Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697753146446.pdf (Georgia)
JSC Isbank Georgia Financial Statements For the year ended 31 December 2020 Together with Independent Auditor's Report JSC Isbank Georgia For the year ended 31 December 2020 Contents Independent auditor’s report……………………………………………………………………………………..3 Financial statements Statement of profit or loss and other comprehensive income ................................................................... 5 Statement of financial position ................................................................................................................... 6 Statement of changes in equity ................................................................................................................. 7 Statement of cash flows ............................................................................................................................. 8 Notes to, and forming part of, the financial statements Principal activities ............................................................................................................................. 9 1.
Basis of preparation ....................................................................................................................... 10 2.

Summary of significant accounting policies ................................................................................... 11 3.

4.

Critical accounting estimates judgment ......................................................................................... 20 5.
Net interest income ....................................................................................................................... 22 6.
Net fee and commission income .................................................................................................... 22 7. Credit loss expenses on financial assets ....................................................................................... 22 Personnel expenses ....................................................................................................................... 23 8.

9.
9.

Other expenses .............................................................................................................................. 23 10.

Taxation ......................................................................................................................................... 24 11.

Cash and cash equivalents ............................................................................................................ 25 12.
Amounts due from credit institutions .............................................................................................. 26 13.

Mandatory reserves at the National Bank of Georgia .................................................................... 26 14.
Loans to customers ........................................................................................................................ 27 Investment securities ..................................................................................................................... 37 15.

16.

Property, equipment, intangible and Right-of-use assets .............................................................. 38 17.
Other assets and liabilities ............................................................................................................. 39 18.

Amounts due to credit institutions .................................................................................................. 39 19.

Amounts due to customers ............................................................................................................ 40 20.
Other borrowed funds and subordinated debt ............................................................................... 40 21.

Capital management ...................................................................................................................... 41 22.
Risk management, corporate governance and internal control ..................................................... 42 23. Credit related commitments ........................................................................................................... 59 24.

Contingencies.

............................................................................................................................... 59 25.
Related party transactions ............................................................................................................. 61 26.

Fair value of financial assets and liabilities .................................................................................... 62 27.

Presentation of financial instruments by measurement category .................................................. 64 28.
Events after reporting date ............................................................................................................. 64 JSC Isbank Georgia Statement of Financial Position As at 31 December 2020 (In thousands of GEL) ASSETS Cash and cash equivalents Amounts due from banks Mandatory reserves at the National Bank of Georgia Loans to customers Investment securities Property, equipment, intangible and right-of-use assets Other assets Total assets Liabilities Amounts due to banks Amounts due to customers Other borrowed fund and subordinated debt Deferred tax liabilities Other liabilities Total liabilities Equity Share capital Fair value reserve for investment securities Retained earnings Total equity Total liabilities and equity Notes (127) 25,178 94,213 339,988 57,013 1,627 24,609 155,420 33,704 2,541 812 275,726 133,656 36,862 15,674 1,013 4,499 191,704 69,162 (644) 15,504 84,022 275,726 38,031 5,155 26,567 156,471 25,461 984 11,257 263,926 106,509 38,352 31,916 649 8,300 185,726 69,162 (404) 9,442 78,200 263,926 The accompanying notes on pages 9 to 64 are an integral part of these Financial Statements.
Page 6 of 64 JSC Isbank Georgia Statement of changes in equity For the year ended 31 December 2020 (In thousands of GEL) Note Balances as at 1 January 2018 Profit for the year Other comprehensive income for the year Total comprehensive income for the year Increase in share capital 21 Balances as at 31 December 2018 Profit for the year Other comprehensive loss for the year Total comprehensive income for the year Share capital 30,000 - - - 39,162 69,162 - - - Balances as at 31 December 2019 69,162 Profit for the year Other comprehensive loss for the year Total comprehensive income for the year - - - Balances as at 31 December 2020 69,162 Fair value reserve for investment securities Retained earnings 123 - (527) (527) - (404) - (240) (240) (644) - 517 517 (127) 6,892 2,550 - 2,550 - 9,442 6,062 - 6,062 15,504 9,674 - 9,674 25,178 Total equity 37,015 2,550 (527) 2,023 39,162 78,200 6,062 (240) 5,822 84,022 9,674 517 10,191 94,213 The accompanying notes on pages 9 to 65 are an integral part of these Financial Statements.
Page 7 of 64 JSC Isbank Georgia Statement of cash flows For the year ended 31 December 2020 (In thousands of GEL) Cash flows from operating activities Profit before income tax Adjustment for: Depreciation and amortization Interest income calculated using effective interest rate Interest expense Impairment loss Net foreign exchange gain 16 5 5 7 Cash flows (used in) / from operating activities before changes in operating assets and liabilities Decrease in mandatory reserves at the National Bank of Georgia Increase/ (decrease) in amounts due from banks Decrease/ (increase) in loans to customers Decrease/ (increase) in other assets Increase/(decrease) in deposits and balances from banks (Decrease)/ increase in current accounts and deposits from customers (Decrease)/ increase in other liabilities Cash flows (used in)/from operations before interest and tax Interest receipts Interest payments Income tax paid Cash flows (used in) / from operations Cash flows from investing activities Purchases of investment securities Receipts from investment securities Purchases of property, equipment and intangible assets Cash flows from / (used in) investing activities Cash flows from financing activities Receipts from other borrowed fund and subordinated debt Repayments of other borrowed funds and subordinated debt Repayments of principal portion of lease liabilities Cash flows from / (used in) financing activities 16 20 20 Notes 2020 2019 2018 10,053 7,456 3,227 1,269 (19,388) 4,203 254 (827) (4,436) (3,554) (1,886) (57,999) (3,846) (26,919) 33,612 77 (64,951) 18,497 (4,210) (981) (51,645) (6,501) 23,997 (1,082) 16,414 16,219 (4,875) (1,003) 10,341 1,286 (17,003) 4,542 210 (898) (4,407) 4,033 3,802 7,441 10,674 21,209 (3,280) (6,720) 32,752 16,652 (3,749) (317) 45,338 (14,038) 6,000 (109) (8,147) - (17,708) (849) (18,557) 805 (14,672) 6,284 (446) (1,748) (6,550) 2,895 (3,117) (3,281) (8,535) 47,442 (31,453) 5,654 3,055 18,988 (10,535) (137) 11,371 (5,028) 4,125 (260) (1,163) 26,303 (20,132) - 6,171 Net (decrease) / increase in
 cash and cash equivalents Effect of changes in exchange rates and expected credit losses on cash and cash equivalents Cash and cash equivalents as at the beginning of the year Cash and cash equivalents as at the end of the year (24,890) 18,634 16,379 11 11 362 57,013 32,485 348 38,031 57,013 74 21,578 38,031 The accompanying notes on pages 9 to 64 are an integral part of these Financial Statements.
Page 8 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 1 Principal Activities (a) Organization and operations JSC Isbank Georgia (hereinafter the “Bank”) is a joint stock company, incorporated on 29 June 2015 in accordance with legislation of Georgia.

The Bank operates under a general banking license (N: 368) issued by the National Bank of Georgia (“NBG”) on 1 August 2015.
The Bank is registered by the LEPL National Agency of Public Registry and the registration number is 404496611.

Before reorganization (1 August 2015) the Bank was presented as Batumi Branch of JSC Isbank Turkey (the “Branch”) registered on 13 July 2012 by the National Bank of Georgia (License N: 908) as a branch of a foreign bank Türkiye İş Bankası Anonim Şirketi (the “Parent” or the “Shareholder”) which was incorporated in Turkey in 1924.
The Bank’s principal activities include the following: accepts deposits from the public and provide credit, transfers payments in Georgia as well as abroad, exchanges currencies and provides other banking services to its commercial and retail customers.

Main office of the Bank is in Tbilisi, Georgia and as at 31 December 2020, 31 December 2019 and 31 December 2018 it has two branches located in Tbilisi and Batumi.

The Bank’s registered legal address is D. Aghmashenebeli Ave. 140/B, Tbilisi, Georgia.
As at 31 December 2020, 2019 and 2018 the Bank’s 100% shareholder was JSC Isbank Turkey.

As of December 31, 2020, 37.08% of the JSC Isbank Turkey shares of are owned by T. İş Bankası A.Ş.

Supplementary Pension Fund (Fund), 28.09% are owned by the Republican People’s Party- CHP (Atatürk’s shares) and 34.83% are on free float (December 31, 2019: Fund 39.10%, CHP 28.09%, Free float 32.81%, December 31,2018: Fund 40.47%, CHP 28.09%, Free float 31.44%).
The Bank is ultimately controlled by is bank member’s Supplementary Pension Fund.

Related party transactions are disclosed in Note 25.

(b) Business environment The Bank’s operations are located in Georgia.

Consequently, the Bank is exposed to the economic and financial markets of Georgia, which display emerging-market characteristics.
Legal, tax and regulatory frameworks continue to develop, but are subject to varying interpretations and frequent changes that, together with other legal and fiscal impediments, contribute to the challenges faced by entities operating in Georgia.

The effect of the COVID-19 pandemic has been especially severe for developing and emerging economies.

Restrictions imposed to avoid the rapid spread of the virus have had a negative impact on economic activity.
The economy of Georgia contracted by 6.2% in 2020, as the recovery dynamics of 3Q20 was reversed in the last quarter as a result of the partial second lockdown.

The hospitality and other tourism-related sectors were hit the hardest in 2020, but there were still positive dynamics in other sectors of the economy, including mining, agriculture and education.

The current account deficit widened to 12.3% of GDP in 2020, as a result of the sharp drop in tourism revenues.
Due to the pandemic-related uncertainties, the local currency depreciated sharply against the US Dollar in March 2020, which was stabilized by the NBG’s interventions at the end of December, 2020.

Despite these interventions, international reserves increased to US$ 3.9 billion (up 11.5% y-o-y) as at 31 December 2020, largely reflecting increased donor funding.
However, the vast fiscal stimulus measures planned in partnership with international financial institutions will partially offset the effects of the severe shock and will contribute to the rapid recovery of the economy in the post- crisis period.

In 2020 – US$ 1.7 billion donor financing was provided for the public sector.

It should, however, be noted that, as is the case with the global economic forecast, Georgia’s economic forecasts are characterized by a high level of uncertainty.
The path of the pandemic, the availability of effective treatments, and the associated impact on economic activity, are inherently difficult to predict.

Consequently, economic activity in services will continue to suffer in the near term.

On the upside, a faster than expected development and distribution of an effective vaccine could boost confidence, support a rebound in tourism and investment, and accelerate the recovery.
The National Bank of Georgia has taken important measures to mitigate the negative impact of the COVID-19 pandemic on the financial sector and to promote the economy of the country.
Emergency steps were taken to different fields: the Page 9 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 1 Principal Activities (continued) smooth provision of liquidity to various sectors of the economy, to develop temporary supervisory plan, to extend the program of the International Monetary Fund (IMF) and to activate a new mechanism for currency interventions.
Temporary supervisory plan implies to use the capital and liquidity buffers of the banking sector during the financial stress.

This implies lowering the current capital and liquidity requirements, which allows the banking sector to absorb potential losses through these buffers and continue ordinary business activities and funding the real economy.
It is noteworthy that Georgian banking sector is sound and has adequate buffers of capital and liquidity, which have been gradually accumulated as a result of consistent supervisory policy of the NBG.

The Bank has introduced a number of protocols or policies to mitigate a negative impact of COVID – 19 on its business.
The Bank is closely monitoring a development of economic trends and its possible impacts on the business activity to continue taking an appropriate measures to manage a different challenges proactively.

The financial statements reflect management’s assessment of the impact of the Georgian business environment on the operations and financial position of the Bank.

The future business environment may differ from management’s assessment.
2 Basis of preparation (c) Statement of compliance The accompanying financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”).

The Bank presents comparative information for all amounts reported in the current period’s financials statement for two preceding periods – years ended 31 December 2019 and 2018.

The Bank’s management considers such disclosure more useful and informative for the stakeholders of the Bank.
These financial statements have not yet been approved by the Parent on the general meeting of shareholders of the Bank.

The shareholders have the power and authority to amend the financial statements after the issuance.

(d) Basic measurement The financial statements are prepared on the historical cost convention, except for investment securities, that are measured at fair value, or otherwise stated.
(e) Presentation of financial statements The Bank presents its statement of financial position in order of liquidity based on the Bank’s intention and perceived ability to recover/settle the majority of assets /liabilities of the corresponding financial statement line items.

