 2020. HRK ‘000 2021. HRK ‘000 2020. HRK ‘000 Balance at 1 January - - - - Reclassification from investment property to assets held for sale 9,200 - 9,200 - Balance at 31 December 9,200 - 9,200 - Notes to the Financial Statements for the year ended 31 December 2021 180 13. INVESTMENTS IN SUBSIDIARIES a) The Bank’s subsidiaries are as follows: Industry Domicile Ownership at December 31, 2021 HPB Invest Ltd Investment Fund Management Croatia 100% HPB Nekretnine Ltd Real Estate Agency and Construction Croatia 100% b) Investments in Subsidiaries that are fully consolidated in financial reports of the Group, are as follows: 2021 HRK ‘000 2020 HRK ‘000 HPB Invest Ltd 5,000 5,000 HPB Nekretnine Ltd 4,761 4,761 Total 9,761 9,761 The following table presents summary financial information on subsidiaries: 2021 HRK ‘000 2020 HRK ‘000 Short Term Assets 11,288 9,561 Long Term Assets 7,373 8,380 Short Term Liabilities (2,361) (1,753) Long Term Liabilities (222) (629) Net Assets, Book Value of Subsidiaries 16,078 15,559 Share of Revenue and Profit of Subsidiaries 100% 100% Revenue 16,783 17,985 Net profit 1,418 1,322 c) Movements of Investments in Subsidiaries: During 2020, the Bank converted its receivables from HPB Nekretnine into an increase in the capital of that member of the Group. Notes to the Financial Statements for the year ended 31 December 2021 181 14. PROPERTY, EQUIPMENT AND ASSETS WITH THE RIGHT TO USE Group IFRS 16 2021 HRK’000 Land and Buildings Computers, Equipment and Motor Vehicles Assets Under Construct ion Building and land Computers, equipment and motor vehicles Total Purchase Cost or Estimated Value Balance at January 1 2021 237,845 219,679 (3,052) 129,836 27,651 611,958 Increase / Revaluation of land 554 - - - - 554 Decrease/ Revaluation of land (650) - - - - (650) Increase/ Revaluation of buildings 6,050 - - - - 6,050 Decrease / Revaluation of building (83) - - - - (83) Additions - 91 26,398 131 8,582 35,202 Write-offs and other reductions (1,088) (11,265) - (8,718) (47) (21,118) Transferred into Use 13,493 12,875 (26,368) - - - Balance at December 31 2021 256,121 221,380 (3,022) 121,249 36,186 631,913 Accumulated Depreciation Balance at January 1, 2021 (108,983) (197,783) - (36,805) (9,388) (352,958) Depreciation Cost (4,832) (13,237) - (18,602) (5,433) (42,104) Write-offs 689 11,096 - - - 11,785 Balance at December 31 2021 (113,126) (199,924) - (55,407) (14,820) (383,277) Net Book Value Balance at January 1 2021 128,861 21,896 (3,052) 93,031 18,264 259,000 Balance at December 31 2021 142,571 21,879 (3,022) 65,842 21,366 248,636 Notes to the Financial Statements for the year ended 31 December 2021 182 14. PROPERTY, EQUIPMENT AND ASSETS WITH THE RIGHT TO USE (CONTINUED) Group IFRS 16 2020 HRK’000 Land and Buildings Computers, Equipment and Motor Vehicles Assets Under Construct ion Building and land Computers, equipment and motor vehicles Total Purchase Cost or Estimated Value Balance at January 1 2020 233,884 253,919 (3,418) 100,368 25,750 610,503 Reclassification and correction of previous periods 5,803 - - - - - 5,803 Balance at January 1 2020 corrected 239,687 253,919 (3,418) 100,368 25,750 616.306 Increase / Revaluation of land 1,725 - - 32,509 1,902 36,136 Decrease / Revaluation of building (7,533) 36 - 182 - (7,316) Additions - - 13,899 - - 13,899 Write-offs and other reductions (707) (43,138) - (3,222) - (47,067) Transferred into Use 4,672 8,862 (13,533) - - 1 Balance at December 31 2020 237,845 219,679 (3,052) 129,836 27,651 611,958 Accumulated Depreciation Balance at January 1, 2020 (102,652) (226,136) - (17,657) (4,457) (350,903) Reclassification and correction of previous periods (1,695) - - - - (1,695) Balance at January 1 2020 corrected (104,347) (226,136) - (17,657) (4,457) (352,598) Depreciation Cost (4,636) (14,448) - (19,148) (4,931) (43,162) Revaluation of land and building - - - - - - Reclassification and correction of previous periods (1,695) - - - - (1,695) Write-offs - 42,802 - - - 42,802 Balance at December 31 2020 (108,983) (197,782) - (36,805) (9,388) (352,958) Net Book Value Balance at January 1 2020 131,232 27,782 (3,418) 82,711 21,293 259,600 Balance at December 31 2020 128,861 21,896 (3,052) 93,031 18,264 259,000 Assets under construction as of 31 December 2021 refer to investments in equipment and construction objects at purchase cost of HRK 3,022 thousand (2020: HRK 3,052 thousand). The carrying amount of the land owned by the Group as at 31 December 2021 amounts to HRK 19,055 thousand (2020: HRK 19,564 thousand). Notes to the Financial Statements for the year ended 31 December 2021 183 14. PROPERTY AND EQUIPMENT WITH RIGHT OF USE (CONTINUED) Bank IFRS 16 2021 HRK’000 Land and Buildings Computers, Equipment and Motor Vehicles Assets Under Construc tion Building and land Computers, equipment and motor vehicles Total Balance at January 1 2020 210,271 200,398 1,431 129,774 27,668 569,542 Increase / Revaluation of land 554 - - - - 554 Decrease / Revaluation of building (650) - - - - (650) Decrease/ Revaluation of land 6,050 - - - - 6,050 Increase/ Revaluation of buildings (83) - - - - (83) Additions - 26,398 - 8,582 34,980 Write-offs and other reductions (1,088) (11,188) - (8,664) (47) (20,987) Transferred into Use 13,493 12,875 (26,368) - - - Balance at December 31 2021 228,547 202,085 1,461 121,110 36,203 589,407 Accumulated Depreciation Balance at January 1, 2021 (93,189) (172,001) - (36,608) (9,388) (311,187) Depreciation Cost (4,832) (13,181) - (18,395) (5,433) (41,841) Write-offs 689 11,041 - - - 11,730 Balance at December 31 2021 (97,332) (174,141) - (55,003) (14,820) (341,297) Net Book Value Balance at January 1 2021 117,082 28,397 1,431 93,165 18,280 258,356 Balance at December 31 2021 131,215 27,944 1,461 66,107 21,382 248,110 Notes to the Financial Statements for the year ended 31 December 2021 184 14. PROPERTY AND EQUIPMENT WITH RIGHT OF USE (CONTINUED) Bank IFRS 16 2020 HRK’000 Land and Buildings Computers, Equipment and Motor Vehicles Assets Under Construc tion Building and land Computers, equipment and motor vehicles Total Purchase Cost or Estimated Value Balance at January 1 2020 206,311 235,282 1,065 100,479 25,766 568,903 Reclassification and correction of previous periods 5,803 - - - - 5,803 Balance at January 1, corrected 212.114 235.282 1.065 100.479 25.766 574.706 Increase / Revaluation of land 1,725 - - 32,509 1,902 36,136 Decrease / Revaluation of building (7,533) - - - - (7,533) Additions - - 13,899 - - 13,899 Write-offs and other reductions (707) (43,745) - (3,214) - (47,666) Transferred into Use 4,672 8,862 (13,533) - - 1 Balance at December 31 2020 210,271 200,398 1,431 129,774 27,668 569,543 Accumulated Depreciation Balance at January 1, 2020 (86,858) (200,400) - (17,657) (4,457) (309,372) Reclassification and correction of previous periods (1,695) - - - - (1,695) Balance at January 1, corrected (88,553) (200,400) - (17,657) (4,457) (311,067) Depreciation Cost (4,636) (14,395) - (18,951) (4,931) (43,162) Revaluation of land and building - - - - - - Write-offs - 42,793 - - - 42,802 Balance at December 31 2020 (93,189) (172,002) - (36,606) (9,388) (311,187) Net Book Value Balance at January 1 2020 119,453 34,882 1,065 82,822 21,309 259,531 Balance at December 31 2020 117,082 28,397 1,431 93,165 18,280 258,356 Assets under constructions as at 31 December 2021 relate to investments in equipment and buildings at a cost of HRK 1,461 thousand (2020: HRK 1,431 thousand). The carrying amount of land owned by the Bank as at 31 December 2021 was HRK 19,055 thousand (2020: HRK 19,564 thousand). There is no mortgage or other lien on the property owned by the Bank in favor of other parties. Right of Use Asset (RoU) as at 31 December 2021 amounted to HRK 87,489 thousand (2020: HRK 111,445 thousand). Assets with the right of use are recognized in the entity's functional currency and depreciated on a straight-line basis over the term of the lease. Notes to the Financial Statements for the year ended 31 December 2021 185 15. INVESTMENT PROPERTY Group 2021 2020 Note HRK ‘000 HRK ‘000 Purchase Cost Balance as at January 1 256,086 247,983 Additions 4,382 12,104 Reclasification to Assets held for sale (57,673) - Disposals (16,542) (4,001) Balance as at December 31 186,253 256,086 Accumulated Depreciation Balance as at January 1 (3,853) (3,430) Amortization for the Year (subsidiary) (423) (424) Balance as at December 31 (4,277) (3,853) Impairment Loss Balance at January 1 (178,803) (171,794) Impairment 2,436 (8,712) Reclasification to Assets held for sale 48,473 - Disposals 13,559 1,703 Balance at December 31 (114,335) (178,803) Net Book Value Balance as at January 1 73,430 72,759 Balance as at December 31 67,642 73,430 Bank 2021 2020 HRK ‘000 HRK ‘000 Purchase Cost Balance as at January 1 244,796 236,693 Additions 4,382 12,104 Reclasification to Assets held for sale (57,673) - Disposals (16,542) (4,001) Balance as at December 31 174,964 244,796 Impairment Loss Balance as at January 1 (178,803) (171,794) Impairment 2,436 (8,712) Reclasification to Assets held for sale 48,473 - Disposal 13,559 1,703 Balance as at December 31 (114,335) (178,803) Net Book Value Balance as at January 1 65,993 64,899 Balance at December 31 60,629 65,993 Notes to the Financial Statements for the year ended 31 December 2021 186 15. INVESTMENT PROPERTY (CONTINUED) Assets taken over in exchange for uncollected receivables classified as investments in real estate as at 31.12.2021. has a gross book value of HRK 172,358 thousand. The value adjustment based on the assessment of value with the application of the discount factor of marketability related to real estate investment amounts to HRK 111,729 (2020: HRK 1,878,803 thousand), so the net book value of these assets amounts to HRK 60,629 thousand (2020: HRK 65,993 thousand). Fair value hierarchy of investment properties as at December 31, 2021 and December 31, 2020 was as follows: Group Level 1 Level 2 Level 3 Fair Value as at December 31 2021 - Land - - 41,203 41,203 - Buildings - - 25,223 25,223 - Equipment - - 1,216 1,216 TOTAL - - 67,642 67,642 Group Level 1 Level 2 Level 3 Fair Value as at December 31 2020 - Land - - 38,540 38,540 - Buildings - - 33,674 33,674 - Equipment - - 1,216 1,216 TOTAL - - 73,430 73,430 Bank Level 1 Level 2 Level 3 Fair Value as at December 31 2021 - Land - - 40,538 40,538 - Buildings - - 18,875 18,875 - Equipment - - 1,216 1,216 TOTAL - - 60,629 60,629 Bank Level 1 Level 2 Level 3 Fair Value as at December 31 2020 - Land - - 37,875 37,875 - Buildings - - 26,902 26,902 - Equipment - - 1,216 1,216 TOTAL - - 65,993 65,993 Disclosure of the investment valuation in real estate is presented in Note 3. Property is assessed in accordance with the Real Estate Estimates Act (OG 78/2015) and the related Property Ordinance (NN 105/2015), according to law prescribed and appropriate methods consideration is given to a number of factors in determining its current market value. The valuation method has not changed during the year. During the year there were no items that would be reclassified from level 3 indicator to level 1 indicator or vice versa by hierarchy of fair value measures. Notes to the Financial Statements for the year ended 31 December 2021 187 16. INTANGIBLE ASSETS Group 2021 HRK’000 Software Leasehold Improvements Licenses Assets Under Construction Total Cost Balance as at January 1 300,984 92,636 69,091 15,144 477.855 Increase - - - 27,486 27.486 Transferred into Use 25,620 3,476 7,053 (36,161) (12) Amounts Written-Off - (620) - - (620) Balance as at December 31 326,604 95,492 76,144 6,469 504.709 Accumulated Amortization Balance as at January 1 (268,875)) (61,268) (56,481) - (386.624) Depreciation cost (14,111) (5,914) (5,271) - (25.296) Amounts Written-Off - 592 - - 592 Balance as at December 31 (282,986) (66,590) (61,752) - (411.328) Net Book Value Balance as at January 1 32,109 31,368 12,610 15,144 91.231 Balance as at December 31 43,618 28,902 14,392 6,469 93,381 Group 2020 HRK’000 Software Leasehold Improvements Licenses Assets Under Construction Total Cost Balance as at January 1 308,780 96,067 83,472 18,297 506.616 Increase - 707 - 13,537 14.244 Transferred into Use 12,121 913 3,655 (16,690) - Amounts Written-Off (19,917) (5,051) (18,036) - (43.004) Balance as at December 31 300,984 92,636 69,091 15,144 477.855 Accumulated Amortization Balance as at January 1 (268,130) (60,240) (68,116) - (396.486) Depreciation cost (20,662) (6,032) (6,348) - (33.042) Amounts Written-Off 19,917 5,004 17,983 - 42.904 Balance as at December 31 (268,875) (61,268) (56,481) - (386.624) Net Book Value Balance as at January 1 40,650 35,827 15,356 18,297 110.130 Balance as at December 31 32.109 31,368 12,610 15,144 91,231 Assets under construction as at 31 December 2021 mainly refer to investments into the application software and investments in other assets at purchased cost in the amount of HRK 6,469 thousand (2020: HRK 15,144 thousand), which are under construction due to future use by the Group. Notes to the Financial Statements for the year ended 31 December 2021 188 16. INTANGIBLE ASSETS (CONTINUED) Bank 2021 HRK’000 Software Leasehold Improvements Licenses Assets Under Construction Total Cost Balance as at January 1 270,956 87,252 68,607 18,636 445.451 Increase 27,472 27.472 Transferred into Use 25,620 3,476 7,053 (36,161) (12) Amounts Written-Off - (592) - - (592) Balance as at December 31 296,576 90,136 75,660 9,947 472.319 Accumulated Amortization Balance as at January 1 (240,867) (57,380) (56,165) - (354.412) Depreciation cost (13,995) (5,914) (5,271) - (25.180) Amounts Written-Off - 592 - - 592 Balance as at December 31 (254,862) (62,702) (61,436) - (379.000) Net Book Value Balance as at January 1 30,089 29,872 12,442 18,636 91.039 Balance as at December 31 41,714 27,434 14,224 9,947 93,319 Bank 2020 HRK’000 Software Leasehold Improvements Licenses Assets Under Construction Total Cost Balance as at January 1 278,752 90,683 82,988 21,087 473.510 Increase - 707 - 14,239 14.946 Transferred into Use 12,121 913 3,655 (16,690) (1) Amounts Written-Off (19,917) (5,051) (18,036) - (43.004) Balance as at December 31 270,956 87,252 68,607 18,636 445.451 Accumulated Amortization Balance as at January 1 (240,262) (56,352) (67,801) - (364.414) Depreciation cost (20,522) (6,032) (6,348) - (32.902) Amounts Written-Off 19,917 5,004 17,983 - 42.904 Balance as at December 31 (240,867) (57,380) (56,165) - (354.412) Net Book Value Balance as at January 1 38,491 34,331 15,188 21,087 109.096 Balance as at December 31 30.089 29,872 12,442 18,636 91,039 Assets under construction as at 31 December 2021 mainly refer to investments into the application software and investments in other assets at purchased cost in the amount of HRK 9,948 thousand (2020: HRK 18,636 thousand), which are under construction due to future use by the Group. Notes to the Financial Statements for the year ended 31 December 2021 189 17. NET DEFERRED TAX ASSETS a) Recognized Deferred Tax Assets and Liabilities (Group) Changes in the temporary differences and portions of deferred tax assets and deferred tax liabilities, and the related balances at the Group in 2021 are presented below: Group 2021 HRK’000 2021 Recognized as in the P&L Statement Recognized as Other Comprehensive Income 2020 Deferred Tax Assets Loans and Advances to Customers 4,194 (18) - 4,212 Other Provisions 1,907 - - 1,907 Financial Assets 15,643 539 - 15,104 Deferred tax assets - impairment of land 4,748 - - 4,748 Deferred tax assets - revaluation of own assets 132 132 - Deferred tax assets - IFRS 16 329 - - 329 Recognized tax loss - (8,334) - 8,334 Deferred Tax Liabilities Borrowings (510) - - (510) Actuarial profit / loss - IAS 19 251 - 251 - Revaluation Reserve (6,046) - (1,612) (4,434) Fair Value Reserve (46,930) - 6,243 (53,173) Deferred Tax Assets, Net (26,282) (7,681) 4,882 (23,483) Changes in temporary differences and portions of the Group's deferred tax assets and deferred tax liabilities in 2020 are presented as follows: Group 2020 HRK’000 2020 Recognized as in the P&L Statement Recognized as Other Comprehensi ve Income 2019 (restated) Restatement 2019 (previously reported) Deferred Tax Assets Loans and Advances to Customers 4,212 (738) - 4,950 - 4,950 Other Provisions 1,907 - - 1,907 - 1,907 Financial Assets 15,104 1,549 - 13,556 - 13,556 Deferred tax assets - impairment of land 4,748 (311) - 5,058 5,058 - Deferred tax assets - IFRS 16 329 - - 329 - 329 Fair Value Reserve 8,334 (45,464) - 53,798 - 53,798 Deferred Tax Liabilities Borrowings (510) 77 - (587) - (587) Revaluation Reserve (4,434) - 1,511 (5,943) (5,798) (145) Fair Value Reserve (53,173) - 16,796 (69,968) - (69,968) Deferred Tax Assets, Net (23,483) (44,888) 18,306 3,100 (739) 3,839 Notes to the Financial Statements for the year ended 31 December 2021 190 17. NET DEFERRED TAX ASSETS (CONTINUED) b) Recognized Deferred Tax Assets and Liabilities (Bank) Changes in the temporary differences and portions of deferred tax assets and deferred tax liabilities, and the related balances at the Bank in 2021 are presented below: Bank 2021 HRK’000 2021 Recognized as in the P&L Statement Recognized as Other Comprehensive Income 2020 Deferred Tax Assets Loans and Advances to Customers 4,194 (18) - 4,212 Other Provisions 1,907 - - 1,907 Financial Assets 15,643 539 - 15,104 Deferred tax assets - impairment of land 4,748 - - 4,748 Deferred tax assets - revaluation of own assets 132 132 - Deferred tax assets - IFRS 16 329 - - 329 Recognized tax loss - (8,334) - 8,334 Deferred Tax Liabilities Borrowings (510) - - (510) Actuarial profit / loss - IAS 19 251 - 251 - Revaluation Reserve (6,046) - (1,612) (4,434) Fair Value Reserve (46,930) - 6,243 (53,173) Deferred Tax Assets, Net (26,282) (7,681) 4,882 (23,483) Changes in the temporary differences and portions of deferred tax assets and deferred tax liabilities, and the related balances at the Bank in 2020 are presented below: Bank 2020 HRK’000 2020 Recognized as in the P&L Statement Recognized as Other Comprehens ive Income 2019 (restated) Restatement 2019 (previously reported) Deferred Tax Assets Loans and Advances to Customers 4,212 (738) - 4,950 - 4,950 Other Provisions 1,907 - - 1,907 - 1,907 Financial Assets 15,104 1,549 - 13,556 - 13,556 Deferred tax assets - impairment of land 4,748 (311) - 5,058 5,058 - Deferred tax assets - IFRS 16 329 - - 329 - 329 Recognized tax loss 8,334 (45,464) - 53,798 - 53,798 Deferred Tax Liabilities Borrowings (510) 77 - (587) - (587) Revaluation Reserve (4,434) - 1,511 (5,943) (5,798) (145) Fair Value Reserve (53,173) - 16,796 (69,968) - (69,968) Deferred Tax Assets, Net (23,483) (44,888) 18,306 3,100 (739) 3,839 Notes to the Financial Statements for the year ended 31 December 2021 191 18. OTHER ASSETS Group Bank u HRK ‘000 31.12.2021 31.12.2020 31.12.2021 31.12.2020 Fees Receivable 21,458 21,431 20,357 20,513 Items in Course of Collection 31,100 28,279 31,100 28,279 Prepaid expenses 19,216 13,921 19,092 13,662 Other Receivables 72,823 73,164 72,688 72,955 Total Other Assets, Gross 144,597 136,795 143,237 135,409 Impairment Loss (19,941) (23,775) (19,940) (23,775) Total 124,656 113,019 123,297 111,634 * The instruments used in the billing process relate mainly to the assets in the sale-purchase agreement effective in the amount of HRK 13,607 thousand (2019: HRK 20,842 thousand), as well as other accounts receivable (population, card transactions, payment transactions, effective sales etc.). Movements in Impairment Allowance Movements in the impairment allowance on other assets were as follows: Group Bank 2021 HRK ‘000 2020 HRK ‘000 2022 HRK ‘000 2020 HRK ‘000 Balance at January 1 23,775 22,971 23,775 22,971 (Decrease)/Increase in Impairment Losses 3,183 1,311 3,183 1,311 Foreign Exchange Currencies 200 (148) 200 (148) Used Impairments and Other (7,217) (359) (7,217) (359) Balance at December 31 19,941 23,775 19,941 23,775 19. FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Negative Fair Value of Cross Currency Swaps - - - - Negative fair value “swap” - 21 - 21 Balance at December 31 - 21 - 21 Notes to the Financial Statements for the year ended 31 December 2021 192 20. DEPOSITS FROM BANKS Group 2021 HRK ‘000 2020 HRK ‘000 HRK Foreign Currency Total HRK Foreign Currency Total Demand Deposits 25,460 2,557 28,017 12,665 8,593 21,258 Term Deposits - - - - 75,369 75,369 Interest Payable Not Yet Due 8 - 8 8 - 8 Total 25,468 2,557 28,025 12,673 83,962 96,635 Bank 2021 HRK ‘000 2020 HRK ‘000 HRK Foreign Currency Total HRK Foreign Currency Total Demand Deposits 25,460 2,557 28,017 12,665 8,593 21,258 Term Deposits - - - - 75,369 75,369 Interest Payable Not Yet Due 8 - 8 8 - 8 Total 25,468 2,557 28,025 12,673 83,962 96,635 Notes to the Financial Statements for the year ended 31 December 2021 193 21. DEPOSITS FROM CUSTOMERS Group 2021 HRK ‘000 2020 HRK ‘000 HRK Foreign Currency Total HRK Foreign Currency Total Demand Deposits Retail 5,391,146 2,930,540 8,321,686 4,874,332 2,573,118 7,447,449 Corporate 4,861,926 1,691,163 6,553,089 4,561,505 981,375 5,542,880 Restricted Deposits Retail 151,710 112,707 264,417 8,893 6,503 15,396 Corporate 1,610,551 1,851,881 3,462,433 1,380,480 1,137,133 2,517,614 12,015,334 6,586,291 18,601,625 10,825,210 4,698,129 15,523,339 Term Deposits Retail 1,366,648 2,376,772 3,743,420 1,712,786 2,633,743 4,346,529 Corporate 794,770 265,381 1,060,151 941,615 290,491 1,232,105 2,161,418 2,642,153 4,803,571 2,654,401 2,924,234 5,578,635 Interests Payable - Not Yet Due 1,796 5,852 7,649 3,727 5,144 8,872 Total 14,178,548 9,234,297 23,412,844 13,483,338 7,627,508 21,110,846 Bank 2021 HRK ‘000 2020 HRK ‘000 HRK Foreign Currency Total HRK Foreign Currency Total Demand Deposits Retail 5,391,146 2,930,540 8,321,686 4,874,332 2,573,118 7,447,449 Corporate 4,871,124 1,691,211 6,562,335 4,569,046 981,423 5,550,470 Restricted Deposits Retail 151,710 112,707 264,417 8,893 6,503 15,396 Corporate 1,610,551 1,851,881 3,462,433 1,380,480 1,137,133 2,517,614 12,024,531 6,586,339 18,610,871 10,832,751 4,698,177 15,530,929 Term Deposits Retail 1,366,647 2,376,772 3,743,419 1,712,785 2,633,743 4,346,528 Corporate 794,770 265,381 1,060,151 941,615 290,491 1,232,105 2,161,417 2,642,153 4,803,570 2,654,400 2,924,234 5,578,634 Interests Payable - Not Yet Due 1,796 5,852 7,649 3,727 5,144 8,872 Total 14,187,745 9,234,345 23,422,089 13,490,879 7,627,556 21,118,434 Restricted deposits mainly relate to client deposits which are predetermined for special purposes, such as those based on court orders. Notes to the Financial Statements for the year ended 31 December 2021 194 22. BORROWINGS Group 2021 HRK ‘000 2020 HRK ‘000 HRK Foreign Currency Total HRK Foreign Currency Total Long-term loans from HNB 400,000 - 400,000 400,000 - 400,000 Long-term loans from banks - 98,769 98,769 - 121,850 121,850 Long-term loans HBOR 806,117 - 806,117 828,629 - 828,629 Leasing 11,576 78,481 90,057 13,151 101,377 114,528 Accrued Interests Due - - - 130 - 130 Accrued Interests not Yet Due 1,919 24 1,943 1,482 22 1,503 Total 1,219,612 177,274 1,396,886 1,243,392 223,249 1,466,641 Bank 2021 HRK ‘000 2020 HRK ‘000 HRK Foreign Currency Total HRK Foreign Currency Total Long-term loans from HNB 400,000 - 400,000 400,000 - 400,000 Long-term loans from banks - 98,769 98,769 - 121,850 121,850 Long-term loans HBOR 806,117 - 806,117 828,629 - 828,629 Leasing 11,576 78,481 90,057 13,151 101,377 114,528 Accrued Interests Due - - - 130 - 130 Accrued Interests not Yet Due 1,919 24 1,943 1,482 22 1,503 Total 1,219,612 177,274 1,396,886 1,243,392 223,249 1,466,641 The Bank applied modified retrospective approaches in accordance with IFRS 16 and accounting policies, as the lessee used exceptional recognition for the lease of “low value” assets (EFTPOS devices) and short-term leases, i.e. leases with a 12-month or shorter period. During the most recent period in 2021, the Bank recognized as an expense on a pro rata basis HRK 922 thousand (2020: HRK 988 thousand) for the leases of low value assets, or HRK 304 thousand (2020: HRK 272 thousand) for short-term leases. VAT is exempt from accrued property and the lease obligation. The weighted average incremental borrowing rate at December 31, 2021 was 4.68 percent (December 31, 2020: 5.07%). Changes in Lease Liabilities Bank and Group 2021 2020 HRK ‘000 HRK ‘000 Balance as of January 1st 114,528 105,959 New contracts 6,013 25,446 Modifications 1,172 1,734 Lease payments (22,188) (18,682) Cesation (9,480) - Exchange rate fluctuations 12 70 Balance at December 31 90,057 114,528 Future minimal Lease Payments Bank and Group 2021 2020 HRK ‘000 HRK ‘000 up to one year 20,362 23,099 from one to five years 51,930 56,240 over five years 17,765 35,190 Total 90,057 114,528 Notes to the Financial Statements for the year ended 31 December 2021 195 23. PROVISIONS FOR LIABILITIES AND EXPENSES Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Litigation Provisions 16,325 29,868 16,325 29,868 Provision for Contingent Liabilities 7,557 14,445 7,557 14,445 Provisions for Other Liabilities 26,148 26,596 26,148 26,596 Provisions for Off-Balance Sheet Exposures 32,225 43,348 32,225 43,348 Provisions for employees 5,827 2,166 5,762 2,166 Total 88,080 116,424 88,015 116,424 The most significant impact on the movement of provisions for litigation during 2020 was the reversal of provisions for litigation in the amount of HRK 89,111 thousand with regard to the second-instance judgment reversing the first- instance judgment and rejecting the claim ordering the Bank to pay the plaintiff. Additional provisions for the aforementioned dispute were formed in the last quarter of 2019 according to the then estimated probability of loss of disputes and outflows on them, which is the most significant impact of the movement on provisions for litigations in 2019. In addition to the information presented above related to the movements of provisions per litigation during 2020 and 2019, the Bank had release of net provisions for litigation in 2021 in the amount of HRK 13,544 thousand (2020: HRK 2,491 thousand). In 2021, item Provisions for employees was transferred from Note 24. Other liabilities. Movements in Provisions for Liabilities and Expenses The movements in provisions for liabilities and expenses were as follows: Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Balance at January 1 116,424 182,595 116,424 182,595 Increase/ (Decrease) in Provisions in the P&L Report 307 (56,744) 307 (56,744) Other (28,651) (9,427) (28,716) (9,427) Balance at December 31 88,080 116,424 88,015 116,424 Notes to the Financial Statements for the year ended 31 December 2021 196 24. OTHER LIABILITIES Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Trade Accounts Payable 14,866 9,588 14,638 9,328 Salaries Amounts to Be Withheld from Salaries, Taxes and Contributions 22,235 18,486 21,574 17,995 Provisions for Retirement Benefits, Termination Benefits and Similar Liabilities 7,457 9,265 7,457 9,265 Fees Payable 4,471 4,847 4,367 4,743 Items in Course of settlement 67,646 64,816 67,646 64,816 Prepaid Deferred Income 3,627 4,694 3,627 4,694 Other Liabilities 67,469 59,129 66,263 58,183 Total 187,771 170,825 185,572 169,023 In 2021, the item Provisions for employees was transferred to Note 23. Provisions for liabilities and charges 25. EQUITY AND RESERVES a) Share Capital and treasury shares reserve As at 31 December 2021, the authorized, registered and fully paid-up share capital of the parent company of the Group amounted to HRK 1,214,755 thousand (2020: 1,214,755 thousand) and included 2,024,625 (2020: 2,024,625) of the approved ordinary the nominal value of HRK 600.00. At 31 December 2021, the Bank had 795 treasury shares (2020: 795) in the total amount of HRK 477 thousand (2020: HRK 477 thousand). Reserve for own shares as of 31 December 2021 amounted to HRK 4,477 thousand (2020: HRK 4,477 thousand). The ownership structure is as follows: 2021 2020 Paid-In Capital HRK’000 Ownership (%) Paid-In Capital HRK’000 Ownership (%) Republic of Croatia ((Ministry of Physical Planning, Construction and State Property) 545,421 44.90% 515,421 42.43% Hrvatska Pošta d.d. 144,966 11.93% 144,966 11.93% State Agency for Deposit Insurance and Bank Resolution 109,091 8.98% 109,091 8.98% Croatian State Pension Insurance Fund (Ministry of Physical Planning, Construction and State Property) 106,387 8.76% 106,387 8.76% Fund NEK 33,139 2.73% 28,727 2.36% Others 275,772 22.70% 310,183 25.54% Total 1,214,775 100.00% 1,214,775 100.00% Notes to the Financial Statements for the year ended 31 December 2021 197 25. EQUITY AND RESERVES (CONTINUED) Capital gain is the excess amount paid with respect to nominal value of shares at the issue of new shares. In 2021 there were no capital gains from emitting new shares (2020: 0). b) Fair Value Reserve The fair value reserve includes unrealized gains and losses on changes in the fair value of financial assets at fair value through other comprehensive income, net of tax. The movements of fair value reserve during 2021 and 2020 were as follows: Group 2021 2020 HRK ‘000 HRK ‘000 Balance at January 1 242,231 314,658 Equity instruments in assets at other comprehensive income - net change in fair value (1,553) (6,402) Net Unrealized (Loss)/Gain from Financial Assets at FV through OCI (31,302) (52,125) The Cumulative Loss on the Sale of Financial Assets at FV through OCI Transferred to the P&L Report - (32,521) Changes in actuarial gains (3,219) 1,826 Deferred tax relating to the change in the revaluation of financial assets at fair value through other comprehensive income 6,493 16,796 Balance at December 31 212,651 242,231 Bank 2021 2020 HRK ‘000 HRK ‘000 Balance at January 1 242,231 318,746 Equity instruments in assets at other comprehensive income - net change in fair value (1,553) (6,402) Net Unrealized (Loss)/Gain from Financial Assets at FV through OCI (31,302) (56,213) The Cumulative Loss on the Sale of Financial Assets at FV through OCI Transferred to the P&L Report - (32,521) Changes in actuarial gains (3,219) 1,826 Deferred tax relating to the change in the revaluation of financial assets at fair value through other comprehensive income 6,493 16,796 Balance at December 31 212,651 242,231 Notes to the Financial Statements for the year ended 31 December 2021 198 25. EQUITY AND RESERVES (CONTINUED) c) Revaluation Reserve The revaluation reserve in the amount of HRK 22,286 thousand (2020: HRK 22:22,744 thousand), net of taxes, arises from the revaluation of the Bank's land and buildings. In 2021, the decrease in the revaluation reserve amounts to HRK 458 thousand (2020: decrease of HRK 6,023 thousand). The movement of the revaluation reserve during the reporting period 2021 and 2020 is as follows: Group and Bank 2021 2020 HRK ‘000 HRK ‘000 Balance at January 1 (previously reported) 22,744 659 Restatement - 28,108 Balance at January 1 (restated) 22,744 28,767 Decrease in the Revaluation Reserve on Depreciation of Assets 6,411 (7,533) Deferred Tax Related to Revaluation Reserve (1,612) 1,511 Balance at December 31 27,543 22,744 The restatement of previous periods relates to the adjustment of the redistribution of assets between construction and land, which had an impact on revaluation reserves and retained earnings with a total effect of HRK 3,368 thousand on the capital of the Bank and the Group. d) Proposed Dividends Dividend liabilities are not recognized until they are approved at the Shareholders' General Meeting. In 2021 there were no dividend payments (2020: there were no dividend payments). e) Legal and other reserves The Bank is obliged to form a legal reserve by allocating 5% of net profit for the year, until the reserves reach 5% of the share capital. Statutory