Analysis regarding recovery or settlement within 12 months after the reporting date (current) and more 12 months after the reporting date (non-current) is presented in Note 22.
(f) Functional and presentation currency The national currency of Georgia is the Georgian Lari (₾), which is the Bank’s functional and presentation currency.

These financial statements are presented in thousands of Georgian Lari (“₾”) except where otherwise stated.

(g) Going Concern The Management of JSC Isbank Georgia has prepared these financial statements on a going concern basis.
In making this judgment the management considered the Bank’s strong financial position, current intentions, profitability of operations and access to financial resources.

The management is not aware of any material uncertainty that may cast significant doubt on the Bank’s ability to continue as going concern.
The management took into consideration the existing and anticipated effects of the Coronavirus outbreak and believes that it will not have a significant adverse impact to the Bank’s continuous operations in the foreseeable future.
Page 10 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 3 Summary of Significant Accounting Policies Functional and Presentation currency, Foreign Currency Translation The financial statements are presented in Georgian Lari (₾), which is the Bank’s functional currency and presentation currency.
Transactions in foreign currencies are initially recorded in the functional currency, converted at the rate of exchange ruling at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated into the functional currency at the official exchange rate set by the National Bank of Georgia at the reporting date.
Gains or losses resulting from the translation of foreign currency transactions are recognized in the statement of profit or loss as gains less losses from foreign currencies – translation differences.

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value is determined.
Non-monetary 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.

Foreign currency differences arising on revaluation are recognized in profit or loss.
The exchange rates used by the Bank in the preparation of the financial statements as at 31 December 2020, 31 December 2019 and 31 December 2018 are as follows: 1 US Dollar / ₾ 1 Euro / ₾ 1 TRY / ₾ 1 GBP / ₾ Determination of fair value 2020 3.2766 4.0233 0.4462 4.4529 2019 2.8677 3.2095 0.4821 3.7593 2018 2.6766 3.0701 0.5076 3.3955 The Bank measures financial instruments carried at Fair value through profit or loss (FVPL) and Fair value through other comprehensive income (FVOCI) at fair value at each balance sheet date.
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.

The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either.

► ► In the principal market for the asset or liability; or In the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Bank.

The fair value of an asset or liability is measured using the assumption that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
In order to show how fair values have been derived, financial instruments are classified based on a fair value hierarchy, as summarised below: ► ► Level 1 financial instruments - those where the inputs used in the valuation are unadjusted quoted prices from active markets for identical assets or liabilities that the bank has access to the measurement date.
The bank considers markets as active only if there are sufficient trading activities with regards to the volume and liquidity of the identical assets or liabilities and when there are binding and exercisable price quotes available on the balance sheet date; Level 2 financial instruments - those where the inputs that are used for valuation and are significant, are derived from directly or indirectly observable market data available over the entire period of the instrument’s life.
Such inputs include quoted prices for similar assets or liabilities in active market, quoted prices such as interest rates yield curves, implied volatilities, and credit spreads.

In addition, adjustments may be required for the condition or location of the asset or the extent to which it relates to items that are comparable to the valued instrument.
However, if such adjustments are based on unobservable inputs which are significant to the entire measurement, the Bank will classify the instruments as level 3.

► Level 3 financial instruments - those that include one or more unobservable inputs that is significant to the measurement as whole.
Page 11 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 3 Summary of Significant Accounting Policies (continued) The bank periodically reviews its valuation techniques including the adopted methodologies and model calibrations.

However, the base models may not fully capture all factors relevant to the valuation of the Bank’s financial instruments such as credit risk (CVA), own credit (DVA) and /or funding costs (FVA).
Therefore, the Bank applies various techniques to estimate the credit risk associated with it financial instruments measured at fair value, which include a portfolio-based approach that estimate the expected net exposure per counterparty over the full lifetime of the individual assets, in order to reflect the credit risk of the individual counterparties for non-collateralised financial instruments.
The bank evaluates the levelling at each reporting period on an instrument-by-instrument basis and reclassifies instruments when necessary, based on the facts at the end of reporting period.

Income and expense recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured.
The following specific recognition criteria must also be met before revenue is recognised: Interest and similar income and expense Under IFRS 9, interest income is recorded using the EIR method for all financial assets measured at amortised cost.

Interest income on interest bearing financial assets measured at FVOCI under IFRS 9 is also recorded using the EIR method.

Interest expense is also calculated using the EIR method for all financial liabilities held at amortised cost.
The EIR is the rate that exactly discounts estimated future cash receipts through the expected life of the financial assets or liabilities, or, when appropriate, a shorter period, to the gross carrying amount of the financial asset.

The EIR (and therefore, the amortised cost of the financial asset) is calculated by taking into account transaction costs and any discount or premium on the acquisition of the financial assets, as well as fees and costs are an integral part of the EIR.
The bank recognises interest income using a rate of return that represents the best estimate of a constant rate of return over the expected life of the loan.

Hence, the EIR calculation also takes into account the effect of potentially different interest rates that may be charged at various stages of the financial asset’s expected life, and other characteristics of the product life cycle (including prepayments, penalty interest and charges).
If expectations of fixed rate financial assets or liabilities cash flows are revised for reasons other than credit risk, than changes to future contractual cash flows are discounted at the original EIR with a consequential adjustment to the carrying amount.
The difference from the previous carrying amount is booked as a positive or negative adjustment to the carrying amount of the financial asset or liability on the balance sheet with a corresponding increase or decrease in interest revenue/ expense calculated using the effective interest method.

When a financial asset becomes credit-impaired, the Bank calculates interest revenue by applying the effective interest rate to the net amortised cost of the financial asset.
If the financial assets cures and is no longer credit impaired, the Bank reverts to calculating interest revenue on a gross basis.

For purchased or originated credit-impaired (POCI) financial assets, the Bank calculates interest revenue by calculating the credit-adjusted EIR and applying that rate to the amortised cost of the asset.
The credit-adjusted EIR is the interest rate that, at original recognition, discounts the estimated future cash flows (including credit losses) to the amortised cost of the POCI assets.

Fee and commission income The bank earns fee and commission income from a diverse range of financial services it provides to its customers.

Fee and commission income is recognised at an amount that reflects the considerations to which the Bank expects to be entitled in exchange for providing services.
- Fee income earned from services provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period as respective performance obligations are satisfied.
Loan origination fees, loan servicing fees and other fees that are considered to be integral to the overall profitability of a loan, together with the related transaction costs, are deferred and amortized to interest revenue over the estimated life of the financial instrument using the effective interest method.

- Fee income earned at a point in time Other fees, commissions and other income and expense items are recognized in profit or loss when the corresponding service is provided.
Each operation is treated as a separate performance obligation.

Page 12 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 3 Summary of Significant Accounting Policies (continued) Financial instruments (continued) Retirement and other benefit obligations The Bank does not have any pension arrangements separate from the state pension system of Georgia.

In addition, the Bank has no post-retirement benefits.
Financial instruments Initial recognition The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments.

Financial instruments are initially measured at their fair value and, except in the case of financial assets and financial liabilities recorded at FVPL, transaction costs are added to, or subtracted from this amount.
The Bank determines the classification of its financial assets upon initial recognition and subsequently can reclassify financial assets in certain cases as described below.

Classification and measurement Measurement categories of financial assets and liabilities.

The Bank classifies all of its financial assets based on the business model for managing the assets and the asset’s contractual terms, measured at either: ► ► ► Amortised cost; FVOCI; FVPL.
The Bank classifies and measures its derivative and trading portfolio at FVPL.

The Bank may designate financial instruments at FVPL, if so doing eliminates or significantly reduces measurement or recognition inconsistencies.

Financial liabilities, other than loan commitments and financial guarantees, are measured at amortised cost or at FVPL when they are held for trading, are derivative instruments or the fair value designation is applied.
The Bank only measures amounts due from banks, loans to customers and other financial investments at amortized cost if both of the following conditions are met: ► ► The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI).
The corporate bonds represent debt securities issued by the legal entities, which the Bank intends to hold until maturity.

They are measured at amortised cost and recognized within loans to customers section in the statement of financial position.

Business model assessment The Bank determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective.
The Bank’s business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as: ► ► ► ► How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity’s key management personnel; The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed; How managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected); The expected frequency, value and timing of sales are also important aspects of the Bank’s assessment.
Page 13 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 3 Summary of Significant Accounting Policies (continued) Financial instruments (continued) The business model assessment is based on reasonably expected scenarios without taking ‘worst case’ or ‘stress case’ scenarios into account.
If cash flows after initial recognition are realized in a way that is different from the Bank’s original expectations, the Bank does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward.

The SPPI test As a second step of its classification process the Bank assesses the contractual terms of financial asset to identify whether they meet the SPPI test.
‘Principal’ for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortization premium/discount).

The most significant elements of interest within a lending arrangement are typically the consideration for the time value of money and credit risk.
To make the SPPI assessment, the Bank applies judgement and considers relevant factors such as the currency in which the financial asset is denominated, and the period for which the interest rate is set.

In contrast, contractual terms that introduce a more than de Minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding.
In such cases, the financial asset is required to be measured at FVPL.

Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument.
Amortized cost The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and the maturity amount, minus any reduction for Debt instruments at FVOCI.
The Bank applies the new category under IFRS 9 of debt instruments measured at FVOCI when both of the following conditions are met: ► ► The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets; The contractual terms of the financial asset meet the SPPI test.

FVOCI debt instruments are subsequently measured at fair value with gains and losses arising due to changes in fair value recognised in OCI.
Interest revenue and foreign exchange gains and losses are recognised in profit or loss in the same manner as for financial assets measured at amortised cost.

On derecognition, cumulative gains or losses previously recognised in OCI are reclassified from OCI to profit or loss.

The ECLs for debt instruments measured at FVOCI do not reduce the carrying amount of these financial assets in the statement of financial position, which remains at fair value.
Instead, an amount equal to the allowance that would arise if the assets were measured at amortised cost is recognised in OCI as an accumulated impairment amount, with a corresponding charge to profit or loss.

The accumulated loss recognised in OCI is recycled to the profit and loss upon derecognition of the asset.

Financial guarantees, letters of credit and undrawn loan commitments The Bank issues financial guarantees, letter of credit and loan commitments.
Financial guarantees are initially recognised in the financial statements at fair value, being the premium received.

Subsequent to initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amount initially recognised less cumulative amortisation recognised in the consolidated statement of profit or loss, and an ECL provision.
Undrawn loan commitments and letters of credits are commitments under which, over the duration of the commitment, the Bank is required to provide a loan with pre–specified terms to the customer.

Similar to financial guarantee contracts Page 14 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 3 Summary of Significant Accounting Policies (continued) Financial instruments (continued) these contracts are in the scope of the ECL requirements.
Reclassification of financial assets and liabilities The Bank does not reclassify its financial assets subsequent to their initial recognition, apart from the exceptional circumstances in which the Bank changes the business model for managing financial assets.

Financial liabilities are never reclassified.

Staged approach to the determination of expected credit losses IFRS 9 introduced a three-stage approach to impairment for financial instruments that are performing at the date of origination or purchase.
This approach is summarised as follows: ► ► ► Stage 1: The Bank recognises a credit loss allowance at an amount equal to 12-month expected credit losses.

This represents the portion of lifetime expected credit losses from default events that are expected within 12 month of the reporting date, assuming that credit risk has not increased significantly after initial recognition.
For those financial assets with a remaining maturity of less than 12 months, a PD is used that corresponds to the remaining maturity; Stage 2: The Bank recognises a credit loss allowance at an amount equal to lifetime expected credit losses (LTECL) for those financial instruments which are considered to have experienced a significant increase in credit risk since initial recognition.
This requires the computation of ECL based on lifetime probability of default (LTPD) that represents the probability of default occurring over the remaining lifetime of financial instrument.

Allowance for credit losses are higher in this stage because of an increase in credit risk and the impact of a longer time horizon being considered compared to 12 months in Stage 1.
Financial instruments in stage 2 are not yet deemed to be credit-impaired; Stage 3: If the financial instrument is credit-impaired, it is then moved to stage 3.

The Bank recognise a loss allowance at an amount equal to lifetime expected credit losses, reflecting a Probability of Defaults (PD) of 100% for financial instruments that are credit-impaired.

Financial instruments within the scope of the impairment requirement of IFRS 9 are classified into one of the above three stages.
Key judgment and estimates used under IFRS 9 are disclosed in NOTE 4.

Cash and cash equivalents Cash and cash equivalents are items which are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

Cash and cash equivalents include notes and coins on hand, amounts due from National Bank of Georgia (NBG), excluding mandatory reserves, and other highly liquid financial assets with original maturities of less than three month.
Cash and cash equivalent are carried at amortised cost.