reserves amounts to HRK 40,010 thousand for the Group and the Bank (2020: HRK 30,907 thousand for the Group and the Bank), prior to the distribution of result achieved in 2020, which is reported in the retained earnings position. Other reserves for the Bank and the Group as at 31 December 2021 amount to HRK 657,992 thousand (2020: HRK 576,064 thousand). f) Retained earnings In March 2021, the General Assembly of the Bank passed a Decision to transfer part of the profit from 2020 in the amount of HRK 91,031 thousand to retained earnings within capital and reserves (2020: HRK 71,886 thousand) after allocating the legal reserve. Restructuring or reduction of retained earnings in 2020 in the amount of HRK 24,739 thousand relates to the adjustment of redistribution of assets between construction and land, which had an impact on revaluation reserves and retained earnings with a total effect of HRK 3,368 thousand on the Bank's and the Group's capita. g) Financial Leverage Ratio In line with article 429 of Regulation EU 575/ 2013 calculation of financial leverage ratio between common Tier-1 equity and total exposure is mandatory for each credit institution. Financial leverage ratio for the Bank is as follows: 2021 2020 Financial Leverage Ratio (%) 9.14 8.64 Notes to the Financial Statements for the year ended 31 December 2021 199 26. INTEREST AND SIMILAR INCOME a) Analysis by Product: Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Loans and Advances to Customers - Corporate 155,315 173,206 155,315 173,306 - Individuals 332,187 332,305 332,187 332,305 487,502 505,510 487,502 505,611 Loans and Advances to Customers (3,625) (1,347) (3,625) (1,347) Debt Securities 72,293 81,201 72,293 81,201 Bills of Exchange 86 100 86 100 Total 556,257 585,463 556,257 585,564 b) Analysis by Source: Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Corporate 102,361 113,385 102,361 113,485 Retail 332,187 332,305 332,187 332,305 Government and Public Sector 124,404 139,945 124,404 139,945 Banks and Other Financial Institutions (3,557) (1,235) (3,557) (1,235) Other Organizations 862 1,064 862 1,064 Total 556,257 585,463 556,257 585,564 Notes to the Financial Statements for the year ended 31 December 2021 200 27. INTEREST AND SIMILAR EXPENSE a) Analysis by Product Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Borrowings 11,995 12,886 11,995 12,886 Customer Deposits - Corporate 9,475 13,718 9,475 13,718 - Retail 9,605 20,137 9,605 20,137 19,080 33,855 19,080 33,855 Deposits from Banks 1,009 791 1,009 791 Other 64 704 62 697 Total 32,148 48,236 32,146 48,229 b) Analysis by Recipient Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Corporate 7,119 8,310 7,119 8,310 Retail 9,605 20,137 9,605 20,137 Government and Public Sector 1,077 2,752 1,077 2,752 Banks and other Financial Institutions 14,174 15,920 14,174 15,920 Others 173 1,116 170 1,109 Total 32,149 48,236 32,146 48,229 Within the Legal entity item, HRK 5,079 thousand relates to interest expense in accordance with IFRS16 (2020: HRK 5,342 thousand) 28. FEES AND COMMISSIONS INCOME Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Cash Payment Operations 217,314 219,683 217,314 219,683 Non-Cash Payment Operations 54,679 52,825 54,668 52,855 Retail and Credit Card Operations 172,414 141,735 172,414 141,735 Letters of Credit Guarantees and Foreign-Exchange Payment Operations 14,508 14,650 14,508 14,650 Other Fees and Commissions Income 31,138 27,963 24,073 21,234 Total 490,053 456,855 482,976 450,156 29. FEES AND COMMISSIONS EXPENSE Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Cash Payment Operations 193,961 194,662 193,961 194,662 Non-Cash Payment Operations 12,559 12,339 12,535 12,337 Card Operations 64,368 52,923 64,368 52,923 Other Fees and Commission Expense 20,718 15,216 19,236 13,966 Total 291,606 275,141 290,100 273,889 Notes to the Financial Statements for the year ended 31 December 2021 201 30. GAINS LESS LOSSES ARISING FROM FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Realized Gains/ (Losses) - Debt securities (1,806) - (1,806) - - Equity Securities 30,800 17 30,800 17 - Investment Funds (460) 44 (460) 44 - Forward Contracts, OTC 28,534 61 28,534 61 Unrealized Gains/ (Losses) (5,595) (7,007) (5,595) (7,007) - Debt securities 452 126 452 126 - Equity Securities 9,875 (914) 9,875 (914) - Investment Funds 21 (10) 21 (10) - Forward Contracts, OTC 4,753 (7,805) 4,753 (7,805) Net fx gains/losses from monetary assets and liabilities revalorization (7,593) (8,625) (7,593) (8,625) Total 25,694 (16,369) 25,694 (16,369) 31.a) GAINS LESS LOSSES FROM FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Realized Gains on Disposal of Debt Securities at FV through OCI - 35,036 - 35,036 Total - 35,036 - 35,036 31.b) GAINS LESS LOSSES FROM TRADING IN FOREIGN CURRENCIES Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Profit from trading in foreign currencies 53,533 51,471 53,533 51,471 Other trading in foreign currencies 3,943 3,342 3,943 3,342 Total 57,476 54,812 57,476 54,812 32. OTHER OPERATING INCOME Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Dividend Income 2,044 3,293 2,044 3,293 Income from sale of asset 5,029 2,308 5,029 2,308 Other income 17,711 12,618 13,980 6,415 Total 24,784 18,219 21,053 12,016 Notes to the Financial Statements for the year ended 31 December 2021 202 33. GENERAL AND ADMINISTRATIVE EXPENSES Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Materials and Services 117,388 109,070 116,488 106,749 Administration and Marketing 8,828 9,398 8,792 9,386 Postage and Telecommunications 24,419 22,752 23,971 22,282 Staff Costs 249,606 234,860 243,810 229,153 Savings Deposit Insurance Costs 13,916 42,002 13,916 42,002 Other General and Administrative Expenses 35,944 24,903 35,421 24,304 Total 450,102 442,985 442,399 433,877 a) Staff Costs Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Net Salaries and Other Employee Costs 141,169 129,501 137,906 126,383 Taxes and Contributions (including contributions payable by employers) 92,003 89,433 89,742 87,083 Provision for severance pay, jubilee awards, vol. employee vacations 1,095 3,392 1,095 3,392 Other Fees to Employees 15,117 12,297 14,956 12,176 Fees to Supervisory Board Members 223 237 112 119 Total 249,606 234,860 243,810 229,153 As at December 31, 2021, the Bank had 1,289 employees (2020: 1,301) and the Group had 1,315 employees (2020: 1,326). Notes to the Financial Statements for the year ended 31 December 2021 203 34. IMPAIRMENT LOSSES ON LOANS TO AND RECEIVABLES FROM CUSTOMERS AND OTHER ASSETS Group Bank Notes 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Individually Identified / Expected Impairment Losses Loans to and Receivables from Customers 11 (67,348) (86,878) (67,348) (86,878) Financial Assets at FV through P&L 8 914 27,807 914 27,807 Financial Assets at FV through OCI 9 (6,410) (577) (6,410) (577) Financial Assets at Amortized Cost 10 90 (60) 90 (60) Other Assets 18 (3,182) (1,311) (3,181) (1,311) Investment property 15 1,903 (8,712) 1,903 (8,712) Tangible and intangible assets 14,16 192 1,725 192 1,725 Net (loss)/gains from (writte-off)/collection of Placements Written-Off in Previous Years (6) 842 (6) 842 Total Cost (73,846) (67,164) (73,846) (67,164) Portfolio Based Identified / Expected Impairment Losses Loans to and Receivables from Customers 11 8,015 (54,074) 8,015 (54,074) Financial Assets at Amortized Cost 10 21 (126) 21 (126) Total revenue 8,036 (54,200) 8,036 (54,200) Total Portfolio Based and Individually expected / Identified Losses Loans to and Receivables from Customers 11 (59,333) (140,953) (59,333) (140,953) Financial Assets at FV through P&L 8 914 27,807 914 27,807 Financial Assets at FV through OCI 9 (6,410) (577) (6,410) (577) Financial Assets at Amortized Cost 10 111 (186) 111 (186) Other Assets 18 (3,182) (1,311) (3,181) (1,311) Investment property 15 1,903 (8,712) 1,903 (8,712) Tangible and intangible assets 14,16 192 1,725 192 1,725 Gains from Recovery of Placements Written-Off in Previous Years (6) 842 (6) 842 Total Cost (65,810) (121,364) (65,810) (121,364) Identified losses on an individual basis related to financial assets at fair value through profit or loss relate to loans and receivables from customers who failed the SPPI test. Notes to the Financial Statements for the year ended 31 December 2021 204 35. CORPORATE TAX Total recognized corporate tax expense, calculated at the corporate tax rate of 18%, comprises corporate tax expense recognized in the P&L report and movements in deferred tax recognized in equity, as follows: Income Tax Expense Recognized in the P&L Statement Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Current Tax (36,139) (298) (35,887) - Used net DTA (7,681) (44,888) (7,681) (44,888) Total Current Tax Recognized in the P&L Report (43,820) (45,186) (43,568) (44,888) The movement of deferred tax assets and liabilities with recognition effects in other comprehensive income and the income statement is set out in Note 17. Net deferred tax assets / liabilities. Reconciliation of Income Tax Expense The reconciliation between income tax expense and profit before tax is shown as follows: Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Profit Before Taxation 246,445 228,570 245,675 226,950 Income Tax at the Rate of 18% (44,360) (41,143) (44,222) (40,851) Tax Non-Deductible Expenses (2,830) (11,872) (2,628) (11,863) Non-Taxable Income 6,046 9,635 5,957 9,632 Recognized Deferred Tax Assets 5,005 (1,806) 5,005 (1,806) (36,139) (45,186) (35,887) (44,888) Effective Income Tax Rate 14.66% 19.77% 14,61% 19.78% Recognized Deferred Tax in Respect of Tax Losses Disposable in Prospective Periods As at 31 December 2020, the Bank, as the parent company of the Group, had HRK 33,908 thousand of accumulated unused tax losses that it can use until 31 December 2024. Profit before tax after increase and decrease of the tax base amounted to HRK 239,343 thousand for 2020. As at 31 December 2021, the Bank, as the parent company of the Group, did not have (2020: HRK 27,808 thousand) accumulated unused tax losses that it could use until 31 December 2024. In 2021, all previously recognized tax assets with a total effect on the income statement in the amount of HRK 8,334 thousand were used. Notes to the Financial Statements for the year ended 31 December 2021 205 36. EARNINGS PER SHARE For the purpose of calculating earnings per share, earnings are accounted for as the profit / loss for the current period intended for the shareholders of the Bank. The number of ordinary shares is the weighted average number of ordinary shares in circulation during the year after the decrease of the number of regular treasury shares. The weighted average number of ordinary shares used in calculating the basic earnings per loss was 2,023,830 (2020: 2,023,830). Given that there is no effect on options, convertible bonds or similar effects, the weighted average number of ordinary shares used to calculate the diluted / diluted earnings per share would be the same as the number used to calculate the basic earnings per share, or 2,023,830 (2020: 2,023,830), as shown below: a) Basic Earnings Per Share Profit and weighted average number of ordinary shares outstanding: 2021 2020 HRK ‘000 HRK ‘000 Current Year Profit/ Distributable to the Bank’s Owners 202,107 182,063 Profit Used to Calculate Basic Earnings Per Share 202,107 182,063 Weighted Average Ordinary Shares Outstanding Used to Calculate Basic Earnings Per Share 2,023,830 2,023,830 Basic Earnings Per Share from Active Operations 99.86 89.96 b) Diluted Earnings Per Share Profit used to calculate diluted Earnings Per Share 2021 2020 HRK ‘000 HRK ‘000 Profit Used to Calculate Earnings Per Share 202,107 182,063 Adjustments - - Profit Used to Calculate Diluted Earnings Per Share 202,107 182,063 Adjustments of weighted average ordinary shares outstanding used to calculate diluted earnings per share compared to weighted average ordinary shares outstanding used to calculate earnings per share: 2021 2020 Weighted Average Ordinary Shares Outstanding Used to Calculate Earnings Per Share 2,023,830 2,023,830 Shares Issued Without Cost: - Options for Employees - - - Partially Payed Ordinary Shares - - - Convertible Bonds - - - Other - - Weighted Average Ordinary Shares Outstanding Used to Calculate Diluted Earnings Per Share 2,023,830 2,023,830 Diluted Earnings Per Share 99.86 89.96 Notes to the Financial Statements for the year ended 31 December 2021 206 37. CONCENTRATION OF ASSETS AND LIABILITIES The assets and liabilities of the Bank are significantly concentrated on amounts directly due from and to the Republic of Croatia. The amounts at year end, including accrued interest, are as follows: Group Bank Notes 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Giro Account with the CNB 5 4,354,286 2,246,485 4,354,286 2,246,485 Mandatory Reserve with the Croatian National Bank 6 1,326,442 1,219,157 1,326,442 1,219,157 Bonds of the Republic of Croatia 4,465,745 4,460,155 4,465,745 4,460,155 Treasury Bills of the Croatian Ministry of Finance 376,071 188,212 376,071 188,212 Loans and Advances to the Republic of Croatia 1,691,852 2,192,767 1,691,852 2,192,767 Deposits from the Republic of Croatia (4,422,236) (3,207,102) (4,422,236) (3,207,102) Total 7,792,159 7,099,675 7,792,159 7,099,675 The Bank’s exposure towards local government and state institutions not directly funded by the State Budget (excluding state owned companies) is presented below: Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Loans 1,381,522 1,446,454 1,381,522 1,446,454 Deposits (674,425) (463,745) (674,425) (463,745) Total 707,097 982,709 707,097 982,709 38. CASH AND CASH EQUIVALENTS u HRK ‘000 Group Bank Note 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Cash and Amounts Due from Banks 5 6,192,555 3,684,942 6,192,515 3,684,902 Deposits with Banks with Original Maturities of Up to 90 Days 277,696 368,360 277,696 368,360 Items in Course of Collection 18 31,100 28,279 31,100 28,279 Total 6,501,351 4,081,581 6,501,311 4,081,541 Notes to the Financial Statements for the year ended 31 December 2021 207 39. CONTINGENT LIABILITIES Group Bank 2021 HRK ‘000 2020 HRK ‘000 2021 HRK ‘000 2020 HRK ‘000 Guarantees Denominated in HRK 429,026 334,258 429,026 334,258 Guarantees Denominated in Foreign Currency 61,632 54,562 61,632 54,562 Letters of Credit 9,888 9,844 9,888 9,844 Undrawn Lending Commitments 2,176,448 1,932,285 2,176,448 1,932,285 Total 2,676,993 2,330,948 2,676,993 2,330,948 As at December 31, 2021, the Group and the Bank recognized the provision based on off-balance sheet risks arising from the issuance of guarantees, letters of credit and unused loans in the amount of HRK 32,225 thousand (2020: Bank and Group HRK 43,348 thousand) included in Provisions for liabilities and expenses (Note 23). 