Amounts due from banks Amounts due from banks are recorded when the Bank advances money to counterparty banks.

Amounts due from banks are initially recognized at fair value and are subsequently measured at amortized cost (AC) using the effective interest method when: they are held for the purposes of collecting contractual cash flows and cash flows represent SPPI, and they are not designated at FVTPL.

Otherwise they are carried at Fair value (FV).


Amounts due from banks are carried net of any allowances for impairment losses.

Mandatory reserve with National Bank of Georgia (NBG) Mandatory reserves with NBG, as financial assets are carried at amortised cost and represent mandatory reserve deposits that are not available to finance the Bank’s day-to-day operations.

Investments securities Investment securities include Government bonds.

The Bank classifies investment securities as carried at AC or FVOCI.
Securities are carried at AC if they are held for collection of contractual cash flows and where those cash flows represent SPPI.
Securities are carried at FVOCI if they are held for collection of contractual cash flows and for selling, where Page 15 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 3 Summary of Significant Accounting Policies (continued) Financial instruments (continued) those cash flows represent SPPI, and if they are not designated at FVTPL.
Interest income from these assets is calculated using the effective interest method and recognised in profit of loss for the year.

All other changes in the carrying value are recognised in OCI.

When the security are derecognised, the cumulative gain or loss previously recognised in OCI is classified from OCI to profit or loss.
Derivative financial instruments In the normal course of business, the Bank enters into various derivative financial instruments including, forwards, swaps and options in the foreign exchange and capital markets.

Such financial instruments are held for trading and are recorded at fair value.

The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors.
Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative.

Gains and losses resulting from these instruments are included in the statement of profit or loss as net gains/ (losses) from financial instruments at fair value through profit or loss or net gains/ (losses) from foreign currencies dealing, depending on the nature of the instrument.
Borrowings including subordinated debt Issued financial instruments or their components are classified as liabilities, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity instruments.
Such instruments include amounts due to credit institutions, amounts due to customers, debt securities issued and subordinated debt.

After initial recognition, borrowings are subsequently measured at amortised cost using the effective interest method.

Gains and losses are recognised in the statement of profit or loss when the borrowings are derecognised as well as through the amortisation process.
If the Bank purchases its own debt, it is removed from the statement of financial position and the difference between the carrying amount of the liability and the consideration paid is recognised in the statement of profit or loss.

Amounts due to customers Amounts due to customers are non-derivative liabilities to individuals or corporate customers and are carried at AC.
Derecognition of financial assets and liabilities Financial assets The Bank derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset.
The Bank derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.

Write-off Financial assets are written off either partially or in their entirety only when the Bank has stopped pursuing the recovery.

If the amount to be written off is greater than the accumulated loss allowance, the difference is first treated as an addition to the allowance that is then applied against the gross carrying amount.
Any subsequent recoveries are credited to credit loss expense.

A write-off constitutes a derecognition event.

Once the loan is in overdue, the problematic debt collection process is started.

The loan is transferred to problem asset manager, who is trying to contact the borrower and find a solution for covering the loan.

If there is no any result within the 90 days, court actions are undertaken, which may last for 3 or 4 years, including all steps of the process.
The management believes that around 4 years are needed to conclude that there is no reasonable expectation of recovery and the asset should be written off.

Financial liabilities A financial liability is derocognised when the obligation under the liability is discharged or cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition Page 16 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 3 Summary of Significant Accounting Policies (continued) Financial instruments (continued) of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss.
Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
The right of set-off must not be contingent on a future event and must be legally enforceable in all of the following circumstances: ► ► ► The normal course of business; The event of default; and The event of insolvency or bankruptcy of the entity and all of the counterparties.

Impairment of financial assets.

The bank assesses, on a forward-looking basis, the ECL for debt instruments measured at AC and FVOCI and for the exposures arising from loan commitments and financial guarantee contracts.
The bank measures ECL and recognises credit loss allowance at each reporting date.

The measurement of ECL reflects: (i) an unbiased and probability weighted amount that is determined by evaluating a range of possible outcomes, (ii) time value of money and (iii) all reasonable and supportable information that is available without undue cost and effort at the end of each reporting period about past events, current conditions and forecasts of future conditions.
The bank applies a three stage model for impairment, based on changes in credit quality since initial recognition: ` ► Stage 1: A financial instrument that is not credit-impaired on initial recognition is classified in Stage 1.

Financial assets in Stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL that results from default events possible within the next 12 months or until contractual maturity, if shorter (“12 Months ECL”).
` ► Stage 2: If the bank identifies a significant increase in credit risk (“SICR”) since initial recognition, the asset is transferred to Stage 2 and its ECL is measured based on ECL on a lifetime basis (“Lifetime ECL”).

If a SICR is no longer observed, instrument will move back to Stage 1.

Stage 3: Credit impaired assets are transferred to Stage 3 and allowance for Lifetime ECL is recognized.
The bank’s definition of credit impaired assets and definition of default is based on the occurrence of one or more loss events.

Change in ECL is recognized in statement of profit or loss with a corresponding allowance reported as a decrease in carrying value of the financial asset on the statement of financial position.

described further in Note 22.


► Property and equipment Property and equipment is stated at cost excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment in value.

Changes in the expected useful life are accounted for by changing the amortisation period or methodology, as appropriate, and treated as changes in estimates.
Right-of-use assets are presented together with property and equipment in the statement of financial position-refer to the accounting policy in below.

Right-of-use assets are depreciated on a straight-line basis over the lease term.

Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of the individual assets.
Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use.

The estimated useful lives are as follows: Leasehold improvements Computers and office equipment Furniture and fixtures Motor vehicles Right-of-use assets lease term 5 years 5 years 5 years 5 years Leasehold improvements are depreciated over the shorter of the lease term and their useful lives.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected its use of disposal.

Any gain or loss arising on derecognition of the assets is included in the statement of profit or loss when the asset is derecognised.
Page 17 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 3 Summary of Significant Accounting Policies (continued) The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate.

Intangible assets Acquired intangible assets are stated at cost less accumulated amortization and impairment losses.
Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software.

Amortization is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets.

The estimated useful lives range from 6 to 7 years.

Share capital Share capital Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity, net of any tax effects.

Dividends The ability of the Bank to declare and pay dividends is subject to the rules and regulations of Georgian legislation.

Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared.
Dividends are recognised as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date.

Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the financial statements are authorised for issue.

Leases The bank assesses at contract inception whether a contract is or contains, a lease.
That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

The bank applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets.

The bank recognise lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.
Right-of-use assets The Bank recognises right-of-use assets at the commencement date of the lease.

Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any re-measurement of lease liabilities.

The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received.
Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets.

Right-of-use assets are also subject to impairment.

Lease liabilities At the Commencement date of the lease, the Bank recognises lease liabilities measured at the present value of lease payments to be made over the lease term.
The lease payments include fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees.

The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the bank and payments of penalties for terminating the lease, if the lease term reflects the Bank exercising the option to terminate.
In calculating the present value of lease payments, the Bank uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable.

The carrying amount of lease liabilities is re-measured if there is a modification, a change in the lease term, a change in the lease payments or a change in the assessment of an option to purchase the underlying asset.
Short-term leases and leases of low-value assets The Bank applies the lease of low-value assets recognition exemption to leases of placement of ATM that are considered to be low value.

Lease payments on leases of low-value assets are recognised as expense on a straight- line basis over the lease term.
Page 18 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 3 Summary of Significant Accounting Policies (continued) Impairment of non-financial assets Non-financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment.

The recoverable amount of non-financial assets is the greater of their fair value less costs to sell and value in use.
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.

For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment loss is recognized when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.

All impairment losses in respect of non-financial assets are recognized in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount.
Any impairment loss reversed is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

Credit enhancements The bank seeks to use collateral to mitigate its credit risks on financial assets.

The collateral comes in various forms, such as cash, securities, letters of credit/guarantees, real estate, receivables.
Collateral, unless repossessed, is not recorded on the Bank’s statement of financial position.

Cash flows expected from credit enhancements which are not required to be recognised separately by IFRS standards and which are considered integral to the contractual terms of a debt instrument which is subject to ECL, are included in the measurement of those ECL.

On this basis, the fair value of collateral affects the calculation of ECL.
Collateral is generally assessed, at a minimum, at inception and re-assessed on a quarterly basis.

Details of the Bank’s credit enhancements are disclosed in Note 21.

Repossessed assets The Bank’s policy is to determine whether a repossessed asset can be best used for its internal operations or should be sold.
Assets determined to be useful for the internal operations are transferred to their relevant asset category at the lower of their repossessed value or the carrying value of the original secured asset.

Assets for which selling is determined to be a better option are transferred to assets held for sale at their fair value (if financial assets) and fair value less cost to sell for non-financial assets at the repossession date in, line with the Bank’s policy.
Contingencies Contingent liabilities are not recognised in the statements of financial position but are disclosed unless the possibility of any outflow in settlement is remote.

A contingent asset is not recognised in the statement of financial position but disclosed when an inflow of economic benefits is probable.
Taxation Income taxes are provided in the financial statements in accordance with the legislation enacted or substantively enacted by the end of reporting period in the respective territories that the Bank operates.
The income tax comprises of current tax and deferred tax and is recognised in profit or loss except if it is recognised directly in the other comprehensive income because it is related to transactions that are also recognised, in the same or a different period, directly in other comprehensive income.
Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Current tax payable also includes any tax liability arising from dividends.
Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
In accordance with initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit.

Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill and subsequently for goodwill that is not deductible for tax purposes.
Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period that are expected to apply to the extent of time when the temporary differences will reverse or the tax loss carry forwards will be utilised.

Georgia also has various operating taxes that are assessed on the Bank’s activities.
These taxes are included as a Page 19 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 3 Summary of Significant Accounting Policies (continued) component of other operating expenses.

Application of new standards, interpretations and amendments The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Bank’s financial statements are disclosed below.
The Bank intends to adopt these standards, if applicable, when they become effective.

IFRS 9 Financial Instruments – Fees in the ’10 per cent’ test for derecognition of financial liabilities As part of its 2018-2020 Annual Improvements to IFRS standards process, the IASB issued an amendment to IFRS 9.
The amendment clarifies the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability.

These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf.
An entity applies the amendment to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment.

The amendment is effective for annual reporting periods beginning on or after 1 January 2022 with earlier adoption permitted.
The Bank will apply the amendments to financial liabilities that are modified or exchanged on or after the beginning of the annual period in which it will first apply the amendment and does not expect this will result in a material impact on its financial statements.
4 Critical Accounting Estimates and Judgements The preparation of the Bank’s financial statements requires management to make judgments, estimates and assumptions that affect the reported amount or revenues, expenses, assets and liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities.
Uncertainty about these assumptions and estimates could results in outcomes that require a material adjustment to the carrying amount of assets and liabilities affected in future periods.
In the process of applying the Bank’s accounting policies, management has made the following judgements and assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
Significant Increase in Credit Risk (SIRC) A significant increase in credit risk is not a defined term per IFRS 9, and is determined by management, based on their experience and judgment.
In assessing whether the credit risk has significantly increased the Bank has identified a series of qualitative and quantitative criteria based on undertaking the holistic analysis of various factors including those which specific to a particular financial instrument or to a borrower as well as those applicable to particular sub-portfolios.

The Bank has established general trigger events for individually significant and collectively assessed loans.
For further details on significant increase in credit risk see NOTE 22.
Measurement of expected credit losses (ECL) ECL reflects an unbiased, probability-weighted estimate based on a combination of the following principal factors: probability of defaults (PD), loss given defaults (LGD), exposure of default (EAD) and loss given liquidation of collateralized exposure (LGL) which are further explained below: Probability of Defaults (PD): The bank estimates PD based on a combination of rating model calibration results and a migration matrices approach which is further adjusted for macroeconomic expectations for all portfolios, to represent the forward-looking estimators of the PD parameters.
With the forecasted conditional PD’s migration matrices are constructed, from which unconditional marginal PD’s are calculated that are further adjusted by age of the instrument in the portfolio.

Since stage 3 financial instruments are defaulted, the probability of default in this case is equal to 100%.

Exposure of Defaults (EAD): The EAD represents an estimate of the exposure to credit risk at the time of a potential default occurring during the life of a financial asset.
It represents the cash flows outstanding at the time of default, considering expected repayments, interest payments and accruals discounted at the EIR.

For Stage 1, the EAD are calculated as a monthly average of outstanding amount of loans and off balance commitments taking into account CCF and cash cover amounts by the end of 12 month from the reporting date.

For Stage 2 financial instruments, the EAD is calculated for each contractual remaining year.
EAD for each year is estimated as an outstanding amount by the reporting period minus the cumulative yearly principal repayments.

The outstanding amount by the reporting period is calculated taking Page 20 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 4 Critical Accounting Estimates and Judgment (continued) into account CCF and cash cover amounts.
For Stage 3, the EAD is calculated as the outstanding amount of the instrument by the reporting date taking into account CCF and cash cover amounts.

Loss Given Default (LGD): LGD is defined as the likely loss in case of a counterparty default.

It provides an estimation of the exposure that cannot be recovered in default event and therefore captures the severity of a loss.

LGD rate are calculated for corporate and retail portfolios.
LGD is statistically calculated based on historical loan recovery data and takes into account historical losses incurred on unsecured exposures.

While calculation LGD outlier recoveries are excluded from the calculation.

LGD is expressed as a percentage of the EAD.

Loss Given Liquidation of collateralized exposures (LGL): LGL represents the percentage of the exposure that cannot be recovered from collateral liquidation if the exposure is defaulted.
Loss Given Liquidation calculation takes into account LTV, adjusted by time to sale of movable and immovable collateral, real estate price index, EIR, and expected sales ratio of collaterals.

For uncollateralized exposures LGL is taken at 100%.

Details of ECL measurement methodology are disclosed in Note 22.

As at 31 December 2020, the Bank introduced certain changes in its process of estimation of expected credit losses in the context of the ongoing COVID-19 pandemic.
In particular, it has revised indicators of significant increase in credit risk and does not automatically consider the credit risk to have significantly increased in the case of a loan modification being part of the Government support measures.

The Bank also updated forward looking information, including forecasts of macroeconomic indicators and scenarios’ weights.
Macro-economic scenarios Under IFRS 9, the allowance for credit losses is based on reasonable and supportable forward-looking information obtainable without undue costs of effort, which takes into considerations past events, current conditions and forecasts of future economic conditions.

To incorporate forward-looking information into the Bank’s allowance for credit losses, the Bank uses the macroeconomic forecasts provided By National Bank of Georgia.
Macroeconomic variables covered by these forecasts and which the Bank incorporated in its ECL assessment model include GDP growth, foreign exchange rate and unemployment rate.

The determination of the probability weighted ECL requires evaluating a range of diverse and relevant future economic conditions.
To accommodate this requirement, the Bank uses three different economic scenarios in the ECL calculation: an upside (weight 0.25), a baseline (weight 0.50) and downside (weight 0.25) scenario relevant for each respective portfolio.

A weight is computed for each scenario by using a probabilistic economic model that considers recent information as well as historical data provided by National Bank of Georgia.
Income tax The Bank is subject to income tax and significant judgment is required in determining the provision for income taxes.

During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain.

As a result, the Bank recognizes tax liabilities based on estimates of whether additional taxes and interest will be due.
These tax liabilities are recognized when, despite the Bank's belief that its tax return positions are supportable, the Bank believes that certain positions are likely to be challenged and may not be fully sustained upon review by tax authorities.
Page 21 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 5 Net interest income The interest income and expenses of the bank are as follows: Interest income Financial assets measured as amortized cost Loans to customers Cash and cash equivalent and due from banks Financial assets measured at fair value through other comprehensive income Investment securities Interest income calculated using effective interest rate Interest expense Amounts due to banks Other borrowed funds and subordinated debt Amounts due to customers Interest expenses Net interest income 6 Net Fee and commission income The interest income and expenses of the bank are as follows: Fee and commission income Commission from guarantees Settlement operations Card operations Other operations Total fee and commission income Fee and commission expense Card operations Settlement operations Other operations Total fee and commission expense Total net fee and commission income 2020 2019 2018 17,230 503 14,207 1,163 12,213 811 1,655 19,388 (2,663) (910) (630) (4,203) 15,185 1,633 17,003 1,648 14,672 (2,301) (1,306) (935) (4,542) 12,461 (1,838) (3,356) (1,090) (6,284) 8,388 2020 2019 2018 2,189 366 270 21 2,846 (685) (294) (76) (1,055) 1,791 1,706 341 438 74 2,559 (757) (312) (80) (1,149) 1,410 596 506 306 49 1,457 (851) (437) (78) (1,366) 91 The Bank applies the practical expedient in paragraph 121 of IFRS 15 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
7 Credit loss expense on financial assets The table below shows the net ECL charges (reversal) on financial instruments recorded in the statement of profit or loss for the year ended 31 December 2020: Stage 1 Stage 2 Stage 3 Total Cash and cash equivalents Amounts due from banks Loans to customers Investment securities Financial guarantees Total credit loss Notes 11 12 14 15 - - 366 (82) 98 382 - - 9 - - 9 - - (137) - - (137) - - 238 (82) 98 254 Page 22 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 7 Credit loss expense on financial assets (continued) The table below shows the net ECL charges (reversal) on financial instruments recorded in the statement of profit or loss for the year ended 31 December 2019: Cash and cash equivalents Amounts due from banks Loans to customers Investment securities Financial guarantees Total credit loss Stage 1 Stage 2 Stage 3 Total - 1 24 115 59 199 - - (48) - - (48) - - 59 - - 59 - 1 35 115 59 210 The table below shows the ECL charges on financial instruments recorded in the statement of profit or loss for the year ended 31 December 2018: Cash and cash equivalents Amounts due from banks Loans and advances to customers Investment securities Financial guarantees Total Credit loss reversal 8 Personnel expenses Personnel expenses of the bank are as follows: Salaries and bonuses Other compensation cost Stage 1 Stage 2 Stage 3 Total 1 2 (237) (3) (18) (249) - - 6 - - 6 - - (200) - - (200) 1 2 (431) 3 (18) (443) 2020 4,558 292 4,850 2019 4,202 353 4,555 2018 4,109 526 4,635 In 2020 the avarage number of employees by the Bank was 64 (2019: 68; 2018: 66).
9 Other expense Other expenses of the Bank are as follows: Depreciation and amortization (Note 16) Royalty Professional services Insurance expense Interest expense on lease liability Repairs and maintenance Communication and information services Utilities Entertainment expenses Travel expenses Expenses relating to leases of low-value assets Office supplies Taxes other than on income Advertising and marketing Penalty fee Operating Lease Other 2020 1,269 549 114 112 94 81 53 46 32 30 14 10 7 5 - - 230 2,646 2019 1,286 92 158 10 134 49 46 46 75 113 17 16 10 - 218 - 278 2,548 2018 805 72 146 10 - 45 53 49 95 86 - 14 15 6 - 1,063 349 2,808 Page 23 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 9 Other expenses (continued) Remuneration of the Bank’s auditor for the audit of the Bank’s annual financial statements for the year ended 31 December 2020 comprised GEL 63 thousand (2019: GEL 75 thousand, 2018: GEL 90 thousand) (net of VAT).
10 Taxation In June 2016, amendments to the Georgian tax law in respect of corporate income tax became enacted.

The amendments became effective from 1 January 2017 for all Georgian companies except the banks, insurance companies and microfinance organization, for which the effective date was initially set at January 2019.

On 5 May the effective date of the amendment for banks was revised to January 2023.
Under the new regulation, corporate income tax will be levied on profit distributed as dividends, rather than on profit earned as under the current regulation.

The amount of tax payable on a dividend distribution will be calculated as 15/85 of the amount of net distribution.
The companies will be able to offset corporate income tax liability arising from dividend distributions out of profits earned in 2008-2016 by the amount of corporate income tax paid for the respective period under the current regulation.

Dividends distributions between Georgian resident companies will not be subject to corporate income tax.
Following the enactment of the initial 2016 amendment, as at 31 December 2017 the Bank remeasured its deferred tax assets and liabilities for the periods after 1 January 2019.

As IAS 12 Income Taxes requires, the Bank used 0% tax rate applicable for undistributed profits in respect of assets and liabilities expected to be realized or settled in the periods when the new regulation becomes effective.
Following the enactment of the latest amendment, the Bank recalculated its deferred tax assets at 31 December 2020 and made the relevant recognition of deferred tax expense in the profit and loss statement for 2020.
The corporate income tax expense comprises: Current year tax expense Deferred tax benefit/(expense) Movement in deferred tax assets and liabilities due to origination and reversal of temporary differences Total income tax expense 2020 2019 2018 (218) (987) (157) (160) (160) (378) (407) (407) (1,394) (520) (520) (677) In 2020, the applicable tax rate for current and deferred tax is 15% (2019: 15%; 2018: 15%) Reconciliation of effective tax rate for the year ended 31 December: Profit before tax Income tax at the applicable Tax rate (15%) Non-taxable income and other differences 2020 10,053 2019 7,456 2018 3,227 (1,508) (1,119) (484) 1,130 (378) 712 (407) (36) (520) Deferred tax assets and liabilities Movements in temporary differences during the years ended 31 December 2020, 2019 and 2018 are presented as follows.
Page 24 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 10 Income tax expense (continued) Balance 1 January 2020 Recognized in profit or loss Recognized in other comprehensive income Balance 31 December 2020 (323) (654) 49 (85) (1,013) 24 (153) (45) 14 (160) - - (91) - (91) (299) (807) (87) (71) (1,264) Balance 1 January 2019 Recognized in profit or loss Recognized in other comprehensive income Balance 31 December 2019 (102) (581) 88 (54) (649) (221) (73) (81) (32) (407) - - 42 - 42 (323) (654) 49 (85) (1,013) Balance 1 January 2018 Recognized in profit or loss Recognized in other Balance IFRS 9 adoption comprehensive 31 December 2018 income - (135) (46) (28) (209) (102) (432) 40 (26) (520) - (14) - - (14) - - 94 - 94 (102) (581) 88 (54) (649) Property, equipment, Intangible and ROU assets Loans to customers Investment securities Other liabilities Net tax (liabilities)/assets Property, equipment, Intangible and ROU assets Loans to customers Investment securities Other liabilities Net tax (liabilities)/assets Property, equipment and intangible assets Loans to customers Investment securities Other liabilities Net tax (liabilities)/assets 11 Cash and cash equivalents Cash and cash equivalents as at 31 December 2020, 31 December 2019 and December 2018 comprise of following: Cash on hand Cash equivalents Correspondent accounts with the NBG Nostro accounts with other banks Term deposits with NBG Term deposits with other banks Less-allowance for impairment Total cash equivalents Total cash on hand and cash equivalents 2020 3,167 16,181 5,676 3,203 4,260 (2) 29,318 32,485 2019 2,752 498 39,734 1,400 12,630 (1) 54,261 57,013 2018 5,109 370 17,445 10,502 4,606 (1) 32,922 38,031 All balances of cash equivalents are allocated to Stage 1; there were no significant movements in ECL during the year.
Page 25 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 11 Cash and cash equivalents (continued) As at 31 December 2020 the Bank has a placement with one bank (2019: one bank; 2018: one bank) with carrying value that individually exceeds 10% of equity.

The gross value of that balance as at 31 December 2020 is GEL 19,381 thousand (2019: GEL 38,190 thousand; 2018: GEL 14,148 thousand).
Credit rating of correspondent accounts and placements with other banks with original maturities of less than three month stands as follow: BB BB- B+ B Not Rated Total 2020 19,381 5,462 40 - 4,435 29,318 2019 1,898 38,546 9,645 - 4,172 54,261 2018 58 28,259 4,605 - - 32,922 The table illustrates the ratings by international agency Fitch Ratings.
12 Amounts due from credit institutions Amounts due from credit institutions as at 31 December 2020, 31 December 2019 and 31 December 2018 comprise of following: With less than 1 year contractual maturity With more than 1 year contractual maturity Expected credit loss Total amount due from banks 2020 9,193 - (3) 9,190 2019 1,630 - (3) 1,627 2018 4,572 586 (3) 5,155 For the purpose of ECL measurement due from CI are included in stage 1.
The ECL recognised for the amounts due from banks as at 31 December 2020 was GEL 3 thousand and there were no significant movements in ECL during the year (NOTE 7).

Credit rating of Amounts due from banks stands as follow: BB+ BB B+ 2020 - 8,645 545 9,190 2019 - - 1,627 1,627 2018 513 4,642 - 5,155 The table illustrates the ratings by international agency Fitch Ratings.
13 Mandatory reserves at the National Bank of Georgia Mandatory reserves at the National Bank of Georgia (NBG) represents amounts deposits with the NBG.

Resident financial institutions are required to maintain an interest-earning obligatory reserve with the NBG, the amount of which depends on the level of funds attracted by the financial institutions.