40. DERIVATIVE INSTRUMENTS AND DEALINGS IN FOREIGN CURRENCIES The Bank and Group had the following derivative contracts, accounted for as trading instruments, open at year-end: Group 2021 HRK ‘000 Contracted Amount, Remaining Life Fair Value Up to 3 Months 3 to 12 Months 1 to 5 Years Over 5 Years Total Assets Liabilities Cross Currency Swap Contracts - OTC 75,450 - - - 75,450 - - Total 75,450 - - - 75,450 - - Bank 2021 HRK ‘000 Contracted Amount, Remaining Life Fair Value Up to 3 Months 3 to 12 Months 1 to 5 Years Over 5 Years Total Assets Liabilities Cross Currency Swap Contracts - OTC 75,450 - - - 75,450 - - Total 75,450 - - - 75,450 - - Notes to the Financial Statements for the year ended 31 December 2021 208 41. RELATED PARTY TRANSACTIONS The Bank is the parent of the Hrvatska Poštanska Bank Group. Key shareholders of the Bank are the Republic of Croatia as the largest shareholder with an ownership stake of 44.90 percent, and Hrvatska Pošta d.d. (“HP”) with a stake of 11.93 percent. Other significant state-owned shareholders include: State agency for deposits insurance and bank resolution (“HAOD”), the Croatian Pension Insurance Institute (“HZMO”) and Fund for financing the decommissioning of the Krško Nuclear Power Plant and the disposal of radioactive waste and spent nuclear fuel (“NEK fund”). These shareholders together own 77.42% of the Bank's shares (2020: 74.46%). The remaining 22.58% (2020: 25.54%) are publicly traded. a) Key Transactions with Related Parties Hrvatska Pošta d.d. ("HP") performs domestic payment transactions for and on behalf of the Bank. Exposure to Hrvatska Pošta d.d. mainly comprises fees receivable based on domestic payment transactions performed for and on behalf of the Bank, as well as placements in debt securities issued by Hrvatska Pošta d.d. Liabilities towards Hrvatska Pošta d.d. mainly relate to demand and term deposits. Income and expenses mostly relate to commissions for services provided. Exposure to the state is shown in Note 37, Concentration of assets and liabilities. The exposure to members of HPB Group mainly consists of investment into share capital. The Bank performs payment transactions on behalf of its subsidiaries and, accordingly, recognizes income. Expenses payable to HPB Nekretnine relate to the services performed by the subsidiary in respect of estimation of collateral. Key management did not have regular shares at the end of the reporting period (2020: -). Notes to the Financial Statements for the year ended 31 December 2021 209 41. RELATED PARTY TRANSACTIONS (CONTINUED) b) Amounts arising from transactions with related parties Assets and liabilities and off-balance sheet exposure and income and expense as at and for the years ended December 31, 2021 and December 31, 2020 of the Group and Bank, arising from transactions with related parties were as follows: Group 2021 Exposure HRK’000 Liabilities HRK’000 Income HRK’000 Expenses HRK’000 Key Shareholders Republic of Croatia Hrvatska Pošta d.d. 185,341 204,964 229,728 227,562 Subsidiaries HPB Invest - - - - HPB Nekretnine - - - - Key Management Personnel Short-Term Benefits (bonuses, salaries and fees) 373 2,800 21 19,871 Long-Term Benefits (loans and deposits) 3,599 486 203 201 Companies Under Significant Influence - - 6 - Total 189,313 208,250 229,958 247,634 2020 Exposure HRK’000 Liabilities HRK’000 Income HRK’000 Expenses HRK’000 Key Shareholders Republic of Croatia - - - - Hrvatska Pošta d.d. 216,793 231,773 230,555 229,508 Subsidiaries HPB Invest - - - - HPB Nekretnine - - - - Key Management Personnel Short-Term Benefits (bonuses, salaries and fees) 665 2,186 10 22,690 Long-Term Benefits (loans and deposits) 3,635 621 97 312 Companies Under Significant Influence 20,000 750 7 22 Total 241,093 235,330 230,669 252,532 * The exposure includes advances in cash and in kind, contingent liabilities and commitments, interest and other receivables and includes HRK 20,227 thousand (2020: HRK 16,046 thousand) of off-balance sheet exposures. Expenses do not include value adjustments, unrealized gains / losses on securities or provisions for losses. Notes to the Financial Statements for the year ended 31 December 2021 210 41. RELATED PARTY TRANSACTIONS (CONTINUED) b) Amounts arising from transactions with related parties (continued) Bank 2021 Exposure HRK’000 Liabilities HRK’000 Income HRK’000 Expenses HRK’000 Key Shareholders Republic of Croatia Hrvatska Pošta d.d. 185,341 204,964 229,728 227,562 Subsidiaries HPB Invest Ltd 5,076 6,016 2,824 - HPB Nekretnine d.o.o. 4,875 6,734 314 1,937 Key Management Personnel Short-Term Benefits (bonuses, salaries and fees) 268 2,800 16 18,256 Long-Term Benefits (loans and deposits) 2,493 486 145 18 Companies Under Significant Influence - - 6 - Total 198,052 221,000 233,034 247,773 2020 Exposure HRK’000 Liabilities HRK’000 Income HRK’000 Expenses HRK’000 Key Shareholders Republic of Croatia Hrvatska Pošta d.d. 216,793 231,773 230,555 229,508 Subsidiaries HPB Invest Ltd 5,061 5,870 3,000 - HPB Nekretnine d.o.o. 7,200 6678 644 1,541 Key Management Personnel Short-Term Benefits (bonuses, salaries and fees) 725 2,189 9 20,785 Long-Term Benefits (loans and deposits) 3,225 883 76 12 Companies Under Significant Influence 20,000 750 7 22 Total 253,004 248,143 234,291 251,868 * The exposure includes advances in cash and in kind, contingent liabilities and commitments, interest and other receivables and includes HRK 20,236 thousand (2020: HRK 17,117 thousand) of off-balance sheet exposures. Expenses do not include value adjustments, unrealized gains / losses on securities or provisions for losses. Notes to the Financial Statements for the year ended 31 December 2021 211 41. RELATED PARTY TRANSACTIONS (CONTINUED) c) State owned companies Major shareholders of the Bank, which together own 77.42% of its shares, are state agencies or state-owned companies, all mainly funded from the State Budget. Accordingly, transactions and balances with other state-owned companies, including credit risk exposures guaranteed by the state, also represent related party relationships. The Bank has a significant exposure to these parties, which is disclosed in Note 37. 42. REPURCHASE AND RESALE AGREEMENTS The Group raises funds by selling financial instruments under agreements to repay the funds by repurchasing the instruments at future dates at the same price plus interest at a predetermined rate. Repurchase agreements are commonly used as a tool for short-term financing of interest-bearing assets, depending on the prevailing interest rates. The financial instruments sold are not derecognized and the proceeds are accounted for as interest-bearing borrowings. At the end of the year assets sold under repurchase agreements were as follows: Book Value of Receivables Fair Value of Collaterals Repurchase Date Repurchase Price HRK’000 HRK’000 HRK’000 Loans to Customers – Repo Agreements 2021 401,790 451,720 March 2025 403,699 2020 400,790 420,856 March 2025 401,319 Related Party Transactions, in accordance with IFRS 9: Financial Instruments, are recognized as repurchase agreements. The Group also purchases financial instruments provided that they are re-sold at a contracted future date ("resale agreement"). The seller agrees to buy the same or similar instruments on the agreed future date. Re-sale is contracted as a client financing instrument and is recorded as loans and advances to customers and the purchased financial instrument is not recognized. Book Value of Receivables Fair Value of Collaterals Repurchase Date Repurchase Price HRK’000 HRK’000 HRK’000 Loans to Customers – Reverse Repo Agreements 2021 - - - - 2020 27,275 4,604 January 2021 27,276 Notes to the Financial Statements for the year ended 31 December 2021 212 43. FUNDS MANAGED FOR AND ON BEHALF OF CORPORATE AND RETAIL CUSTOMERS The Group manages funds on behalf of and for the account of legal entities, households and investment funds (including investment funds of the Group), which holds and manages assets or invests funds in various financial instruments at the client's request. For services provided, the Bank receives a fee income. This asset is not the Group's assets and is not recognized in the statement of financial position. The Group is not exposed to credit risks from such placements or guarantees for investments. As at 31 December 2021, total assets under the custody of the Bank, including HPB Group funds, amounted to HRK 7.18 billion (2020: HRK 6.16 billion). Furthermore, as at 31 December 2021, the total assets of investment and pension funds, for which the Bank operates as depositories, amounted to HRK 6.74 billion (2020: HRK 6.03 billion). The Bank also manages other credit exposure, as follows: 2021 2020 HRK ‘000 HRK ‘000 Assets Corporate 55,065 58,006 Retail 461,802 483,200 Giro Accounts 689,882 635,490 Total Assets 1,206,749 1,176,696 Liabilities 63,910 67,314 Croatian Employment Office 9,999 10,114 Counties 1,119,048 1,084,975 Government of the Republic of Croatia 9,062 8,849 Other Liabilities 4,729 5,445 Total Liabilities 1,206,749 1,176,696 Notes to the Financial Statements for the year ended 31 December 2021 213 44. AVERAGE INTEREST RATES Average interest rates calculated as the weighted average of each category of interest-earning asset and interest- bearing liability, are presented below: Group Assets Average interest rates 2021 Average interest rates 2020 Cash and Amounts Due from Banks (0.10%) (0.12%) Loans to and Receivables from Banks 0.09% 0.42% Financial Assets at FV Through P&L 1.68% 1.89% Financial Assets at FV through OCI 1.46% 1.63% Financial Assets at Amortized Cost 10.11% 5.35% Loans and Receivables from Customers 3.39% 3.63% Liabilities Deposits from Banks (1.62%) (0.03%) Customer Deposits (0.09%) (0.25%) Borrowings (0.84%) (1.05%) Bank Assets Average interest rates 2021 Average interest rates 2020 Cash and Amounts Due from Banks (0.10%) (0.12%) Credits to and Receivables from Banks 0.09% 0.42% Financial Assets at FV Through P&L 1.68% 1.89% Financial Assets at FV through OCI 1.46% 1.63% Financial Assets at Amortized Cost 10.11% 5.35% Loans and Receivables from Customers 3.39% 3.63% Liabilities Deposits from Banks (1.62%) (0.03%) Customer Deposits (0.09%) (0.25%) Borrowings (0.84%) (1.05%) Notes to the Financial Statements for the year ended 31 December 2021 214 45. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is the amount for which an asset could be exchanged, or a liability settled, in an arm’s-length transaction. Financial instruments at fair value through profit or loss or financial assets at fair value through other comprehensive income are measured at fair value. Financial assets valued at amortized cost are measured at amortized cost less impairments. Financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income are disclosed at their fair value that arises from price quotes of these instruments on active markets. Financial liabilities at fair value through profit or loss are disclosed at fair values calculated on the basis of available conditions of these instruments. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Bank takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/ or disclosure purposes in these consolidated financial reports is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 or value in use in IAS 36. In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; • Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and • Level 3 inputs are unobservable inputs for the asset or liability. Set out below is an overview of key methods and assumptions used in estimating the fair values of financial instruments. Loans The fair value of loans and advances is calculated based on discounted expected future cash flows. Loan repayments are assumed to occur at contractual repayment dates, where applicable. Expected future cash flows are estimated considering credit risk and any indication of impairment including portfolio-based provisions for performing (i.e. A-risk rated) loans calculated at rates prescribed by the CNB. The estimated fair values of loans reflect changes in credit status since the loans were made and changes in interest rates in the case of fixed rate loans. The Bank has a limited portfolio of loans with fixed rates, where there is a difference between the fair value and the carrying amount. Notes to the Financial Statements for the year ended 31 December 2021 215 45. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Investments carried at cost For equity investments for which a quoted market price is not available, fair value is, where possible, estimated using discounted cash flow techniques. Estimated future cash flows are based on management’s best estimates and the discount rate is a market related rate for a similar instrument at the reporting date. Where discounted cash flow techniques provide insufficiently reliable valuations due to a number of uncertainties related to estimations of future cash flows, investments are carried at cost less impairment. Bank and customer deposits For demand deposits and deposits with no defined maturities, fair value is taken to be the amount payable on demand at the reporting 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 value of long-term relationships with depositors is not taken into account in estimating fair values. Borrowings Most of the Bank’s long-term debt has no quoted market price and fair value is estimated as the present value of future cash flows, discounted at interest rates available at the reporting date to the Bank for new debt of similar type and remaining maturity. The following table represents the Group’s and Bank’s estimate of the fair value hierarchy of financial instruments as of December 31, 2021 and December 31, 2020. Notes to the Financial Statements for the year ended 31 December 2021 216 45. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Group December 31, 2021 Fair Value Fair Value Level Valuation Technique(s) and Key input(s) Book Value Unrecognized Gains/ (Losses) FINANCIAL ASSETS Cash and Receivables from Banks 6,192,555 Level 1 Cash and Cash Equivalents 6,192,555 - Mandatory Reserve with the Croatian National Bank 1,326,442 Level 1 Cash Equivalent 1,326,442 - Loans to and Receivables from Banks 289,806 Level 3 Cash Equivalent other than Assets with a Defined Maturity > 30 days at a Fixed Rate, Where the Fair Value is the Present Value of Discounted Cash Flows 289,837 (31) Financial Assets at Fair Value through P&L 625,986 625,986 - - Ministry of Finance Treasury Bills - Level 2 Ministry of Finance Treasury Bills - - - Ministry of Finance Bonds 483,499 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 483,499 - - Corporate bonds and commercial bills 24,861 Level 1 Corporative bonds and commercial bills 24,861 - - Open-End Investment Fund Investments 80,933 Level 1 Value of an Individual Share on Given Date 80,933 - - Equity Securities 24,706 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 24,706 - 1 Loans and Receivables from customers 8,883 Level 3 Present Value of Discounted Future Cash Flows 8,883 - - Interest Receivables, not due 3,104 Not Applicable Not Applicable 3,104 Financial Assets at Fair Value through OCI 4,601,297 4,601,297 - - Ministry of Finance Treasury Bills 376,071 Level 2 Mark-to-Model Using Internal Model for Determining the Present Values of Future Cash Flows 376,071 - - Ministry of Finance Bonds 3,953,844 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 3,953,844 - - Foreign Country Securities - Level 1 Mark-to-Model Using Internal Model for Determining the Present Values of Future Cash Flows - - - Corporate Bonds of State-Run Companies 195,219 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 195,219 - - Corporate Bonds of Other Companies - Level 3 Mark-to-Model Using Internal Model for Determining the Present Values of Future Cash Flows - - - Equity Securities – Not Listed 25,669 Level 3 Method of Comparable Companies, Average of standard multiples EV/ EBITDA, P/ E, P/ S, P/ B, 25,669 - - Equity Securities – Listed 23,204 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 23,204 - - Interest Receivables, not due 27,292 Not Applicable Not Applicable 27,292 Financial Assets at Amortized Cost 453 Level 3 Present Value of Future Discounted cash Flows 453 - Loans and Receivables from Customers 13,985,258 Level 3 Present Value of Future Discounted Cash Flows 14,251,800 (266,542) Total Financial Assets 27,021,798 27,288,371 (266,573) FINANCIAL LIABILITIES Financial Assets at Fair Value Through P&L - Level 3 Internal valuation Model for FX Contracts Using Future Cash Flows - - Deposits from Banks 28,025 Level 3 Present Value of Discounted Cash Flows Under Currently Effective Interest Rates 28,025 - Customer Deposits 23,414,833 Level 3 Present Value of Discounted Cash Flows Under Currently Effective Interest Rates 23,412,844 (1,989) Borrowings 1,410,402 Level 3 Present Value of Discounted Cash Flows Under Currently Effective Interest Rates 1,396,886 (13,516) Total Financial Liabilities 24,853,260 24,837,755 (15,505) TOTAL (282,078) Notes to the Financial Statements for the year ended 31 December 2021 217 45. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Group December 31, 2020 Fair Value Fair Value Level Valuation Technique(s) and Key input(s) Book Value Unrecognized Gains/ (Losses) FINANCIAL ASSETS Cash and Receivables from Banks 3,684,942 Level 1 Cash and Cash Equivalents 3,684,942 - Mandatory Reserve with the Croatian National Bank 1,219,157 Level 1 Cash Equivalent 1,219,157 - Loans to and Receivables from Banks 379,399 Level 3 Cash Equivalent other than Assets with a Defined Maturity > 30 days at a Fixed Rate, Where the Fair Value is the Present Value of Discounted Cash Flows 379,399 - Financial Assets at Fair Value through P&L 758,106 758,106 - - Ministry of Finance Treasury Bills - Level 2 Ministry of Finance Treasury Bills - - - Ministry of Finance Bonds 619,551 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 619,551 - - Open-End Investment Fund Investments 71,086 Level 1 Value of an Individual Share on Given Date 71,086 - - Equity Securities 24,254 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 24,254 - - Equity Securities – Not Listed 20,000 Level 3 Internal valuation 20,000 - - Fair Value of Forwards - Level 3 Internal valuation Model for FX Contracts Using Future Cash Flows - - Loans and Receivables from customers 17,415 Level 3 Present Value of Discounted Future Cash Flows 17,415 - - Interest Receivables, not due 5,798 Not Applicable Not Applicable 5,798 - Financial Assets at Fair Value through OCI 4,158,035 4,158,035 - - Ministry of Finance Treasury Bills 188,212 Level 2 Mark-to-Model Using Internal Model for Determining the Present Values of Future Cash Flows 188,212 - - Ministry of Finance Bonds 3,807,305 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 3,807,305 - - Foreign Country Securities - Level 1 Mark-to-Model Using Internal Model for Determining the Present Values of Future Cash Flows - - - Corporate Bonds of State-Run Companies 83,065 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 83,065 - - Corporate Bonds of Other Companies Level 3 Mark-to-Model Using Internal Model for Determining the Present Values of Future Cash Flows - - Equity Securities – Not Listed 24,095 Level 3 Method of Comparable Companies, Average of standard multiples EV/ EBITDA, P/ E, P/ S, P/ B. 24,095 - - Equity Securities – Listed 24,933 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 24,933 - - Interest Receivables, not due 30,426 Not Applicable Not Applicable 30,426 - Financial Assets at Amortized Cost 1,975 Level 3 Present Value of Future Discounted cash Flows 1,975 - Loans and Receivables from Customers 14,395,471 Level 3 Present Value of Future Discounted Cash Flows 14,722,770 (328,107) Total Financial Assets 24,596,227 24,924,384 (328,107) FINANCIAL LIABILITIES Financial Assets at Fair Value Through P&L 21 Level 3 Internal valuation Model for FX Contracts Using Future Cash Flows 21 - Deposits from Banks 96,639 Level 3 Present Value of Discounted Cash Flows Under Currently Effective Interest Rates 96,635 (4) Customer Deposits 21,119,160 Level 3 Present Value of Discounted Cash Flows Under Currently Effective Interest Rates 21,110,846 (8,315) Borrowings 1,487,332 Level 3 Present Value of Discounted Cash Flows Under Currently Effective Interest Rates 1,466,641 (20,691) Total Financial Liabilities 22,703,152 22,674,143 (29,009) TOTAL (357,167) Notes to the Financial Statements for the year ended 31 December 2021 218 45. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Bank December 31, 2021 Fair Value Fair Value Level Valuation Technique(s) and Key input(s) Book Value Unrecognized Gains/ (Losses) FINANCIAL ASSETS Cash and Receivables from Banks 6,192,515 Level 1 Cash and Cash Equivalents 6,192,515 - Mandatory Reserve with the Croatian National Bank 1,326,442 Level 1 Cash Equivalent 1,326,442 - Loans to and Receivables from Banks 289,806 Level 3 Cash Equivalent other than Assets with a Defined Maturity > 30 days at a Fixed Rate, Where the Fair Value is the Present Value of Discounted Cash Flows 289,837 (31) Financial Assets at Fair Value through P&L 625,986 625,986 - Ministry of Finance Treasury Bills - Level 2 Ministry of Finance Treasury Bills - - - Ministry of Finance Bonds 483,499 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 483,499 - - Corporative bonds and commercial bills 24,861 Level 1 Corporative bonds and commercial bills 24,861 - - Open-End Investment Fund Investments 80,933 Level 1 Value of an Individual Share on Given Date 80,933 - - Equity Securities 24,706 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 24,706 - Loans and Receivables from customers 8,883 Level 3 Present Value of Discounted Future Cash Flows 8,883 - - Interest Receivables, not due 3,104 Not Applicable Not Applicable 3,104 - Financial Assets at Fair Value through OCI 4,601,297 4,601,297 - - Ministry of Finance Treasury Bills 376,071 Level 2 Mark-to-Model Using Internal Model for Determining the Present Values of Future Cash Flows 376,071 - - Ministry of Finance Bonds 3,953,844 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 3,953,844 - - Foreign Country Securities - Level 1 Mark-to-Model Using Internal Model for Determining the Present Values of Future Cash Flows - - - Corporate Bonds of State-Run Companies 195,219 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 195,219 - - Corporate Bonds of Other Companies Level 3 Mark-to-Model Using Internal Model for Determining the Present Values of Future Cash Flows - - - Equity Securities – Not Listed 25,669 Level 3 Method of Comparable Companies, Average of standard multiples EV/ EBITDA, P/ E, P/ S, P/ B, 25,669 - - Equity Securities – Listed 23,204 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 23,204 - - Interest Receivables, not due 27,292 Not Applicable Not Applicable 27,292 - Financial Assets at Amortized Cost 453 Level 3 Present Value of Future Discounted cash Flows 453 - Loans and Receivables from Customers 13,985,258 Level 3 Present Value of Future Discounted Cash Flows 14,251,800 (266,542) Total Financial Assets 27,021,758 27,288,330 (266,573) FINANCIAL LIABILITIES Financial Assets at Fair Value Through P&L - Level 3 Internal valuation Model for FX Contracts Using Future Cash Flows - - Deposits from Banks 28,025 Level 3 Present Value of Discounted Cash Flows Under Currently Effective Interest Rates 28,025 - Customer Deposits 23,424,078 Level 3 Present Value of Discounted Cash Flows Under Currently Effective Interest Rates 23,422-089 (1,989) Borrowings 1,410,402 Level 3 Present Value of Discounted Cash Flows Under Currently Effective Interest Rates 1,396,886 (13,516) Total Financial Liabilities 24,862,505 24,847,000 (15,505) TOTAL (282,078) Notes to the Financial Statements for the year ended 31 December 2021 219 45. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Bank December 31, 2020 Fair Value Fair Value Level Valuation Technique(s) and Key input(s) Book Value Unrecognized Gains/ (Losses) FINANCIAL ASSETS Cash and Receivables from Banks 3,684,902 Level 1 Cash and Cash Equivalents 3,684,902 - Mandatory Reserve with the Croatian National Bank 1,219,157 Level 1 Cash Equivalent 1,219,157 - Loans to and Receivables from Banks 379,399 Level 3 Cash Equivalent other than Assets with a Defined Maturity > 30 days at a Fixed Rate, Where the Fair Value is the Present Value of Discounted Cash Flows 379,399 - Financial Assets at Fair Value through P&L 759,271 759,271 - - Ministry of Finance Treasury Bills - Level 2 Ministry of Finance Treasury Bills - - - Ministry of Finance Bonds 619,551 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 619,551 - - Open-End Investment Fund Investments 71,086 Level 1 Value of an Individual Share on Given Date 71,086 - - Equity Securities 24,254 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 24,254 - - Equity Securities – Not Listed 20,000 Level 3 Internal valuation 20,000 - - Fair Value of Forwards - Level 3 Internal valuation Model for FX Contracts Using Future Cash Flows - - Loans and Receivables from customers 17,415 Level 3 Present Value of Discounted Future Cash Flows 17,415 - - Interest Receivables, not due 6,964 Not Applicable Not Applicable 6,964 - Financial Assets at Fair Value through OCI 4,158,035 4,158,035 - - Ministry of Finance Treasury Bills 188,212 Level 2 Mark-to-Model Using Internal Model for Determining the Present Values of Future Cash Flows 188,212 - - Ministry of Finance Bonds 3,807,305 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 3,807,305 - - Foreign Country Securities - Level 1 Mark-to-Model Using Internal Model for Determining the Present Values of Future Cash Flows - - - Corporate Bonds of State-Run Companies 83,065 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 83,065 - - Corporate Bonds of Other Companies - Level 3 Mark-to-Model Using Internal Model for Determining the Present Values of Future Cash Flows - - - Equity Securities – Not Listed 24,095 Level 3 Method of Comparable Companies, Average of standard multiples EV/ EBITDA, P/ E, P/ S, P/ B. 24,095 - - Equity Securities – Listed 24,933 Level 1 Mark-to-Market According to the Prices Quoted in an Active Market 24,933 - - Interest Receivables, not due 30,426 Not Applicable Not Applicable 30,426 - Financial Assets at Amortized Cost 1,975 Level 3 Present Value of Future Discounted cash Flows 1,975 - Loans and Receivables from Customers 14,395,471 Level 3 Present Value of Future Discounted Cash Flows 14,722,770 (328,157) Total Financial Assets 24,597,351 24,925,509 (328,157) FINANCIAL LIABILITIES Financial Assets at Fair Value Through P&L 21 Level 3 Internal valuation Model for FX Contracts Using Future Cash Flows 21 - Deposits from Banks 96,639 Level 3 Present Value of Discounted Cash Flows Under Currently Effective Interest Rates 96,635 (4) Customer Deposits 21,126,749 Level 3 Present Value of Discounted Cash Flows Under Currently Effective Interest Rates 21,118,434 (8,315) Borrowings 1,487,332 Level 3 Present Value of Discounted Cash Flows Under Currently Effective Interest Rates 1,466,641 (20,691) Total Financial Liabilities 22,710,741 22,681,732 (29,009) TOTAL (357,167) Notes to the Financial Statements for the year ended 31 December 2021 220 46. ENCUMBERED ASSETS OF THE CREDIT INSTITUTION The Bank under the term encumbered assets means the pledged assets, given as collateral, subject to some form of pledge or serves to improve the credit position from which it cannot be withdrawn freely. Also, the assets for which the withdrawal must be previously approved are considered to be encumbered assets In the structure of assets, the Bank has recorded encumbered assets in the amount of HRK 2,080,941 thousand (2020: HRK 2,663,217 thousand). The carrying amount of the Bank's encumbered assets in relation to the Bank's balance sheet total is 7.48 percent of the Bank's assets. Encumbered assets of the Bank include a total of HRK and foreign currency reserve requirements, which include the amounts held in the accounts with the CNB, as well as funds on reserve maintenance accounts in the total amount of HRK 1,326,442 thousand (2020: HRK 1,935,792 thousand *). In arrangement with the CNB, the Bank contracted a repo loan in 2020 in response to the strengthening of the liquidity position caused by COVID-19, on the basis of which it pledged Croatian bonds in the total amount of HRK 451,720 thousand. The remaining amount of encumbered assets refers to the pledged loan in the amount of HRK 289,733 thousand as collateral for the foreign currency loan received from the European Investment Bank and guarantee deposits in the amount of HRK 13,046 thousand. Table form of encumbered assets of the Group and Bank are presented as at December 31, 2021: 31 December 2021 31 December 2020 Group HRK '000 Book Value Fair Value Book Value Fair Value Equity Instruments - - - - Securities 451,720 451,720 420,856 420,856 Mandatory Reserve and Balances on Nostro Accounts on Which Mandatory Reserve is Maintained 1,326,442 1,326,442 1,935,792 1,935,792 Loans to Customers and Other Assets 302,779 302,779 306,569 306,569 Total 2,080,941 2,080,941 2,663,217 2,663,217 31 December 2021 31 December 2020 Bank HRK '000 Book Value Fair Value Book Value Fair Value Equity Instruments - - - - Securities Mandatory Reserve and Balances on Nostro Accounts on Which Mandatory Reserve is Maintained 451,720 1,326,442 451,720 1,326,442 420,856 1,935,792 420,856 1,935,792 Loans to Customers and Other Assets 302,779 302,779 306,569 306,569 Total 2,080,941 2,080,941 2,663,217 2,663,217 * According to the EBA response, Q&A 2020_5475 Definition of encumbered assets. ** Comparative year on 31.12.2020. it also included funds on reserve requirement accounts with rating banks. Notes to the Financial Statements for the year ended 31 December 2021 221 47. EVENTS AFTER THE REPORTING DATE Hrvatska poštanska banka, p.l.c, has a very limited business relationship with entities from Russia and Ukraine, with minimal direct credit exposure to entities owned by persons from Ukraine or Russia. The Bank does not expect material negative effects as a result of events in Ukraine in the short term due to relatively low exposure to tourism and energy activities, which are expected to be the first sectors affected by the situation, and relatively high accumulated savings. The longer duration of the current situation in Ukraine could indirectly lead to a deterioration in the quality of the loan portfolio, but the Bank does not expect that such losses could materially affect its liquidity and solvency. credit and high collateralism on the other hand. Following the Russian invasion of Ukraine, the European Union and the United States imposed a package of sanctions that had a rapid and significant impact on the operations of Sberbank d.d. Due to the sudden disturbance of liquidity, the European Central Bank (ECB), which directly supervises this bank, on February 28, 2022, announced that Sberbank d.d. is failing or is likely to fail. The European Central Bank (ECB) informed the Single Resolution Board (SRB), the central resolution authority within the Banking Union, which found that the bank is failing or likely to fail due to its deteriorating liquidity position, hence on March 1, 2022 in cooperation with the Croatian National Bank as the national resolution authority, issued a decision of initiating the resolution procedure against Sberbank dd Zagreb, which will be concluded through sale. As of March 2, 2022, Hrvatska poštanska banka d.d. becomes the new owner, and the Croatian National Bank transfers 615,623 shares, which represent 100% of the share capital of Sberbank d.d., by order of the Single Resolution Board to Hrvatska poštanska banka p.l.c. Until the completion of the resolution carried out by the Croatian National Bank, ie until the appointment of the new management of Sberbank d.d. which will be set up by Hrvatska poštanska banka p.l.c., the coordination of the bank's operations will be taken over by the resolution management. Decision on resolution of Sberbank d.d. by sale was made in order to ensure financial stability in the Republic of Croatia, prevent economic disturbances and protect the public interest, as well as the clients of this bank. The new name of Sberbank Hrvatska under which it will operate within the HPB Group is Nova hrvatska banka. Regulatory financial statements for the Croatian National Bank 222 Regulatory Financial Statements of Croatian National Bank Balance Sheet as at 31 December 2021 Position AOP Note Previous Period (net) Current Period (net) 1 2 3 4 5 Assets 1. Cash and Balances with the CNB and Other a vista deposit (AOP 002 to 004) 001 3,662,460,152 6,177,602,131 1.1. Cash in Register 002 900,072,987 1,422,548,361 1.2. Cash Balances with CNB 003 2,224,401,393 4,339,757,848 1.3. Other a Vista Deposits 004 537,985,772 415,295,922 2. Financial Assets Held for Trading (AOP 006 to 009) 005 719,257,423 616,670,614 2.1. Derivatives 006 0 0 2.2. Equities 007 95,340,654 105,639,274 2.3. Debt securities 008 623,916,769 511,031,340 2.4. Loans and Advances 009 0 0 3. Financial Assets not for Trading at Fair Value through Profit and Loss Account (AOP 011 to 013) 010 18,865,901 9,316,729 3.1. Equities 011 0 0 3.2. Debt Securities 012 0 0 3.3. Loans and Advances 013 18,865,901 9,316,729 4. Financial Assets at Fair Value through Profit and Loss Account (AOP 015 + 016) 014 0 0 4.2. Debt Securities 015 0 0 4.3. Loans and Advances 016 0 0 5. Financial Assets at Fair Value through Other Comprehensive Income (AOP 018 to 020) 017 4,158,015,469 4,601,319,906 5.1. Equities 018 49,027,711 48,896,784 5.1. Debt Securities 019 4,108,987,758 4,552,423,122 5.2. loans and Advances 020 0 0 6. Financial Assets at Amortized Cost (AOP 022+023) 021 16,413,935,375 15,955,565,325 6.1. Debt Securities 022 1,978,784 454,371 6.2. Loans and Advances 023 16,411,956,591 15,955,110,954 7. Derivatives – hedge accounting 024 0 0 8. Changes in Fair Value of Hedge Items in Interest Rate Risk Portfolio Hedging 025 0 0 9. Investments in Subsidiaries, Joint Ventures and Associates 026 9,760,843 9,760,843 10. Tangible Assets 027 326,523,749 310,680,257 11. Intangible Assets 028 91,038,847 93,319,300 12. Tax Assets 029 2,797,956 642,640 13. Other Assets 030 40,321,774 50,579,782 14. Non-current Assets and Disposal Groups Classified as Held for Sale 031 20,000,000 9,200,000 15. TOTAL ASSETS (AOP 001 + 005 + 010 + 014 + 017 + 021 + 024 do 031) 032 25,462,977,489 27,834,657,527 Regulatory financial statements for the Croatian National Bank 223 Balance Sheet as at 31 December 2021 (continued) Position AOP Note Previous Period (net) Current Period (net) 1 2 3 4 5 Liabilities 16. Financial Liabilities Held for Trading (AOP 034 to 038) 033 21,172 0 16.1. Derivatives 034 21,172 0 16.2. Short Positions 035 0 0 16.3. Deposits 036 0 0 16.4. Issued Debt Securities 037 0 0 16.5. Other Financial Liabilities 038 0 0 17. Financial Liabilities at Fair Value through Profit and Loss Account (AOP 040 to 042) 039 0 0 17.1. Deposits 040 0 0 17.2. Issued Debt Securities 041 0 0 17.3. Other Financial Liabilities 042 0 0 18. Financial Liabilities at Amortized Cost (AOP 044 to 046) 043 22,688,405,792 24,599,744,662 18.1. Deposits 044 22,569,135,023 24,505,320,711 18.2. Issued Debt Securities 045 0 0 18.3. Other Financial Liabilities 046 119,270,769 94,423,951 19. Derivatives – Hedge Accounting 047 0 0 20. Changes in Fair Value of Hedge Items in Interest Rate Risk Portfolio Hedging 048 0 0 21. Provisions 049 125,688,739 341,273,561 22. Tax Liabilities 050 25,697,310 64,392,779 23. Share Capital Returned at Request 051 0 0 24. Other Liabilities 052 150,060,287 178,816,674 25. Liabilities Included into Disposal Groups for Classified as Held for Sale 053 0 0 26. TOTAL LIABILITIES (AOP 033 + 039 + 043 + 047 do 053) 054 22,989,873,300 25,184,227,676 Equity 27. Share Capital 055 1,214,775,000 1,214,775,000 28. Premium on Equity 056 0 0 29. Issued Equity Instruments Except for Capital 057 0 0 30. Other Equity Instruments 058 0 0 31. Accumulated Other Comprehensive Income 059 264,974,555 240,193,702 32. Retained Earnings 060 200,321,464 291,352,537 33. Revaluation Reserves 061 0 0 34. Other Reserves 062 611,448,026 702,479,098 35. Treasury Equities 063 -477,000 -477,000 36. Profit or Loss belonging to Mother Company Owners 064 182,062,145 202,106,513 37. Dividends During Business Year 065 0 0 38. Minority Interests (Non-controlling Interests) 066 0 0 39. TOTAL ASSETS (AOP 055 do 066) 067 2,473,104,190 2,650,429,850 40. TOTAL LIABILITIES AND EQUITY (AOP 054+067) 068 25,462,977,490 27,834,657,526 Regulatory financial statements for the Croatian National Bank 224 Profit and Loss Account for period from 1 January to 31 December 2021 Position AOP Note Previous Period (net) Current Period (net) 1 2 3 4 5 1. Interest Income 069 588,918,099 560,475,074 2. Interest Expense 070 51,583,346 36,363,820 3. Share Capital Returned at Request Expenses 071 0 0 4. Dividend Income 072 3,292,513 2,043,665 5. Fee and Commissions Income 073 450,155,698 482,976,369 6. Fee and Commissions Expense 074 273,888,635 290,099,614 7. Gains or Losses from derecognition of Financial Assets and Liabilities not measured at Fair Value through Profit and Loss Account, net 075 35,035,565 671,529 8. Gains or Losses from Financial Assets and Liabilities Held for Trading, net 076 47,068,263 59,962,657 9. Gains or Losses from Financial Assets Not for trading Measured at Fair Value through Profit and Loss Account, net 077 -571,077 30,491,412 10. Gains or Losses from Financial Assets and Liabilities at Fair Value through Profit and Loss Account, net 078 0 0 11. Gains or Losses from Hedge Accounting, net 079 0 0 12. Exchange Rate Differences (Gain or Loss), net 080 -8,624,819 -7,592,753 13. Gains or Losses from Derecognition of Non-financial Assets, net 081 0 0 14. Other Operating Income 082 10,448,879 18,529,530 15. Other Operating Expenses 083 13,223,239 19,815,032 16. TOTAL OPERATING INCOME, NET (AOP 069 - 070 - 071 + 072 + 073 - 074 + 075 to 082 - 083) 084 787,027,901 801,279,017 17. Administrative Expenses 085 381,956,776 408,674,319 18. Contributions in cash to recovery committees and deposit insurance schemes 086 42,002,367 13,916,357 19. Depreciation 087 75,816,110 67,020,386 20. Gains or Losses from Changes, net 088 -3,386,347 -4,328,639 21. Provisions or Termination of Provisions 089 -61,671,217 306,219 22. Impairment or Termination of Impairment of Financial Assets Not Measured at Fair Value through Profit and Loss Account 090 109,876,155 63,262,189 23. Impairment or Termination of Impairment of Investments into Subsidiaries, Joint Ventures and Associates 091 0 0 24. Impairment or Termination of Impairment of Non-financial Assets 092 8,711,610 -1,903,399 25. Negative Goodwill recognized through Profit or Loss 093 0 0 26. Profit or Loss Share from Investments into Subsidiaries, Joint Ventures and Associates accrued by Share Method 094 0 0 27. Gains or Losses from Non-current Assets and Disposal Groups Classified as Held for Sale Not Qualified as Continuation of Business 095 0 0 28. PROFIT OR LOSS BEFORE TAX FROM CONTINUING BUSINESS (AOP 084 - 085 - 086 + 087 - 088 do 091+ 092 to 094) 096 226,949,753 245,674,307 29. Tax Expenses or Income related to Profit or Loss from Continuing Business 097 -44,887,608 -43,567,794 30. PROFIT OR LOSS AFTER TAX FROM CONTINUING BUSINESS (AOP 095 - 096) 098 182,062,145 202,106,513 31. Profit or Loss After Tax from Non-continuing Business (AOP 099 - 100) 099 0 0 30.1. Profit or Loss After Tax from Non-continuing Business 100 0 0 30.2. Tax Expenses or Income related to Non-continuing Business 101 0 0 32. PROFIT OR LOSS FOR THE YEAR (AOP 097 + 098; 102 + 103) 102 182,062,145 202,106,513 33. Attributable to Minority Interests (Non-Controlling Interests) 103 0 0 34. Attributable to Owners of the Mother Company 104 182,062,145 202,106,513 Regulatory financial statements for the Croatian National Bank 225 Comprehensive Income Statement for the Period from 1 January to 31 December 2021 Position AOP Note Previous Period (net) Current Period (net) 1 2 3 4 5 COMPREHENSIVE INCOME STATEMENT 1. Profit or loss for the Year (AOP 101) 104 182,062,145 202,106,513 2. Other Comprehensive Income (AOP 106 + 118) 105 -82,538,216 -24,780,853 2.1. Items – not to be reclassified to P&L (AOP 107 do 113 + 116 + 117) 106 -4,199,151 1,831,095 2.1.1. Tangible Assets 107 -7,533,354 6,411,028 2.1.2. Intangible Assets 108 0 0 2.1.3. Actuarial gains or losses from employer's pension benefits programmed 109 1,825,625 -2,968,225 2.1.4. Non-current Assets and Disposal Groups Held for Sale 110 0 0 2.1.5. Other recognized income and expenses from entities recognized at share method 111 0 0 2.1.6. Changes in Fair Value of Equities at Fair Value through Other Comprehensive Income 112 0 0 2.1.7. Gains or Losses from Hedge Accounting of Equities at Fair Value through OCI, net 113 0 0 2.1.8. Changes of fair Value of Equities at Fair Value through OCI (Hedge Item) 114 0 0 2.1.9. Changes in Fair Value of Equities at Fair Value through OCI (Hedge Instrument) 115 0 0 2.1.10. Changes in Fair Value of Financial Liabilities at Fair Value through P&L Due to Changes in Credit Risk 116 0 0 2.1.11. Income tax on items not to be reclassified to P&L 117 1,508,578 -1,611,708 2.2. Items that might be reclassified to P&L (AOP 119 to 126) 118 -78,339,065 -26,611,948 2.2.1 Hedge on Net Investments to Foreign Operations (effective share) 119 0 0 2.2.2. FX Exchange 120 0 0 2.2.3. Cash flow Hedge (effective share) 121 0 0 2.2.4. Hedge Risk Instruments (Undetermined Elements) 122 0 0 2.2.5. Debt Instruments at Fair Values through OCI 123 -95,463,311 -32,525,728 2.2.6. Non-current Assets and Disposal Groups Held for Sale 124 0 0 2.2.7. Share of other income and expenses from investments in subsidiaries, joint ventures and associates 125 0 0 2.2.8. Income tax on items that might be reclassified to P&L 126 17,124,246 5,913,780 3. Total other comprehensive income for the year (AOP 104 + 105 and AOP 128 + 129) 127 99,523,929 177,325,660 4. Attributable to Minority Interests (Non-Controlling Interests) 128 0 0 5. Attributable to Owners of the Mother Company 129 99,523,929 177,325,660 Regulatory Financial Statements for the Croatian National Bank 226 Changes in Equity During 2021 Equity Share premium Equity instruments issued other than capital Other equity instruments Accumulated other comprehensi ve income Retained profit Revaluation reserves Other reserves ( ) Treasury shares Profit or ( - ) loss attributable to owners of the parent (-) Interim dividends Accumulate d other comprehen sive income Other items 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 001 1,214,775,000 0 0 0 264,974,555 200,321,464 0 611,448,026 -477,000 182,062,145 0 0 0 2,473,104,190 002 0 0 0 0 0 0 0 0 0 0 0 0 0 0 003 0 0 0 0 0 0 0 0 0 0 0 0 0 0 004 1,214,775,000 0 0 0 264,974,555 200,321,464 0 611,448,026 -477,000 182,062,145 0 0 0 2,473,104,190 005 0 0 0 0 0 0 0 0 0 0 0 0 0 0 006 0 0 0 0 0 0 0 0 0 0 0 0 0 0 007 0 0 0 0 0 0 0 0 0 0 0 0 0 0 008 0 0 0 0 0 0 0 0 0 0 0 0 0 0 009 0 0 0 0 0 0 0 0 0 0 0 0 0 0 010 0 0 0 0 0 0 0 0 0 0 0 0 0 0 011 0 0 0 0 0 0 0 0 0 0 0 0 0 0 012 0 0 0 0 0 0 0 0 0 0 0 0 0 0 013 0 0 0 0 0 0 0 0 0 0 0 0 0 0 014 0 0 0 0 0 0 0 0 0 0 0 0 0 0 015 0 0 0 0 0 0 0 0 0 0 0 0 0 0 016 0 0 0 0 0 91,031,073 0 91,031,073 0 -182,062,145 0 0 0 1 017 0 0 0 0 0 0 0 0 0 0 0 0 0 0 018 0 0 0 0 0 0 0 0 0 0 0 0 0 0 019 0 0 0 0 -24,780,853 0 0 0 0 202,106,513 0 0 0 177,325,660 020 0 0 0 0 0 0 0 0 0 0 0 0 0 0 021 1,214,775,000 0 0 0 240,193,702 291,352,537 0 702,479,099 -477,000 202,106,513 0 0 0 2,650,429,851 Total Purchase/sale of treasury shares Sale or cancellation of treasury shares Reclassification of financial instruments from equity to liability Item 1 Opening balance [before restatement] Effects of error corrections Exercise or expiration of other equity instruments issued Conversion of debt to equity Capital reduction Dividends Effects of changes in accounting policies Opening balance [current period] (1 + 2 + 3) Ordinary shares issue Non-controlling interest Closing balance [current period] (from 4 to 20) ADP code Reclassification of financial instruments from liability to equity Preference shares issue Issue of other equity instruments Equity instruments increase or (-) decrease resulting from business combinations Attributable to owners of the parent Share based payments Other increase or ( - ) decrease of equity instruments Total comprehensive income for the current year Transfers among components of equity instruments Regulatory Financial Statements for the Croatian National Bank 227 Cash Flow for the Year 2021 2021 2020 HRK '000 HRK '000 Operating Activities and Impairment 1. Profit/ (Loss) Before Tax 245,675 227,124 2. Impairment Losses and Provisions 66,116 174,934 3. Depreciation and Amortization 67,020 74,953 4. Net Unrealized (Losses)/ Gains on Financial Assets and Liabilities at Fair Value (83,170) (73,479) 5. Gains/ (Losses) on Sale of Tangible Assets (5,029) - 6. Other Non-monetary Items (518,562) (537,335) Changes in Operating Assets 7. CNB Deposits (107,285) (280,916) 8. Treasury Bills of the Ministry of Finance and the CNB bills (4,727) 258,286 9. Loans and Advances to Other Customers 446,381 (1,316,302) 10. Securities and Other Financial Instruments at Fair Value through OCI - 468,611 11. Securities and Other Financial Instruments Held for Trading 172,074 (65,609) 12. Securities and Other Financial Instruments Not Actively Trading and Measured at Fair Value through P&L - - 13. Securities and Other Financial Instruments Mandatory at Fair Value through P&L - - 14. Securities and Other Financial Instruments Measured at Amortized Cost 1,534 2,327 15. Other Operating Assets (19,526) 2,683 Net Increase/ Decrease in Operating Liabilities - 16. Deposits from Financial Institutions (69,619) 105,944 17. Transaction Accounts of Other Customers 890,116 1,255,559 18. Saving Deposits of Other Customers 1,918,207 720,175 19. Term Deposits of Other Customers (775,064) (928,046) 20. Derivative Financial Liabilities and Other Liabilities Not for Trading (21) 5,953 21. Other Liabilities 236,166 862 22. Collected Interest from Operating Activities 484,505 588,918 23. Received Dividend from Operating Activities - 3,281 24. Paid Interest from Operating Activities (30,807) (51,583) 25. Income Tax Paid 2,098 - A) Net Cash Flows from Operating Activities 2,916,082 636,339 Investing Activities 1. Proceeds from Sale/ (Payments for Purchases) of Tangible and Intangible Assets (47,009) (58,990) 2. Proceeds from Sale of/ Payments for Investments in Subsidiaries, Associates and Joint Ventures - - 3. Proceeds from/ (Payments to Acquire) Securities and Other Financial Instruments from Investing Activities (369,725) - 4. Dividends Received from Investing Activities 2,044 2,327 5. Other inflows / outflows from Investing Activities - - B) Net Cash Flows from Investing Activities (414,690) (56,663) Financing Activities 1. Net Increase/ (Decrease) in Borrowings from Financing Activities (57,279) 475,823 2. Net Increase/ (Decrease) in Issued Debt Securities - - 3. Net increase / (Decrease) of Additional Capital Instruments - - 4. Increase in Share Capital - - 5. Dividend Paid - - 6. Other inflows / outflows from Financing Activities (24,343) - C) Net Cash Flows from Financing Activities (81,622) 475,823 D) Net Increase in Cash and Cash Equivalents 2,419,770 1,055,499 Cash and Cash Equivalents at the Beginning of the Year 4,081,541 3,037,319 Effect of Changes in Foreign Exchange Rates on Cash and Cash Equivalents - (8,625) Cash and Cash Equivalents at the End of the Year 6,501,311 4,084,193 Regulatory Financial Statements for the Croatian National Bank 228 Balance Sheet Reconciliation as at 31 December 2021 ASSETS 1. Cash on hand in the amount of HRK 1,422,548 thousand, Other demand deposits in the amount of HRK 415,296 thousand, Financial assets at fair value through other comprehensive income in the amount of HRK 4,339,758 thousand, Financial assets at amortized cost \ Debt securities Loans and advances in the amount of HRK 15,955,111 thousand, Financial assets in the amount of HRK 643 thousand, Other assets in the amount of HRK 50,580 thousand, Other assets in the amount of HRK 50,580 thousand, Financial liabilities measured at amortized cost in the amount of HRK 24,599,744 HRK thousand, Provisions in the amount of HRK 341,274 thousand, Tax liabilities in the amount of HRK 64,393 thousand, and Other liabilities in the amount of HRK 