The Bank’s ability to withdraw these deposits is restricted by regulations.
Mandatory reserves at the NBG 2020 36,217 36,217 2019 24,609 24,609 2018 26,567 26,567 Page 26 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 14 Loans to customers Loans to customers as at 31 December 2020, 31 December 2019 and 31 December 2018 comprise of following: Loans to legal entities Corporate lending Small and medium business lending Total loans to legal entities Loans to individuals Residential mortgage Consumer lending Total loans to individuals Gross loans to customers Less-allowance for impairment Loans to customers 2020 2019 2018 207,908 22,627 230,535 4,186 3,286 7,472 238,007 (1,052) 236,955 128,516 18,594 147,110 5,619 3,505 9,124 156,234 (814) 155,420 132,010 12,480 144,490 8,867 3,892 12,759 157,249 (778) 156,471 (a) Allowance for impairment of loans to customers at amortised cost The following tables disclose the changes in the credit loss allowance and gross carrying amount for loans to customers carried at amortised cost between the beginning and the end of the reporting period.
Below main movements in the table are described: ► Transfers between Stage 1, 2 and 3 due to balances experiencing significant increases (or decreases) of credit risk or becoming credit-impaired in the period, and the consequent “step up” (or “step down”) between 12- month and Lifetime ECL; ► New originated or purchased gives us information regarding gross loans and corresponding credit impairment losses issued during the period (however, exposures which were issued and repaid during the period and issued to refinance existing loans are excluded); ► The line, derecognised during the period refers to starting balance of loans which were repaid or during the period; ► Foreign exchange translations of assets denominated in foreign currencies; ► Net remeasurement due to stage transfers and risk parameters changes refers to the movements in ECL as a result of transfer of exposure between stages or changes in risk parameters and forward looking expectations.
An analysis of changes in the gross carrying value and corresponding ECL in relation to corporate lending during the year ended 31 December 2020 is as follows: Corporate lending Stage 1 Stage 2 Stage 3 Total Gross carrying values as at 1 January 2020 New assets originated or purchased Assets repaid Foreign exchange adjustments At 31 December 2020 126,883 162,268 (88,200) 5,092 206,043 - - - - 1,632 - - 233 1,865 128,515 162,268 (88,200) 5,325 207,908 Corporate lending ECL as 1 January 2020 New assets originated or purchased Assets repaid Net remeasurement of ECL At 31 December 2020 Stage 1 Stage 2 Stage 3 Total (212) (516) 223 (66) (571) - - - - - - - - (37) (37) (212) (516) 223 (103) (608) Page 27 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 14 Loans to consumer (continued) An analysis of changes in the gross carrying value and corresponding ECL in relation to corporate lending during the year ended 31 December 2019 is as follows: Corporate lending Stage 1 Stage 2 Stage 3 Total Gross carrying values as at 1 January 2019 New assets originated or purchased Assets repaid Transfers to stage 3 Foreign exchange adjustments At 31 December 2019 130,484 89,498 (94,617) - 1,519 126,884 1,526 - (3) (1,523) - - - - - 1,523 109 1,632 132,010 89,498 (94,620) - 1,628 128,516 Corporate lending ECL as 1 January 2019 New assets originated or purchased Assets repaid Net remeasurement of ECL At 31 December 2019 Stage 1 Stage 2 Stage 3 Total (175) (178) 167 (26) (212) - - - - - - - - - - (175) (178) 167 (26) (212) An analysis of changes in the gross carrying value and corresponding ECL in relation to corporate lending during the year ended 31 December 2018 is as follows: Corporate lending Stage 1 Stage 2 Stage 3 Total Gross carrying values as at 1 January 2018 New assets originated or purchased Assets repaid Transfers to stage 1 Foreign exchange adjustments At 31 December 2018 133,550 97,559 (103,157) 2,302 230 9,086 - (5,306) (2,302) 48 130,484 1,526 - - - - -
 - 142,636 97,559 (108,463) - 278 132,010 Corporate lending ECL as 1 January 2018 New assets originated or purchased Assets repaid Net remeasurement of ECL At 31 December 2018 Stage 1 Stage 2 Stage 3 Total (344) (167) 289 47 (175) (1) - 1 - - - - - - - (345) (167) 290 47 (175) An analysis of changes in the gross carrying value and corresponding ECL in relation to small and medium business lending during the year ended 31 December 2020 is as follows: Small and medium business Stage 1 Stage 2 Stage 3 Total Gross carrying values as at 1 January 2020 New assets originated or purchased Assets repaid Foreign exchange adjustments At 31 December 2020 15,236 17,340 (12,565) 411 20,422 - 39 - - 39 3,358 1,710 (2,915) 13 2,166 18,594 19,089 (15,480) 424 22,627 Page 28 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 14 Loans to consumer (continued) Small and medium business ECL as 1 January 2020 New assets originated or purchased Assets repaid Net remeasurement of ECL At 31 December 2020 Stage 1 Stage 2 Stage 3 Total (26) (19) 22 2 (21) - (15) - - (15) (230) (56) 182 1 (103) (256) (90) 204 3 (139) An analysis of changes in the gross carrying value and corresponding ECL in relation to small and medium business lending during the year ended 31 December 2019 is as follows: Small and medium business Stage 1 Stage 2 Stage 3 Total Gross carrying values as at 1 January 2019 New assets originated or purchased Assets repaid Transfers to stage 1 Foreign exchange adjustments At 31 December 2019 9,467 13,839 (8,227) 112 45 15,236 463 - (351) (112) - - 2,550 1,174 (372) - 6 3,358 12,480 15,013 (8,950) - 51 18,594 Small and medium business ECL as 1 January 2019 New assets originated or purchased Assets repaid Transfers to stage 2 Net remeasurement of ECL At 31 December 2019 Stage 1 Stage 2 Stage 3 Total (27) (23) 23 (2) 3 (26) (46) - 44 2 - - (240) (74) 17 - 67 (230) (313) (97) 84 - 70 (256) An analysis of changes in the gross
 carrying value and corresponding ECL in relation to small and medium business lending during the year ended 31 December 2018 is as follows: Small and medium business Stage 1 Stage 2 Stage 3 Total Gross carrying values as at 1 January 2018 New assets originated or purchased Assets repaid Transfers to stage 2 Transfers to stage 3 Foreign exchange adjustments At 31 December 2018 4,923 9,795 (4,486) (463) (307) 5 9,467 878 - (878) 463 - - 463 2,422 - (181) - 307 2 2,550 8,223 9,795 (5,545) - - 7 12, 480 Small and medium business ECL as 1 January 2018 New assets originated or purchased Assets repaid Transfers to stage 2 Transfers to stage 3 Net remeasurement of ECL At 31 December 2018 Stage 1 Stage 2 Stage 3 Total (65) (85) 56 46 17 4 (27) (39) - 39 (46) - - (46) (323) - 4 - (17) 96 (240) (427) (85) 99 - - 100 (313) Page 29 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 14 Loans to consumer (continued) An analysis of changes in the gross carrying value and corresponding ECL in relation to Residential mortgages during the year ended 31 December 2020 is as follows: Residential mortgages Stage 1 Stage 2 Stage 3 Total Gross carrying values as at 1 January 2020 New assets originated or purchased Assets repaid Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Foreign exchange adjustments At 31 December 2020 5,175 555 (2,901) 93 (38) (246) 135 2,773 156 65 (27) (93) 38 (5) 10 144 288 731 (33) - - 251 32 5,619 1,351 (2,961) - - - 177 1,269 4,186 Residential mortgages ECL as 1 January 2020 New assets originated or purchased Assets repaid Net remeasurement of ECL At 31 December 2020 Stage 1 Stage 2 Stage 3 Total (14) (28) 12 3 (27) (1) - - - (1) (8) (6) 2 - (12) (23) (34) 14 3 (40) An analysis of changes in the gross carrying value and corresponding ECL in relation to Residential mortgages during the year ended 31 December 2019 is as follows: Residential mortgages Stage 1 Stage 2 Stage 3 Total
 Gross carrying values as at 1 January 2019 New assets originated or purchased Assets repaid Transfers to stage 2 Transfers to stage 3 Foreign exchange adjustments At 31 December 2019 8,634 1,092 (4,467) (153) (118) 187 5,175 18 - (18) 153 - 3 156 215 - (58) - 118 13 288 8,867 1,092 (4,543) - - 203 5,619 Residential mortgages ECL as 1 January 2019 New assets originated or purchased Assets repaid Transfers to stage 1 Net remeasurement of ECL At 31 December 2019 Stage 1 Stage 2 Stage 3 Total (14) (7) 5 1 1 (14) - 1 - (1) (1) (1) - - - - (7) (7) (14) (6) 5 - (7) (22) An analysis of changes in the gross carrying value and corresponding ECL in relation to Residential mortgages during the year ended 31 December 2018 is as follows: Page 30 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 14 Loans to consumer (continued) Residential mortgages Stage 1 Stage 2 Stage 3 Total Gross carrying values as at 1 January 2018 New assets originated or purchased Assets repaid Transfers to stage 3 Foreign exchange adjustments At 31 December 2018 2,440 7,320 (1,125) (30) 29 8,634 150 - (72) (60) - 18 120 - - 90 5 215 2,710 7,320 (1,197) - 34 8,867 Residential mortgages ECL as 1 January 2018 New assets originated or purchased Assets repaid Net remeasurement of ECL At 31 December 2018 Stage 1 Stage 2 Stage 3 Total (4) (9) 3 (4) (14) - - - - - - - - - - (4) (9) 3 (4) (14) An analysis of changes in the gross carrying value and corresponding ECL in relation to consumer lending during the year ended 31 December 2020 is as follows: Consumer lending Stage 1 Stage 2 Stage 3 Total Gross carrying values as at 1 January 2020 New assets originated or purchased Assets repaid Transfers to stage 3 Foreign exchange adjustments At 31 December 2020 2,705 1,319 (1,485) (77) 166 2,628 77 64 (69) (8) - 64 723 147 (363) 85 2 594 3,505 1,530 (1,917) - 168 3,286 Consumer lending ECL as at 1 January 2020 New assets originated or purchased Assets repaid
 Transfers to stage 3 Net remeasurement of ECL At 31 December 2020 Stage 1 Stage 2 Stage 3 Total (21) (24) 31 (14) 6 (22) (10) - 13 (3) - - (293) (39) 60 17 12 (243) (324) (63) 104 - 18 (265) An analysis of changes in the gross carrying value and corresponding ECL in relation to consumer lending during the year ended 31 December 2019 is as follows: Consumer lending Stage 1 Stage 2 Stage 3 Total Gross carrying values as at 1 January 2019 New assets originated or purchased Assets repaid Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Foreign exchange adjustments At 31 December 2019 3,078 1,607 (1,890) 18 (29) (87) 8 2,705 195 41 (122) (18) 29 (50) 2 77 619 91 (129) - - 137 5 723 3,892 1,739 (2,141) - - - 15 3,505 Page 31 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 14 Loans to consumer (continued) Consumer lending ECL as at 1 January 2019 New assets originated or purchased Assets repaid Transfers to stage 1 Transfers to stage 2 Net remeasurement of ECL At 31 December 2019 Stage 1 Stage 2 Stage 3 Total (30) (20) 15 9 (3) 8 (21) (33) (1) 16 - 12 (4) (10) (212) (101) 107 (9) (9) (69) (293) (275) (122) 138 - - (65) (324) An analysis of changes in the gross carrying value and corresponding ECL in relation to consumer lending during the year ended 31 December 2018 is as follows: Consumer lending Stage 1 Stage 2 Stage 3 Total Gross carrying values as at 1 January 2018 New assets originated or purchased Assets repaid Transfers to stage 2 Transfers to stage 3 Foreign exchange adjustments At 31 December 2018 4,254 1,937 (2,743) (129) (250) 9 3,078 157 - (93) 129 - 2 195 535 - (166) - 250 - 619 4,946 1,937 (3,002) - - 11 3,892 Consumer lending ECL as at 1 January 2018 New assets originated or purchased Assets repaid Transfers to stage 2 Transfers to stage 3 Net remeasurement of ECL At 31 December 2018 Stage 1 Stage 2 Stage 3 Total (71) (85) 10 1 71 43 (31) (33) - 14 (1) - (13) (33) (329) -
 125 - (71) 63 (212) (433) (85) 149 - - 93 (276) The credit loss allowance for loans and advances to customers recognised in the period is impacted by a variety of factors, details of ECL measurement are provided in Note 7.
(b) Credit quality of loans to customers The bank is working on implementation its own internal grading system, which will define credit risk category based on the several factors, which has impact on the quality of the loans to customers by business segment.

Before implementation the mentioned internal grading system, the Bank is controlling its loan portfolio by four overdue buckets on daily basis and relevant actions are planned according to the information, retrieved after such analysis.
The following table provides information on the credit quality of loans to customers as at 31 December 2020: Loans to legal entities Corporate lending not overdue overdue more than 90 days Small and medium business lending not overdue overdue less than 30 days overdue more than 90 days Total loans to legal entities Stage 1 Stage 2 Stage 3 Total 206,043 206,043 - 20,422 20,377 45 - 226,465 - - - 1,865 - 1,865 207,908 206,043 1,865 39 39 - - 39 2,166 1,711 - 455 4,031 22,627 22,127 45 455 230,535 Page 32 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 14 Loans to consumer (continued) Loans to individuals Residential mortgages not overdue overdue less than 30 days overdue more than 30 days and less than 90 days overdue more than 90 days Consumer lending not overdue overdue less than 30 days overdue more than 30 days and less than 90 days overdue more than 90 days Total loans to individuals Total gross loans to customers Stage 1 2,773 2,345 428 Stage 2 144 34 Stage 3 1,269 1,104 - - 2,628 2,505 123 - - 5,401 231,866 - 110 - - - 165 64 64 - - - 208 247 594 271 28 17 277 1,863 5,894 Total 4,186 3,483 428 110 165 3,286 2,841 151 17 277 7,472 238,007 The following table provides information on the credit quality of loans to customers as at 31 December 2019: Stage 1 Stage 2 Stage 3 Total Loans to legal entities Corporate lending not overdue overdue more than 90 days Small and medium business lending not overdue overdue more than 90 days Total loans to legal entities Loans to individuals Residential mortgages not overdue overdue less than 30 days overdue more than 30 days and less than 90 days overdue more than 90 days Consumer lending not overdue overdue less than 30 days overdue more than 30 days and less than 90 days overdue more than 90 days Total loans to individuals Total gross loans to customers 126,884 126,884 - 15,236 15,236 - 142,120 5,175 4,804 371 - - 2,705 2,669 36 - - 7,880 150,000 - - - - - - - 156 - - 156 - 77 29 - 48 - 233 233 1,632 -
 1,632 3,358 1,174 2,184 4,990 288 155 - - 133 723 376 6 - 341 1,011 6,001 128,516 126,884 1,632 18,594 16,410 2,184 147110 5,619 4,959 371 156 133 3,505 3,074 42 - 48 341 9,124 156,234 The following table provides information on the credit quality of loans to customers as at 31 December 2018: Loans to legal entities Corporate lending not overdue Small and medium business lending not overdue overdue more than 90 days Total loans to legal entities Stage 1 Stage 2 Stage 3 Total 130,484 130,484 1,526 1,526 - - 132,010 132,010 9,467 9,467 463 463 - - 139,951 1,989 2,550 108 2,442 2,550 12,480 10,038 2,442 144,490 Page 33 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 14 Loans to consumer (continued) Loans to individuals Residential mortgages not overdue overdue less than 30 days overdue more than 90 days Consumer lending not overdue overdue less than 30 days overdue more than 30 days and less than 90 days overdue more than 90 days Total loans to individuals Total gross loans to customers Stage 1 8,634 8,434 200 - Stage 2 18 18 - - Stage 3 215 41 - 174 3,078 2,917 161 - - 11,712 151,663 195 61 3 131 - 213 2,202 619 189 - 16 414 834 3,384 Total 8,867 8,493 200 174 3,892 3,167 164 147 414 12,759 157,249 (c) Analysis of collateral and other credit enhancements The amount and type of collateral required depends on an assessment of the credit risk of the counterparty.
Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained are as follows: ► ► For commercial lending, charges over real estate properties, inventory, trade receivables, movable properties, sureties; For retail lending, mortgages over residential properties, movable properties and sureties.
The below table provides an analysis of the current fair values of collateral held and credit enhancements for credit- impaired (stage 3) assets.

Dependent on the level of collateral, some Stage 3 exposures may not have individual ECLs when the expected value of the collateral is greater than the LGD, even in if the future value of collateral is forecast using multiple economic scenarios.
However, the Stage 3 ECL can be higher than net exposure show below when the future value of collateral, measured using multiple economic scenarios, is expected to decline.
Maximum Fair value of collateral held under the base scenario Net exposure Surplus collateral Total collateral Other* exposure to credit risk 5,894 1,865 Real estate property 16,168 5,902 31 December 2020 Corporate lending Small and medium business lending Residential mortgages Consumer lending 3,979 1,865 (14,635) (5,902) 2,166 6,615 1,876 (6,398) 1,269 594 2,361 1,290 - 238 (1,110) (1,225) 5,512 1,865 2,093 1,251 303 382 - 73 18 291 * Vehicles, sureties, machinery, other fixed assets, inventory and trade receivables.
Maximum Fair value of collateral held under the base scenario Net exposure Surplus collateral Total collateral Other* exposure to credit risk 6,001 1,632 Real estate property 11,491 2,810 5,029 1,632 (10,855) (2,810) 3,358 7,297 3,137 (7,083) 288 723 540 844 33 227 (285) (677) 31 December 2019 Corporate lending Small and medium business lending Residential mortgages Consumer lending * Vehicles, sureties, machinery, other fixed assets, inventory and trade receivables.
5,665 1,632 3,351 288 394 335 - 6 - 329 Associated ECL 395 37 103 12 243 Associated ECL 530 - 230 7 293 Page 34 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 14 Loans to consumer (continued) Maximum Fair value of collateral held under the base scenario Net exposure Surplus collateral Total collateral Other* exposure to credit risk 3,384 - Real estate property 8,730 - 2,795 - (8,383) - 2,550 7,619 2,516 (7,611) 215 619 449 662 41 238 (279) (493) 31 December 2018 Corporate lending Small and medium business lending Residential mortgages Consumer lending 3,140 - 2524 209 407 244 - 26 6 212 Associated ECL 452 - 240 - 212 * Vehicles, sureties, machinery, other fixed assets, inventory and trade receivables The following table shows carrying value of loans on which no ECL was recognized because of existence of collateral as at 31 December 2020: Loans to legal entities Corporate lending Small and medium business lending Total loans to legal entities Loans to individuals Residential mortgages Consumer lending Total loans to individuals Gross loans to customers 2020 6,810 5,856 12,666 2,229 1,803 4,032 16,698 The following table shows carrying value of loans on which no ECL was recognized because of existence of collateral as at 31 December 2019: Loans to legal entities Corporate lending Small and medium business lending Total loans to legal entities Loans to individuals Residential mortgages Consumer lending Total loans to individuals Gross loans to customers 2019 29,398 6,630 36,028 3,160 1,098 4,258 40,286 The following table shows carrying value of loans on which no ECL was recognized because of existence of collateral as at 31 December 2018: Loans to legal entities Corporate lending Small and medium business lending Total loans to legal entities Loans to individuals Residential mortgages Consumer lending Total loans to individuals Gross loans to customers 2018 39,363 5,669 45,032 6,133 1,736 7,869 52,901 Page 35 of 64 JSC Isbank Georgia Notes to the
 Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 14 Loans to consumer (continued) (d) Industry and geographical analysis of the loan portfolio Loans to customers were issued to customers located within Georgia who operate in the following economic sectors: 2020 2019 2018 Construction and land development Financial institutions Energy Consumer goods Service Hotels, restaurant and tourism Other sector Real estate management Production and trade of clothes, shoes and textiles Healthcare Loan to individuals Telecommunication Agriculture Total loan to customers Less -allowance for impairment Total net loans to customers (1,052) 236,955 (814) 155,420 (778) 156,471 (e) Significant credit exposures As at 31 December 2020 the Bank has loans issued to ten borrowers or groups of connected borrowers (2019: five; 2018: seven) with carrying values that individually exceed 10% of equity.
The gross value of these loans as at 31 December 2020 is GEL 116,435 thousand (2019: GEL 54,261 thousand; 2018: GEL 73,033 thousand).

(f) Loan maturities The maturity of the loan portfolio is presented in Note 22 which shows the remaining period from the reporting date to the contractual maturity of the loans.

Due to the short-term nature of the loans issued by the Bank, it is likely that many of the loans will be renewed at maturity.
Accordingly, the effective maturity of the loan portfolio may be significantly longer than the contractually agreed term.

(g) Modified and restructured loans The Bank derecognises a financial asset, such as a loan to a customer, when the terms and conditions have been renegotiated to the extent that, substantially, it becomes a new loan, with the difference recognised as a derecognition gain or loss, to the extent that an impairment loss has not already been recorded.
The newly recognised loans are classified as Stage 1 for ECL measurement purposes.

If the modification does not result in cash flows that are substantially different, the modification does not result in derecognition.

Based on the change in cash flows discounted at the original EIR, the Bank records a modification gain or loss, to the extent that an impairment loss has not already been recorded.
During 2020, the Bank has modified the terms and conditions of certain corporate and commercial loans, including introduction of payment holidays, as part of the measures introduced by the Government related to consequences of COVID-19 pandemic.

The Bank considered these modifications to be non-substantial.
Page 36 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 15 Investment securities Investment securities as at 31 December are as follows: Debt securities at FVOCI Treasury bonds of Ministry of Finance Georgia Treasury bonds of Republic of Turkey Total investment securities 2020 2019 2018 7,485 10,553 18,038 21,868 11,836 33,704 15,022 10,439 25,461 All Investment securities are allocated to Stage 1.
The ECL recognized for investment securities as at 31 December 2020 was GEL 105 thousand and there were no significant movements in ECL during the year (Note 7).
Credit rating of Investment securities as at 31 December 2020, 2019 and 2018 stands as follow: BB BB- 2020 7,485 10,553 18,038 2019 21,868 11,836 33,704 2018 10,439 15,022 25,461 Country rating for Republic of Georgia stands at BB with stable outlook as assigned by international rating Country rating for Republic of turkey stands at BB- With stable outlook as assigned by international rating agency.
Page 37 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 16 Property, equipment, intangible and right-of-use assets Property, equipment, intangible and right-of-use assets as of December 31 2020, 2019 and 2018 comprise: Cost Balance at 1 January 2018 Additions Balance at 31 December 2018 Effect of adoption of IFRS 16 as at 1 January 2019 Additions Write off Balance at 31 December 2019 Additions Balance at 31 December 2020 Depreciation and Amortization Balance at 1 January 2018 Depreciation and Amortization For the year Balance at 1 January 2019 Depreciation and Amortization For the year Write off Balance at 31 December 2019 Depreciation and Amortization For the year Balance at 31 December 2020 Carrying amount at 31 December 2018 Carrying amount at 31 December 2019 Carrying amount at 31 December 2020 Leasehold Improvements Computers and office equipment Furniture and fixtures Motor vehicles Intangible assets Building Total Right-of-use assets 2,054 2 2,056 - - - 2,056 7 2,063 (1,396) (393) (1,789) (62) - (1,851) (47) (1,898) 267 205 165 818 75 893 - 12 (12) 893 561 1,454 (454) (169) (623) (138) 9 (752) (133) (885) 270 141 568 370 12 382 - 14 - 396 3 399 (242) (75) (317) (48) - (365) (33) (398) 65 31 1 167 171 338 - 83 (52) 369 208 577 (131) (59) (190) (48) 52 (186) (61) (247) 148 183 330 729 - 729 - - - 729 303 1,032 (386) (109) (495) (109) - (694) (80) (684) 234 125 348 - - - 2,737 - - - - 2,737 - - - (880) - (880) (915) (1,795) - 1,856 942 4,138 260 4,398 2,737 109 (64) 7,180 1,082 8,262 (2,609) (805) (3,414) (1,285) 61 (4,638) (1,269) (5,907) 984 2,541 2,354 Page 38 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 16 Property, equipment, Intangible assets and Right-of-use assets (continued) The intangible assets comprised computer software and licenses.
Set out below are the carrying amounts of lease liabilities and the movements during the period: As at 1 January 2020 Accrual of interest Foreign exchange adjustments Payments As at 31 December 2020 17 Other assets and liabilities 2020 1,932 94 61 (1,003) 1,084 Other assets and liabilities as at December 2020, 31 December 2019 and 31 December 2018 comprise the following: Other assets Settlement operations Income tax asset Repossessed assets Receivables from problematic borrowers Prepaid expenses Other Total other assets Other liabilities Settlement operations Finance Lease Cash Cover Other Income tax liability Total other liabilities 2020 650 821 2,355 443 445 35 4,749 203 1,084 997 698 - 2,982 2019 2018 625 - - 135 - 52 812 311 1,932 1,051 351 854 4,499 11,084 107 - 63 - 3 11,257 8,272 - - 28 - 8,300 18 Amounts due to credit institutions Amounts due to credit institutions as at December 2020, 31 December 2019 and 31 December 2018 comprise the following: Vostro accounts Term deposits Short-term loan from NBG 2020 2019 2018 16,014 115,506 5,001 136,521 33,131 100,525 - 133,656 13,672 92,837 - 106,509 As at 31 December 2020 the Bank has placements from four banks (2019: three banks; 2018: three banks) with carrying values that individually exceed 10% of equity.
The gross value of these balances as at 31 December 2020 is GEL 126,272 thousand (2019: GEL 129,486 thousand; 2018: GEL 106,509 thousand).