178,817 thousand within the Prescribed reports are stated under Money and bank accounts in the amount of HRK 1,422,544 thousand, Financial assets by fair value through other comprehensive income in the amount of HRK 4,601,297 thousand, Financial investments at amortized cost in the amount of HRK 9,317 thousand and HRK, Reserve requirement with the Croatian National Bank in the amount of HRK 1,326,442 thousand, Loans and receivables from banks in the amount of HRK 289,837 thousand, Loans and receivables from customers in the amount of HRK 14,272,157 thousand, Assets held for in HRK '000 Regulatory reporting Cash and amounts due from banks Mandatory reserve with CNB Loans and receivables from banks Financial assets at fair value through profit and loss Financial assets at fair value through other comprehensive income Financial assets ant amortized cost Loans and receivables from customers Assets held for sale Investments in subsidiaries Property and land Investment property Intangible assets Net deferred tax assets Tax prepayment Other assets Reconciliation between statutory and regulatory reporting Cash in register 1.422.548 (1.422.544) - - - - - - - - - - - - - - 4 Deposits with the CNB 4.339.758 (4.339.758) - - - - - - - - - - - - - - (0) Other a vista deposits 415.296 (415.452) - - - - - - - - - - - - - - (156) Financial assets held for trading 616.655 - - - (616.670) - - - - - - - - - - - (14) Financial assets non for trading, mandatory measured at fair value through profit and loss 9.315 - - - (9.317) - - - - - - - - - - - (2) Financial assets at fair value through other comprehensive income 4.601.340 - - - - (4.601.297) - - - - - - - - - - 42 Financial assets measured at amortized cost - debt securities 450 - - - - - (453) - - - - - - - - - (3) Financial assets measured at amortized cost - loans 15.955.111 - (1.326.442) (289.837) - - - (14.272.157) - - - - - - - - 66.675 Investments in subsidiaries, joint ventures and associates 9.761 - - - - - - - - (9.761) - - - - - - - Tangible assets (less depreciation) 310.680 - - - - - - - - - (248.110) (60.629) - - - (1.942) (0) Intangible assets 93.319 - - - - - - - - - - - (93.319) - - - - Tay assets 643 - - - - - - - - - - - - (26.282) (541) (101) (26.282) Other assets 50.580 (14.761) - - - - - 20.357 - - - - - - - (121.254) (65.078) Non current assets and disposable groups classified as held for sale 9.200 - - - - - - - (9.200) - - - - - - - - Total assets 27.834.657 (6.192.515) (1.326.442) (289.837) (625.986) (4.601.297) (453) (14.251.800) (9.200) (9.761) (248.110) (60.629) (93.319) (26.282) (541) (123.297) (24.814) Statutory reporting Regulatory reporting Regulatory Financial Statements for the Croatian National Bank 229 sale in the amount of HRK 9,200 thousand, Property, plant and equipment in the amount of HRK 248,110 thousand, Investment property in the amount of HRK 60,629 thousand, Other assets in the amount of HRK 123,297 thousand, Bank deposits in the amount of HRK 28,025 thousand, Customer deposits in the amount of HRK 23,422,089 thousand, Loans in the amount of HRK HRK 1,396,886 thousand, Provisions for liabilities and charges HRK 88,015 thousand, and Other liabilities in the amount of HRK 185,572 thousand in the Basic financial statements. 2. The amount of HRK 9,761 thousand presented within the item Investments into subsidiaries, joint ventures and associates in the regulatory financial reports is disclosed within the item Investments in subsidiaries in the statutory financial reports. 3. The amount of HRK 64,393 thousand of deferred tax liabilities is disclosed within the regulatory financial reports in the item Tax liabilities within liabilities, while in the Financial reports it is netted within the item Net deferred tax assets. Differences in other items are purely semantic in nature and there is no irreconciliation between balance sheets for 2021 in the regulatory financial reports and principal financial reports. in HRK '000 Regulatory reporting Financial liabilities at fair value through profit and loss Deposits from banks Customer deposits Borrowing Provision for liabilities and expenses Current tax liability Other liabilities Reconciliation between statutory and regulatory reporting Financial liabilities held for trading - - - - - - - - - Financial liabilities at amortized cost 24,599,744 - (28,025) (23,445,802) (1,396,886) - - - (270,969) Provisions 341,274 - - - - (88,015) - - 253,258 Tax liabilities 64,393 - - - - - (35,887) - 28,506 Other liabilities 178,817 - - 23,713 - - - (185,572) 16,958 Total liabilities 25,184,227 - (28,025) (23,422,089) (1,396,886) (88,015) (35,887) (185,572) 27,752 Statutory reporting Regulatory reporting Regulatory Financial Statements for the Croatian National Bank 230 EQUITY Changes in equity and reserves statement for 2021 reconciliation Except for differences in terminology between regulatory and statutory financial reports, the reconciliation refers to: - Other reserves in regulatory financial report are within treasury shares reserves, statutory reserves and other reserves in the statutory financial reports - Accumulated other comprehensive income in the regulatory financial reports is within items fair value reserve and revaluation reserve in the statutory financial reports - Profit / loss attributable to mother company owners in regulatory financial reports is within the item retained earnings / (uncovered loss) in the statutory financial reports Regulatory reporting Share capital Capital gain Treasury shares Reserves for treasury shares Statutory reserves Other reserves Fair value reserve Revaluation reserve Retained earning/(recovered loss) Reconciliation between statutory and regulatory reporting Share capital 1,214,775 (1,214,775) - Premium on equity - Issued equity instruments - Other equity instruments - Accumulated other comprehensive income 240,194 (212,651) (27,543) 0- Retained earnings 291,353 (291,353) 0- Revaluation reserves - - Other reserves 702,479 (4,477) (40,010) (657,992) 0 Treasury equities (477) 477 - Profit or loss belonging to mother company owners 202,108 (202,107) 1 Dividends during business year - Accumulated other comprehensive income - Other - TOTAL EQUITY 2,650,431 (1,214,775) - 477 (4,477) (40,010) (657,992) (212,651) (27,543) (493,460) 0 Statutory reporting Regulatory reporting Distributable to parent equity holders Minority interest Regulatory Financial Statements for the Croatian National Bank 231 Profit and loss account for 2021 reconciliation in HRK '000 Total regulatory reporting Interests and similar income Interests and similar expense Fees and commission income Fees and commission expense Gains less losses arising from financial instruments at fair value through profit and loss Gains less losses arising from financial instruments available from sale Gains less losses arising from dealing in foreign currencies Other operating income General administrative expenses Depreciation and amortization Impairment losses on loans and receivables from customers and other assets Provisions for liabilities and expenses Profit before tax Deferred income tax (expense)/incom e Profit for the year Total statutory reporting Reconciliation between statutory and regulatory reporting Interest income 560,475 556,257 556,257 (4,218) Interest expense (36,364) (36,240) (36,240) 124 Dividend income 2,044 2,044 2,044 (0) Fee and commission income 482,976 482,976 482,976 0 Fee and commission expense (290,100) (290,100) (290,100) 0 Gains of losses from recognition of financial assets and liabilities not measured at fair value through profit and loss account, net 672 - 672 672 (0) Gains or losses from financial assets and liabilities held for trading, net 59,963 2,487 57,476 59,963 0 Gains or losses on non-trading financial assets measured at fair value through profit or loss, net 30,491 30,800 30,800 309 Gains or losses on financial assets and financial liabilities at fair value through profit or loss, net - - - Gains or losses from hedge accounting, net - - - Exchange rate differences (gain or loss), net (7,593) 46 46 7,639 Other operating income 18,530 18,292 (111) 18,181 (349) Other operating expense (19,815) - (6) (6) 19,809 Administrative expense (408,674) (428,483) (428,483) (19,809) Cash contributions to recovery committees and deposit insurance system (13,916) (13,916) (13,916) (0) Depreciation (67,020) (67,020) (67,020) (0) Gains or losses from changes, net (4,329) (4,329) (4,329) 0 Provisions or reversal of provisions (307) (307) (307) 0 Impairment or reversal of an impairment loss on a financial asset not measured at fair value through profit or loss (63,262) (63,268) (63,268) (6) Impairment or reversal of impairment of investments in subsidiaries, joint ventures and associates - - - Impairment or reversal of impairment of non-financial assets 1,903 1,903 1,903 0 PROFIT OR LOSS BEFORE TAX FROM CONTINUING BUSINESS (AOP 084 - 085 - 086 + 087 - 088 to 091+ 092 to 094) 245,675 245,675 245,675 (0) Tax expense or income related to operating profit or loss from continuing business (43,568) (43,568) (43,568) 0 PROFIT OR LOSS AFTER TAX FROM CONTINUING BUSINESS (AOP 095 - 096) 202,107 202,107 202,107 (0) Profit or loss after tax from continuing operations (AOP 099 - 100) - - - - Profit or loss before tax from non-continuing business - - - - Tax expenses or income related to non-continuing business - - - PROFIT OR LOSS FOR THE CURRENT YEAR (AOP 097 + 098; 102 + 103) 202,107 202,107 202,107 (0) Statutory reporting Regulatory reporting Regulatory Financial Statements for the Croatian National Bank 232 Reconciliation of the statement of changes in profit and loss for 2021 1. The amount of HRK 4,095 thousand disclosed within Interest expense in regulatory financial reports is disclosed within Interest and similar income in statutory financial reports. 2. The amount of HRK 18,530 thousand within Other operating income, the amount of HRK 19,815 thousand within Other operating expenses in the amount of HRK 408,674 thousand within Administrative expenses and amount of HRK 307 thousand within Provisions or termination of provisions in regulatory financial reports are disclosed within Other operating income in the amount of HRK 21,053 thousand, General and administrative expenses in the amount of HRK 442,399 thousand, as well as within Provisions for liabilities and costs in the amount of HRK 307 thousand within statutory financial reports. Differences in other items are purely semantic in nature and there is no mismatch between profit and loss accounts for 2021 in the regulatory financial reports and statutory financial reports. Regulatory Financial Statements for the Croatian National Bank 233 Cash Flows Statement for 2021 reconciliation OPERATING ACTIVITIES Regulatory Financial Reports Principal Financial Reports Difference Operating Activities and Impairment 1. Profit/ (Loss) Before Tax 245,675 245,675 - 2. Impairment Losses and Provisions 66,116 - 66,116 - Impairment losses from loans to customers and other assets - 65,804 (65,804) - losses from provisions for liabilities and expenses - 307 (307) 3. Depreciation 67,020 67,020 - 4. Net Unrealized (Losses)/ Gains on Financial Assets and Liabilities at Fair Value (83,170) (83,170) - 5. Gains/ (Losses) on Sale of Tangible Assets (5,029) - (5,029) 6. Other Non-monetary Items (518,562) (518,562) - (profit) / loss from exchange rate differences - 7,593 (7,593) - net interest income - (524,111) 524,111 - dividend income - (2,044) 2,044 Changes in Operating Assets and Liabilities 7. CNB Deposits (107,285) - (107,285) Net (increase)/decrease in mandatory CNB reserve - (107,285) 107,285 8. Deposits with financial institutions and loans to financial institutions (4,727) - (4,727) Increase in placements and loans to other banks - (4,727) 4,727 9. Loans and Advances to Other Customers 446,381 - 446,381 Net (increase)/decrease in loans and receivables from customers - 441,654 (441,654) 10. Securities and Other Financial Instruments at Fair Value through OCI - - Net (increase)/decrease in loans and receivables through OCI - - 11. Securities and Other Financial Instruments Held for Trading 172,074 - 172,074 Net (increase)/decrease in financial assets at fair value through P&L - 172,074 (172,074) 12. Securities and Other Financial Instruments Not Actively Trading and Measured at Fair Value through P&L - - - 13. Securities and Other Financial Instruments Mandatory at Fair Value through P&L - - - 14. Securities and Other Financial Instruments Measured at Amortized Cost 1,534 1,534 Net (increase)/decrease in financial assets measured at amortized Cost - 1,534 (1,534) 15. Other Operating Assets (19,526) - (19,526) Net (increase)/decrease in other assets - (19,526) 19,526 Interest charged - 484,505 (484,505) Interest paid - (30,807) 30,807 Increase/ decrease in operating liabilities 16. Deposits from Financial Institutions (69,619) - (69,619) 17. Transaction Accounts of Other Customers 890,116 - 890,116 18. Saving Deposits of Other Customers 1,918,207 - 1,918,207 19. Term Deposits of Other Customers (775,064) - (775,064) Net (increase)/decrease in deposits from banks - (69,619) 69,619 Net increase/(decrease) in deposits from customers - 2,032,940 (2,032,940) 20. Derivative Financial Liabilities and other trading liabilities (21) - (21) 21. Other Liabilities 236,166 - 236,166 Net increase/(decrease) in other liabilities - 236,166 (236,166) 22. Collected Interest from Operating Activities 484,505 - 484,505 23. Received Dividend from Operating Activities - - 24. Paid Interest from Operating Activities (30,807) - (30,807) 25. Income Tax Paid 2,098 2,098 - A) Net Cash Flows from Operating Activities 2,916,082 2,916,081 1 Regulatory Financial Statements for the Croatian National Bank 234 Cash Flows Statement for 2021 reconciliation (continued) INVESTING ACTIVITIES Regulatory Financial Reports Principal Financial Reports Difference Investing Activities 1. Proceeds from Sale/ (Payments for Purchases) of Tangible and Intangible Assets (47,009) (47,009) - 2. Proceeds from Sale of/ Payments for Investments in Subsidiaries, Associates and Joint Ventures - - - Sales in financial assets at fair value through other comprehensive income - 50,000 (50,000) Acquisition of financial assets at fair value through other comprehensive income - (419,725) 419,725 3. Proceeds from/ (Payments to Acquire) Securities and Other Financial Instruments from Investing Activities - - (369,725) Net sales/(acquisition) of financial investments at amortized cost (369,725) - - 4. Dividends Received from Investing Activities 2,044 - 2,044 Dividend inflows - 2,044 (2,044) B) Net Cash Flows from Investing Activities (414,690) (414,690) - FINANCING ACTIVITIES Regulatory Financial Reports Principal Financial Reports Difference Financing Activities 1. Net Increase/ (Decrease) in Borrowings from Financing Activities (57,279) - (57,279) Increase in borrowings - 373,287 (373,287) Borrowings repayment - (430,567) 430,567 Lease repayment in accordance with IFRS 16 - (24,343) 24,343 2. Net Increase/ (Decrease) in Issued Debt Securities - - - 3. Net increase / (Decrease) of Additional Capital Instruments - - - 4. Increase in Share Capital - - - Increase in share capital - - - 5. Dividend Paid - - - Dividend outflows - - - 6. Other inflows / outflows from Financing Activities (24,343) - (24,343) C) Net Cash Flows from Financing Activities (81,622) (81,622) - TOTAL Regulatory Financial Reports Statutory Financial Reports Difference Cash and Cash Equivalents at the Beginning of the Year 4,081,541 4,081,541 - Effect of Changes in Foreign Exchange Rates on Cash and Cash Equivalents - - - Cash and Cash Equivalents at the End of the Year 6,501,311 6,501,311 - Regulatory Financial Statements for the Croatian National Bank 235 Cash Flows Statement for 2021 reconciliation (continued) 1. The amount of HRK 66,116 thousand within Impairment and Provisions in regulatory financial reports is disclosed within Losses from impairment of loans and receivables from customers and other assets in the amount of HRK 65,804 thousand and within Provisions for liabilities and costs in the amount of HRK 307 thousand in statutory financial reports. 