Loans from the National Bank of Georgia represent short-term GEL refinancing facilities used by the Bank to uphold its liquidity needs in GEL.
Page 39 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 19 Amounts due to customers Amounts due to customers as at December 2020, 31 December 2019 and 31 December 2018 comprise the following: Current accounts and demand deposits Retail SME Corporate Term deposits Retail SME Corporate 2020 2019 2018 11,503 6,230 20,086 37,819 17,393 695 19,913 38,001 4,312 1,486 11,124 16,922 16,075 2,991 874 19,940 2,877 2,895 6,202 11,974 16,236 3,993 6,149 26,378 Total amounts due to customers 75,820 36,862 38,352 As at 31 December 2020 the bank does not have any customer deposits balances (2019: None; 2018: GEL 225 thousand) that serve as collateral for loans granted by the Bank.
As at 31 December 2020 the Bank does not have placements from any customers (2019: none; 2018: none;) with carrying value that individually exceed 10% of equity.
20 Other borrowed funds and subordinated debt Other borrowed funds and subordinated debt as at December 2020, 31 December 2019 and 31 December 2018 comprise the following: Borrowings from Parent Borrowings Other financial institutions Total other borrowed funds Subordinated loan from the Parent Total other borrowed funds and subordinated debt 2020 2019 2018 - 29,188 29,188 - 29,188 - 15,674 15,674 - 15,674 13,093 18,823 31,916 - 31,916 The bank repaid the subordinated loan from the Parent in the amount of USD 16,000 thousand (GEL 39,162 thousand), and the Parent increased share capital with the same amount on 25 July 2018.
Changes in liabilities arising from financing activities are as follows: Carrying amounts at 31 December 2018 Proceed from issue Redemption Foreign currency translation Other Carrying amount at 31 December 2019 Proceed from issue Redemption Foreign currency translation Other Carrying amount at 31 December 2020 Other borrowed funds 31,916 - (17,708) 1,405 61 15,674 16,219 (4,875) 2,168 2 29,188 Subordinated loans - - - - - - - - - - - Total liabilities form financing activities 31,916 - (17,708) 1,405 61 15,674 16,219 (4,875) 2,168 2 29,188 Page 40 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 21 Capital management The Bank maintains an activity managed capital base to cover risks inherent in the business and is meeting the capital adequacy requirements of the local banking supervisor, National Bank of Georgia.
The adequacy of the Bank’s capital is monitored using, among other measures, the rules and ratios established by Basel Committee on Banking Supervision (BIS rules/ratios) and adopted by the National Bank of Georgia in supervising the bank.

The Bank defines as capital those items defined by statutory regulation as capital for credit institutions.
Under the current capital requirements set by the NBG, banks have to maintain a ratio of capital to risk weighted exposures (statutory capital ratio) above the prescribed minimum level.
The primary objectives of the Bank’s capital management are to ensure that the Bank complies with externally imposed capital requirements set by the NBG and to safeguard the Bank’s ability to continue as a going concern.The compliance with the capital adequacy ratios set by the NBG is monitored monthly with the reports outlining their calculation and are reviewed and signed by the Bank’s CEO and CFO.
Basel I Under the NBG Basel I capital requirements banks have to maintain a ratio of regulatory capital to risk weighted exposures (“statutory capital ratio”) above the minimum level of 9.6% and a ratio of Tier 1 capital to risk weighted exposures above the minimum level of 6.4%.

The bank was in compliance with the minimum requirement of NBG.

2017 is the last year for Basel I capital requirement and it was removed fully from January 2018.
As at 31 December 2017 minimal requirement of capital to risk weighted exposures was as follow: Common Equity Tier 1: 7%; Tier 1: 8.5% and Regulatory Capital: 10.5%.

Basel III In December 2017, the NBG has introduced approved amendments to the “Regulation on Capital Adequacy Requirements for Commercial Banks”.
Under the updated capital framework, capital requirements are divided into Pillar 1 Requirements for Common Equity Tier 1, Tier 1 and Regulatory Capital and additional buffers under Pillar 1 and Pillar 2.
Pillar 1 Pillar 2 ► ► ► ► ► ► ► The capital conservation buffer (which was incorporated in minimum capital requirements) is separated and set at 2.5%; A countercyclical capital buffer is currently set at 0%; A systemic risk buffer will be introduced for systematically important banks over the 4 years period.
A currency induced credit risk (CICR) buffer replaced conservative weighting for un-hedged FX loans denominated in foreign currencies; Concentration buffer for sectoral and single borrower exposure will be introduced; A net stress buffer will be introduced based on stress testing results provided by the Group; A General Risk-assessment Programme (GRAPE) buffer defined by the regulator, based on the Bank’s specific risks.
In addition, specific PTI (payment to income) and LTV (loan to value) thresholds were introduced based on the new methodology.

Exposures that do not meet pre-defined PTI and LTV limits are subject to weighting at higher rates.
Supervisory plan of the National Bank of Georgia with regard to COVID-19 With the intention to reduce the negative effects caused by coronavirus (COVID-19) pandemic and promote Georgian economy, the National Bank of Georgia has developed a temporary supervisory plan, which is in full compliance with the recommendations of the International Monetary Fund, European Central Bank and other leading financial authorities.

Immediate measures: 1).


Postponement of growth (Phase-in) of Credit Risk Concentration Buffer (HHI) and Net GRAPE Buffer on Tier 1 capital (CET 1) and Tier 1 (Tier 1) in March, 2020; Page 41 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 21 Capital management (continued) 2).

Elimination of capital conservation buffer requirement (2.5%); 3).

Decreasing the foreign currency induced credit risk buffer by 2/3.

4).
4).

Postponement of growth (Phase-in) of deduction of the provisions of foreign currency assets, created according to the rule of “Asset classification and possible loan losses” for the open currency position limit of the commercial banks.

NBG has also put in place a moratorium on any regulatory breaches of commercial banks caused by external factors such as additional credit losses, foreign exchange rate fluctuations and so on.
The NBG requires the Bank to maintain a minimum total capital adequacy ratio of 16.63%, Tier 1 Capital ratio of 8.10% and Core Tier 1 Capital ratio of 6.07% of risk-weighted assets, computed based on Basel III requirements.
The Bank’s capital adequacy ratios for the year ended 31 December calculated in accordance with NBG Basel II/III requirements were as follows: Share capital Retained earnings Deductions Total common equity and Tier 1 Capital 2020 2019 2018 69,162 69,162 69,162 14,154 11,357 (318) (111) 5,549 (220) 82,998 80,408 74,491 Subordinated debt (included in regulatory capital) - - - General loans loss provision (up to 1.25% of risk-weighted exposures) 4,423 3,208 3,394 Total regulatory capital Risk-weighted exposures 87,421 83,616 77,885 Credit risk-weighted exposure (balance and off-balance items) 353,850 256,660 271,488 Market risk-weighted exposures Operational risk-weighted exposures Total risk-weighted exposures Common equity Tier 1 ratio Trial 1 capital ratio Total regulatory capital ratio Common equity Tier 1 ratio minimum requirements Trial 1 capital ratio minimum requirement Total regulatory capital minimum requirement 1,464 1,503 346 26,884 22,161 18,304 382,198 280,324 290,138 22% 22% 23% 6% 8% 17% 29% 29% 30% 9% 11% 20% 26% 26% 27% 9% 12% 20% The risk-weighted exposures are measured by means of a hierarchy of risk weights classified according to the nature and reflecting an estimate of credit, market and other risks associated with each asset and counterparty, taking into account any eligible collateral or guarantees.
22 Risk management, corporate governance and internal control (a) Corporate governance framework The Bank is established as a bank in accordance with Georgian law.

The supreme governing body of the Bank is the Supervisory Council.

The Supervisory Council makes strategic decisions on the Bank’s operations.

The Supervisory Council elects the Board of Directors.

The Board of Directors is responsible for overall governance of the Bank’s activities.
(b) Internal control policies and procedures Page 42 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (continued) Management has responsibility for the development, implementation and maintaining of internal controls in the Bank that are commensurate with the scale and nature of operations.
The purpose of internal controls is to ensure: ► ► ► ► ► ► Proper and comprehensive risk assessment and management; Proper business and accounting and financial reporting functions, including proper authorization, processing and recording of transactions; Completeness, accuracy and timeliness of accounting records, managerial information, regulatory reports, etc.
; Reliability of IT-systems, data and systems integrity and protection; Prevention of fraudulent or illegal activities, including misappropriation of assets; Compliance with laws and regulations.

Management is responsible for identifying and assessing risks, designing controls and monitoring their effectiveness.

Management monitors the effectiveness of the Bank’s internal controls and periodically implements additional controls or modifies existing controls as considered necessary.
Management believes that the Bank complies with the NBG requirements related to risk management and internal control systems, including requirements related to the internal audit function, and that risk management and internal control systems are appropriate for the scale, nature and complexity of operations (c) Risk management policies and procedures Management of risk is fundamental to the business of banking and forms an essential element of the Bank’s operations.
The Bank’s strong risk governance reflects the importance placed by Bank’s Risks, Ethics and Compliance Committee on shaping the risk strategy and managing credit, financial and non-financial risks.
All components necessary for comprehensive risk governance are embedded into risk organization structure: enterprise risk management; credit, financial and non-financial risks management; risk reporting and supporting IT infrastructure; cross-risk analytical tools and techniques such as capital adequacy management and stress-testing.

The bank is exposed to credit risk, liquidity risk and market risk.

It is also subject to various operating and business risks.
The risk management policies aim to identify, analyse and manage the risks faced by the Bank, to set appropriate risk limits and controls, and to continuously monitor risk levels and adherence to limits.

Risk management policies and procedures are reviewed regularly to reflect changes in market conditions, products and services offered and emerging best practice.
Management has overall responsibility for the oversight of the risk management framework, overseeing the management of key risks and reviewing its risk management policies and procedures as well as approving significantly large exposures.

Management is responsible for monitoring and implementing risk mitigation measures, and ensuring that the Bank operates within established risk parameters.
CRO is responsible for the overall risk management and compliance functions, ensuring the implementation of common principles and methods for identifying, measuring, managing and reporting both financial and non-financial risks.

He reports directly to Risk Committee of Supervisory Council.

Credit, market and liquidity risks, both at the portfolio and transactional levels, are managed and controlled through a system of Credit Committees and Risk Management Division and ALCO.
Such control arrangements guarantee that the Bank takes informed risk-taking decisions that are adequately priced, avoiding taking risks that are beyond the Bank’s established threshold.

Both external and internal risk factors are identified and managed throughout the organization.

Particular attention is given to identifying the full range of risk factors and determining the level of assurance over current risk mitigation procedures.
Page 43 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (continued) (d) Market risk Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange rates and equity prices.
Market risk arises from open positions in interest rate instruments, which are exposed to general and specific market movements and changes in the level of volatility of market prices and foreign currency rates.

The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk.
The Bank manages its market risk by setting open position limits in relation to financial instruments, interest rate maturity and currency positions.

These are monitored on a regular basis and reviewed and approved by management.

(i) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
Interest rate risk arises from potential changes in the market interest rates that can adversely affect the fair value or future cash flows of the financial instruments.

This risk can arise from maturity mismatches of assets and liabilities, as well as from the re-pricing characteristics of such assets and liabilities.