2. The amount of HRK 7,593 thousand within Other non-monetary items in regulatory financial reports is disclosed within (gains)/losses from FX differences in statutory financial reports 3. The amount of HRK 107,285 thousand within Accounts with CNB in regulatory financial reports is disclosed within Net (increase)/decrease in mandatory CNB reserve in statutory financial reports. 4. Gains/losses from sale of tangible assets in the amount of HRK 5,029 thousand, Loans and advances to other clients in the amount of HRK 446,381 thousand, Securities and other financial instruments held for trading in the amount of HRK 172,074 thousand, Other assets from operating activities in the amount of HRK 19,526 thousand, Deposits from financial institutions in the amount of HRK 69,619 thousand, Transaction accounts of other customers in the amount of HRK 890,116 thousand, Saving deposits from other customers in the amount of HRK 1,918,207 thousand, Term deposits in the amount of HRK 775,064 thousand, Derivative financial liabilities and other liabilities for trading in the amount of HRK 21 thousand, Other liabilities in the amount of HRK 236,166 thousand, Collected interest from operating activities in the amount of HRK 484,505 thousand, Paid interest from operating activities in the amount of HRK 30,807 thousand, Inflows from securities and other financial instruments from investing activities collection in the amount of HRK 369,725 thousand and Net decrease in loans received from financing activities in the amount of HRK 57,279 thousand within regulatory reports are disclosed within Net increase in loans and advances to customers in the amount of HRK 441,654 thousand, Net decrease in financial assets at fair value through profit or loss in the amount of HRK 172,074 thousand, Net increase in financial assets at fair value through other comprehensive income, Net decrease in financial assets at amortized cost in the amount of HRK 1,534 thousand, Net decrease in other assets in the amount of HRK 19,526 thousand, Net decrease in deposits from banks in the amount of HRK 69,619 thousand, Net decrease in customer deposits in the amount of HRK 2,032,940 thousand, Net increase in other liabilities in the amount of HRK 236,166 thousand and on the item Sale of financial assets at fair value through other comprehensive income in the amount of HRK 50,000 thousand and item Acquisition of financial assets at fair value through other comprehensive income in the amount of HRK 419,725 thousand, as well as the increase in Borrowings in the amount of HRK 373,287, Repayment of borrowings in the amount of HRK 430,567 thousand and Lease repayments in accordance with IFRS16 in the amount of HRK 24,343 thousand in the statutory Financial statements. Differences in other items are purely semantic in nature and there is no mismatch between cash flows statements for 2021 in the regulatory financial reports and statutory Financial statements. Branch network and contacts 236 Hrvatska poštanska Banka p.l.c. HEADQUARTER Address: Jurišićeva 4 10 000 Zagreb phone: 072 472 472 0800 472 472 01 4805 057 fax: 01 4810 773 e-mail: hpb@hpb.hr SWIFT: HPBZHR2X web site: www.hpb.hr RCS Središnja Hrvatska OFFICE ZAGREB - BRITANSKI TRG Address: Ilica 81 10 000 Zagreb phone: 01 4686 001 fax: 01 4686 009 OFFICE ZAGREB - DUBRAVA Address: Avenija Dubrava 47 10 040 Zagreb phone: 01 2908 971 fax: 01 2908 978 OFFICE GAJNICE Address: Argetinska 4 10 000 Zagreb phone: 01 3466 930 fax: 01 3466 947 OFFICE HOTO Address: Ulica dr. Franje Tuđmana 4 10 434 Strmec phone: 01 3369 650 fax: 01 3369 660 OFFICE ZAGREB - JURIŠIĆEVA Address: Jurišićeva 4 10 000 Zagreb phone: 01 4888 356 / 300 fax: 01 4804 522 Branch network and contacts 237 OFFICE ZAGREB - MAKSIMIR Address: Maksimirska 105 10 000 Zagreb phone: 01 2383 782 fax: 01 2383 789 OFFICE ZAGREB - SAVSKA Address: Savska 58 10 000 Zagreb phone: 01 5553 501 fax: 01 5553 506 OFFICE ZAGREB - SESVETE Address: Trg D. Domjanića 8 10 360 Zagreb phone: 01 2019 270 fax: 01 2019 287 OFFICE ZAGREB - SREDIŠĆE Address: Ivana Šibla 15 10 000 Zagreb phone: 01 5550 971 OFFICE ZAGREB - ŠPANSKO Address: Trg Ivana Kukuljevića 5 10 000 Zagreb phone: 01 5551 958 / 962 fax: 01 5551 967 OFFICE ZAGREB - VMD Address: Strojarska cesta 16 10 000 Zagreb phone: 01 6323 550 fax: 01 6323 569 OFFICE ZAPREŠIĆ Address: Trg žrtava fašizma 8 10 290 Zaprešić phone: 01 3340 271 fax: 01 3340 278 Branch network and contacts 238 OFFICE VELIKA GORICA Address: Trg kralja Petra Krešimira IV br 1 10 410 Velika Gorica phone: 01 6238 600 fax: 01 6238 614 OFFICE SISAK Address: Stjepana i Antuna Radića 34 44 000 Sisak phone: 044 556 012 fax: 044 556 019 OFFICE KARLOVAC Address: Ivana Gorana Kovačića 4 47 000 Karlovac phone: 047 555 040 fax: 047 555 049 E-CENTAR Address: Strojarska 20 10 000 Zagreb phone: 01 4888 389 fax: 01 4888 374 RCS Sjeverna Hrvatska OFFICE BJELOVAR Address: Eugena Kvaternika 1 43 000 Bjelovar phone: 043 555 095 fax: 043 555 099 OFFICE ČAKOVEC Address: Masarykova 26 40 000 Čakovec phone: 040 555 010 fax: 040 555 019 OFFICE KOPRIVNICA Address: Florijanski trg 13 48 000 Koprivnica phone: 048 555 090 fax: 048 555 099 Branch network and contacts 239 OFFICE VARAŽDIN Address: Ivana Kukuljevića 9a 42 000 Varaždin phone: 042 215 320 fax: 042 215 330 RCS Slavonija OFFICE ĐAKOVO Address: Bana J. Jelačića 8 31 400 Đakovo phone: 031 815 156 fax: 031 815 158 OFFICE OSIJEK Address: Trg Ante Starčevića 7 31 000 Osijek phone: 031 284 887 fax: 031 284 888 OFFICE OSIJEK 2 Address: Prolaz J. Benešića 2 31 000 Osijek phone: 031 555 262 fax: 031 555 269 OFFICE POŽEGA Address: Cehovska 8 34 000 Požega phone: 034 410 130 / 133 fax: 034 410 139 OFFICE SLAVONSKI BROD Address: Kralja Petra Krešimira IV br.3 35 000 Slavonski Brod phone: 035 212 530 fax: 035 212 539 OFFICE VALPOVO Address: Trg Kralja Tomislava 17 31 550 Valpovo phone: 031 654 041 fax: 031 654 042 Branch network and contacts 240 OFFICE VINKOVCI Address: Trg dr. Franje Tuđmana 2 32 100 Vinkovci phone: 032 455 502 fax: 032 455 508 OFFICE VIROVITICA Address: Trg kralja Zvonimira 3 33 000 Virovitica phone: 033 740 060 fax: 033 740 068 OFFICE VUKOVAR Address: J.J. Strossmayerova 16 32 000 Vukovar phone: 032 451 000 fax: 032 451 019 ISPOSTAVA BELI MANASTIR Address: Trg Slobode 38 31 300 Beli Manastir phone: 031 701 412 fax: 031 701 414 ISPOSTAVA DONJI MIHOLJAC Address: Vukovarska 4 31 540 Donji Miholjac phone: 031 620 040 fax: 031 620 041 ISPOSTAVA NAŠICE Address: J.J. Strossmayera 2 31 500 Našice phone: 031 615 162 fax: 031 615 173 RCS Istra i Kvarner OFFICE PULA Address: Anticova 9 52 000 Pula phone: 052 300 602 fax: 052 300 609 Branch network and contacts 241 OFFICE POREČ Address: Trg slobode 14 52 440 Poreč phone: 052 703 222 fax: 052 703 229 OFFICE RIJEKA Address: Trpimirova 3b 51 000 Rijeka phone: 051 301 280 fax: 051 301 288 OFFICE RIJEKA 2 Address: Uljarska 4A 51 000 Rijeka phone: 051 555 570 / 571 fax: 051 555 589 RCS Dalmacija – sjever OFFICE DALMARE Address: Velimira Škorpika 23 22 000 Šibenik phone: 022 242 253 OFFICE GOSPIĆ Address: Trg S. Radića bb 53 000 Gospić phone: 053 617 101 fax: 053 617 109 OFFICE KNIN Address: Ulica Gospe Velikog Hrvatskog Krsnog Zavjeta 9 22 300 Knin phone: 022 556 000 fax: 022 556 009 OFFICE ŠIBENIK Address: Ante Starčevića 4 22 000 Šibenik phone: 022 556 012 fax: 022 556 019 Branch network and contacts 242 OFFICE VIDICI Address: Stjepana Radića 137 22 000 Šibenik phone: 022 209 412 OFFICE VODICE Address: Herfordska ulica b.b. 22 111 Vodice phone: 022 442 678 OFFICE ZADAR Address: Zrinsko - Frankopanska 8 23 000 Zadar phone: 023 350 000 fax: 023 350 018 OFFICE ZADAR 2 Address: Ulica Andrije Hebranga2 23 000 Zadar phone: 023 411 900 ISPOSTAVA GRAD Address: Kralja Držislava bb 22 000 Šibenik phone: 022 200 463 RCS Dalmacija – jug OFFICE DUBROVNIK Address: Dr. Ante Starčevića 24 20 000 Dubrovnik phone: 020 362 045 fax: 020 362 048 OFFICE IMOTSKI Address: Šetalište S. Radića 19 21 260 Imotski phone: 021 555 280 fax: 021 555 289 OFFICE KAŠTEL STARI Address: Ivana Danila 12 21 216 Kaštel Stari phone: 021 246 184 fax: 021 246 199 Branch network and contacts 243 OFFICE KONAVLE Address: Gruda 43 20 215 Gruda phone: 020 450 800 fax: 020 450 802 OFFICE MAKARSKA Address: Trg 4. svibnja 533 br.1 21 300 Makarska phone: 021 695 760 fax: 021 695 768 OFFICE SINJ Address: Trg kralja Tomislava 1 21 230 Sinj phone: 021 708 080 fax: 021 708 097 OFFICE SOLIN Address: Kralja Zvonimira 87a 21 210 Solin phone: 021 555 751 fax: 021 555 756 OFFICE SPLIT 1 Address: Domovinskog rata 49 21 000 Split phone: 021 340 626 fax: 021 340 629 OFFICE SPLIT 2 Address: Dubrovačka 31 21 000 Split phone: 021 401 620/626 fax: 021 401 639 OFFICE SPLIT 3 Address: Ruđera Boškovića 18a 21 000 Split phone: 021 555 854 fax: 021 555 873 Branch network and contacts 244 OFFICE TROGIR Address: Kardinala Alojzija Stepinca 42 21 220 Trogir phone: 021 555 728 fax: 021 555 743 ISPOSTAVA CAVTAT Address: Trumbićeva 10 20 210 Cavtat phone: 020 450 810 fax: 020 450 811 ISPOSTAVA TRILJ Address: Bana Josipa Jelačića 8 21 240 Trilj phone: 021 830 410 fax: 021 830 427 Members of the HPB Group: HPB INVEST d.o.o. Address: Strojarska cesta 20 10 000 Zagreb phone: 01 4804 516 0800 472 472 fax: 01 4804 599 e-mail: hpb.invest@hpb.hr web site: www.hpb-invest.hr HPB-nekretnine d.o.o. Address: Amruševa 8 10 000 Zagreb phone: 01 5553 920 fax: 01 4839 235 e-mail: hpb.nekretnine@hpb.hr web site: www.hpb-nekretnine.hr Hrvatska poštanska banka, p.l.c. 10000 Zagreb, Jurišićeva 4 SUPERVISORY BOARD Zagreb, March 30 2022 In accordance with the provision of article 21 of the Articles of Association of HPB p.l.c. (hereinaftert: Bank), and in line with Articles 300.c and 300.d of the Companies Act, Supervisory Board of the Bank has on 9. meeting held on March 30 2022 made the following: RESOLUTION on giving consent to Annual financial statements and consolidated annual financial statements of the Bank and the Group for 2021, comprising also the Management Board's annual report on condition of HPB p.l.c. and its subisidiaries for year 2021 I. Consent is given to Annual financial statements and consolidated annual financial statements of the Bank and the Group for the business year ended December 31 2021, comprising also the Management Board's annual report on condition of HPB p.l.c. and its subisidiaries for 2021. Acceptance is given for Auditor's report by BDO CROATIA d.o.o., Zagreb, Radnička cesta 180, Zagreb. Auditor has conducted the audit of Annual financial statements the Bank and the Group for the year ended December 31 2021. II. By giving consent to statements outlined in paragraph I. of this Resolution, Annual financial statements and consolidated annual financial statements of the Bank and Group for the year ended December 31 2021 are considered to be confirmed by the Management Board and the Supervisory Board. III. This resolution comes into force on the day of its adoption. President of the Supervisory Board Marijana Miličević HRVATSKA POŠTANSKA BANKA, p.l.c. Zagreb, Jurišićeva 4 Management Board 246 Zagreb, March 30 2022 Number: UB-220330-2 Pursuant to Article 13 of the Statute of Hrvatska poštanska banka, p.l.c. (hereinafter: the Bank), and in line with Article 220, paragraph 1, Article 222, Article 300 b, paragraph 2 and Article 275, paragraph. 1, item 2 of the Companies Act, the Management Board of the Bank on March 30, 2022, proposes to the Supervisory Board and the General Assembly of the Bank to adopt the following RESOLUTION on allocation of profit earned in 2021 I. It is determined that Hrvatska poštanska banka, p.l.c. made a net profit of HRK 202,106,512.95 in the business year ended 31 December 2021. II. Pursuant to Article 220 of the Companies Act and the authority referred to in Article 33 of the Bank's Articles of Association, the Bank's Management Board decided on 30 March 2022 to allocate one twentieth of the determined profit from item I of this Decision to legal reserves in the amount of HRK 10,105,325.65. III. The remaining amount of determined net profit in the amount of HRK 192,001,187.30, after its distribution from Article II. of this Decision, is allocated to retained earnings. IV. Pursuant to Article 220, paragraph 3 of the Companies Act and Article 33 of the Bank's Articles of Association, the previously formed amount of HRK 50,604,741.08 is reallocated from other reserves to retained earnings. V. This resolution comes into force on the day of its adoption. Explanation: The proposed distribution of net profit is in accordance with Articles 220 and 300 b of the Companies Act and the Articles of Association of Hrvatska poštanska banka, p.l.c. In order for the successful continuity of Bank's operations, profitability and growth within the possibilities area it is necessary to amortize the effects that will affect the capital position of the Bank in the following periods, namely: • In the transition period of application of IFRS 9 in accordance with EU Regulation 2017/2395 as well as based on the application of deductions for unrealized gains and losses related to assets measured at fair value through other comprehensive income (FVOCI) in accordance with EU Regulation 873/2020 amending Regulation EU 575/2013 and EU 876/2019, the Bank will report HRK 101.2 million of negative effect on regulatory capital by the end of 2023; • According to the prescribed amount of MREL requirements and deadline for compliance with requirements until January 1, 2024 as well as expected increase in risk-weighted assets based on the merger of Sberbank d.d. – u sanaciji, in future Nova hrvatska banka, the Bank must further strengthen its regulatory capital in the coming periods. Based on the above stated, the Management Board of the Bank considers it appropriate to propose to the Supervisory Board and the General Assembly to adopt a Resolution on allocating 5% of net profit for 2021 to legal reserves and the remaining net profit in 2021 to retained earnings. Given that the Bank has achieved the legal maximum in accordance with Article 220, paragraph 3 of the Companies Act, and other reserves reached the amount of half of the share capital, ie HRK 607,387,500.00, it is proposed to reallocate previously formed amount of HRK 50,604,741.08 from other reserves to retained earnings. President of the Management Board Marko Badurina Distribute to: 1. Supervisory Board 2. Finance Management Department 3. Archive of the Management Office Hrvatska poštanska banka, p.l.c. 10000 Zagreb, Jurišićeva 4 SUPERVISORY BOARD 248 Zagreb, March 30 2022 Pursuant to the provision of Article 21 of the Articles of Association of HPB p.l.c. (hereinafter: Bank), and in line with Article 300.b and Article 275, paragraph 1, point 2 of the Companies Act, Supervisory Board of the Bank has on 9. meeting held on March 30 2022, made the following: RESOLUTION on allocation of Bank's profit earned in 2021 I. Bank's Supervisory Board gives its consent and accepts Management Board's proposal on allocation of profit earned in 2021, which is a constitent part of this resolution. II. By providing its consent outlined in paragraph I. of this Resolution, Management Board's proposal on allocation of profit earned in 2021 is considered to be confirmed. III. Supervisory Board proposes to General Assembly to vote in favour of allocation of profit earned in 2021 as outlined in Management Board's proposal. IV. This resolution comes into force on the day of its adoption and is submitted to General Assembly for adoption. President of the Supervisory Board Marijana Miličević