Interest margins may increase as a result of such changes, but may also reduce or create losses in the event that unexpected movements occur.
Interest rate gap analysis Interest rate risk is managed principally through monitoring interest rate gaps.
A summary of the interest gap position for major financial instruments is as follows: Less than 3 months 3-6 months 6-12 months 1-5 years More than 5 years Carrying amount 31 December 2020 Assets Cash and cash equivalents Amounts due from banks Mandatory reserves at the NBG Investment securities Loans to customers Liabilities Accounts and deposits form banks Current accounts and deposits from customers Other borrowed funds and subordinated debt 32,485 9,190 36,217 2,999 67,177 148,068 - - - - 21,392 21,392 - - - 1,490 36,442 37,932 - - - 13,549 74,848 88,397 90,599 40,674 5,248 - 49,520 2,052 23,007 1,241 - - - - 37,096 37,096 - - - 140,119 7,949 2,613 45,339 (23,947) 2,548 30,803 7,129 24,027 25,268 63,129 - - 37,096 32,485 9,190 36,217 18,038 236,955 332,885 136,521 75,820 29,188 241,529 91,356 31 December 2019 Assets Cash and cash equivalents Amounts due from banks Mandatory reserves at the NBG Investment securities Loans to customers Less than 3 months 3-6 months 6-12 months 1-5 years More than 5 years Carrying amount 57,013 - - 1,627 24,609 - 22,209 103,831 - 9,613 23,876 35,116 - - - - - - - - - 4,961 28,099 33,060 15,991 52,778 68,769 3,139 28,458 31,597 57,013 1,627 24,609 33,704 155,420 272,373 Liabilities Accounts and deposits form banks 82,763 Current accounts and deposits from customers Other borrowed funds and subordinated debt 25,067 - 16,146 34,747 - - 133,656 3,526 6,360 1,909 - 36,862 2,291 2,230 107,830 (3,999) 21,963 13,153 43,337 (10,277) 11,153 13,062 55,707 - - 31,597 15,674 186,192 86,181 Page 44 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (continued) 31 December 2018 Assets Cash and cash equivalents Amounts due from banks Mandatory reserves at the NBG Investment securities Loans to customers Liabilities Accounts and deposits form banks Current accounts and deposits from customers Other borrowed funds and subordinated debt Less than 3 months 38,031 4,878
 26,567 - 3-6 months 6-12 months 1-5 years More than 5 years - 73 - - - 204 - - - - - - - 6,430 44,471 51,105 13,612 48,700 62,312 5,419 44,449 49,868 4,654 74,130 14,197 14,270 Carrying amount 38,031 5,155 26,567 25,461 156,471 251,685 46,987 - 44,339 15,183 - 106,509 25,133 8,029 4,530 660 - 38,352 635 72,755 1,375 1,780 9,809 4,461 4,584 53,453 (2,348) 24,917 40,760 21,552 - - 49,868 31,916 176,777 74,908 Average nominal interest rates The table below displays average nominal interest rates for interest-bearing assets and liabilities as at 31 December 2020, 2019 and 2018.
These interest rates are an approximation of the yields to maturity of these assets and liabilities.
2020 2019 2018 Average nominal interest Average nominal interest Average nominal interest rate % USD GEL EUR GEL rate % USD EUR GEL rate % USD EUR Interest bearing assets Cash and cash equivalents 7.15% 1.25% Amounts due from banks 0% Investment securities Loans to customers Interest bearing liabilities Deposits and balances from banks Deposits from customers Other borrowed funds and 7.93% 5.14% 1.36% 1.87% 1.13% 0.56% 0% 3.5% 3.8% 2.9% 0.9% 0.5% 0% 8.9% 4.2% 3.4% 1% 0.6% subordinated debt 0% 4% 0% 0% 5.4% 0% 0% 6.4% 1.9% Interest rate sensitivity analysis The management of interest rate risk, based on an interest rate gap analysis, is supplemented by monitoring the sensitivity of financial assets and liabilities.
An analysis of the sensitivity of net profit or loss and equity (net of taxes) to changes in interest rates (repricing risk, assuming that all other variables, such as foreign currency exchange rates remain constant) based on a simplified scenario of a 100 basis point (bps) symmetrical fall or rise in all yield curves and positions of interest-bearing assets and liabilities existing as at 31 December 2019, 2018 and 2017, is as follows: Page 45 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (continued) 100 bps parallel fall 100 bps parallel rise 2020 (175) 175 2019 (125) 125 Sensitivity of equity (net of taxes) to a 100 bps shift of yield curve as at 31 December was as follows: 100 bps parallel fall 100 bps parallel rise 2020 (149) 149 2019 (106) 106 2018 (84) 84 2018 (72) 72 Currency risk Currency risk is the risk that the fair value or the future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates.
The Bank constantly monitors that the NBG limits of currency positions against regulatory capital are maintained.

The Bank has assets and liabilities denominated in several foreign currencies.
The following table shows the foreign currency exposure structure of financial assets and liabilities as at 31 December 2020: Assets Cash and cash equivalents Amounts due from banks Mandatory reserve at the NBG Investment securities Loans to customers Other financial assets Total assets Liabilities Deposits and balances form banks Current accounts and deposits from customers Other borrowed funds and subordinated debt Other liabilities Total liabilities Net position EUR USD TRY GBP Total 2,469 - 18,688 - 73,938 217 95,312 24,489 9,121 17,530 10,553 68,670 72 130,435 90,584 40,226 4,812 60,585 - 6 95,402 (90) 29,188 1,054 131,053 (618) 24 - - - - 3 27 - 7 - - 7 20 710 - - - - - 710 27,692 9,121 36,218 10,553 142,608 292 226,484 711 131,521 2 65,406 - - 713 (3) 29,188 1,060 227,175 (691) Page 46 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (continued) The following table shows the foreign currency exposure structure of financial assets and liabilities as at 31 December 2019: Assets Cash and cash equivalents Amounts due from banks Mandatory reserve at the NBG Investment securities Loans to customers Other financial assets Total assets Liabilities Deposits and balances form banks Current accounts and deposits from customers Other borrowed funds and subordinated debt Other liabilities Total liabilities Net position EUR USD TRY GBP Total 17,516 - 8,262 - 42,988 155 68,921 32,655 1,630 16,348 11,836 48,076 95 110,640 56 - - - - - 56 600 - - - - - 600 50,827 1,630 24,610 11,836 91,064 250 180,217 68,605 64,453 - 598 133,656 1,128 29,285 - 689 70,422 (1,501) 15,674 848 110,260 380 39 - - 39 17 2 30,454 - - 600 15,674 1,537 181,321 - (1,104) The following table shows the foreign currency exposure structure of financial assets and liabilities as at 31 December 2018: EUR USD TRY GBP Total Assets Cash and cash equivalents Amounts due from banks Mandatory reserve at the NBG Investment securities
 Loans to customers Other financial assets Total assets Liabilities Deposits and balances form banks Current accounts and deposits from customers Other borrowed funds and subordinated debt Other liabilities Total liabilities Net position 17,775 509 10,678 - 22,947 148 52,057 6,993 4,646 15,889 10,440 77,628 5,421 121,017 37,930 68,183 1,112 31,658 12,986 4 52,032 25 18,930 247 119,018 1,999 146 - - - - - 146 51 30 - - 81 65 344 - - - - - 344 25,258 5,155 26,567 10,440 100,575 5,569 173,564 345 106,509 - 32,800 - - 345 (1) 31,916 251 171,476 2,088 A weakening of the Gel, as indicated below, against the following currencies at 31 December 2020, 2019 and 2018, would have increased (decreased) equity and profit or loss by the amounts shown below.
This analysis is on a net-of- tax basis, and is based on foreign currency exchange rate variances that the Bank considered to be reasonably possible at the end of the reporting period.

The analysis assumes that all other variables, in particular interest rates, remain constant.
Page 47 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (continued) 20% appreciation of USD against GEL 20% appreciation of EUR against GEL 20% appreciation of TRY against GEL 20% appreciation of GBP against GEL 2020 (105) (15) 3 (1) 2019 65 (256) 3 - 2018 340 4 11 - A strengthening of the GEL against the above currencies at 31 December 2020, 2019 and 2018 would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remained constant.
(e) Credit risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations.

The Bank has policies and procedures in place to manage credit exposures (both for recognized financial assets and unrecognized contractual commitments), including guidelines to limit portfolio concentration and the establishment of a Credit Committee to actively monitor credit risk.
The credit policy is reviewed and approved by management.

The credit policy establishes: ► ► ► ► ► Procedures for reviewing and approving loan credit applications; Methodology for the credit assessment of borrowers (legal entities and individuals); Methodology for the evaluation of collateral; Credit documentation requirements; Procedures for the ongoing monitoring of loans and other credit exposures.
For all loans to legal entities the Bank performs due diligence that focuses on the customer’s business and financial performance.

Exposure to credit risk is also managed, in part, by obtaining collateral and personal guarantees.

Valuation of collateral is performed by independent experts for loans mentioned above.

The maximum exposure to credit risk is generally reflected in the carrying amounts of financial assets in the statement of financial position and unrecognized contractual commitment amounts.
The impact of the possible netting of assets and liabilities to reduce potential credit exposure is not significant.

Credit-related commitments risks The Bank makes available to its customers guarantees which may require that the Bank make payments on their behalf.

They expose the Bank to similar risks to loans and these are mitigated by the same control processes and policies.
The maximum exposure to credit risk for the components of the statement of financial position, including derivatives, before the effect of mitigation through the use of master netting and collateral agreements, is best represented by their carrying amounts.

Where financial instruments are recorded at fair value, the carrying value represents the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.
Impairment assessment The Bank calculates ECL based on several probability-weighted scenarios to measure the expected cash shortfalls, discounted at an approximation to the EIR.

A cash shortfall is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive.
The mechanics of the ECL calculations are outlined below and the key elements are as follows: PD The Probability of Default is an estimate of the likelihood of default over a given time horizon.

A default may only happen at a certain time over the assessed period, if the facility has not been previously derecognised and is still in the portfolio.
EAD The Exposure at Default is an estimate of the exposure at a future default date, taking into account Page 48 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (continued) expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdowns on committed facilities, and accrued interest from missed payments.
LGD The Loss Given Default is an estimate of the loss arising in the case where a default occurs at a given time.

It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, excluding the realisation of any collateral.

It is usually expressed as a percentage of the EAD.

LGL The Loss Given Liquidation represents the percentage of the exposure that cannot be recovered from collateral liquidation if the exposure is defaulted.
The ECL allowance is based on the credit losses expected to arise over the life of the asset (the lifetime expected credit loss or LTECL), unless there has been no significant increase in credit risk since origination, in which case, the allowance is based on the 12 months’ expected credit loss (12m ECL).

The 12m ECL is the portion of LTECL that represent the ECLs that result from default events on a financial instrument that are possible within the 12 months after the reporting date.
Both LTECL and 12mECL are calculated on an individual basis.

The Bank has established a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument’s credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument.
Based on the above process, the Bank groups its loans into Stage 1, Stage 2 and Stage 3, as described below: Stage 1: When loans are first recognised, the Bank recognises an allowance based on 12m ECL.

Stage 1 loans also include facilities where the credit risk has improved and the loan has been reclassified from Stage 2.

Stage 2: When a loan has shown a significant increase in credit risk since origination, the Bank classifies the loan as Stage 2 loan and records an allowance for the LTECL.
Stage 2 loans also include facilities, where the credit risk has improved and the loan has been reclassified from Stage 3.

Stage 3: Loans considered credit-impaired.

The Bank records an allowance for the LTECL.

POCI: Purchased or originated credit impaired (POCI) assets are financial assets that are credit impaired on initial recognition.

POCI assets are recorded at fair value at original recognition and interest revenue is subsequently recognised based on a credit-adjusted EIR.
ECL are only recognised or released to the extent that there is a subsequent change in the lifetime expected credit losses.

Definition of default and cure The Bank’s definition of default is based on quantitative and qualitative criteria.
An instrument is classified as credit impaired if: ► ► ► Payments of interest, principal or fees by obligor are overdue for more than 90 days; or If a problematic restructuring of a loan took place, which otherwise would become defaulted; or There is a detrimental impact on the estimated future cash flows, when bankruptcy or insolvency proceedings of enforced liquidation have commenced or there is other evidence that payment obligations will not be fully met.
Once financial instrument is classified to Stage 2 it remains so until following two conditions are met: 1.

2.

The financial instrument should fulfil requirements for standard loan category as defined by NBG; Overdue days and probation period conditions should be met.

If these two conditions are met, then the instrument is classified as 1.
A loan is classified as standard if: ► ► ► The payments are done on time or overdue days do not exceed 30 days; The borrower’s liquidity, capital and loan repayment capacity is stable; The borrower is financially sufficiently strong to absorb medium level stress outcomes, and has enough liquidity to service all liabilities.
Page 49 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (continued) As for overdue days and probation period, for non-restructured Stage 2 instruments, probation period is 6 months, during which the instrument must not fall in more than 30 days overdue.
For restructured performing Stage 2 financial instrument the probation period is 1 year (during which it should not fall in more than 30 days overdue and fulfil standard loan category requirements) after which the instrument is reclassified to Stage 1.
Cure period for non-restructured Stage 3 financial instruments is 6 months, after which the instrument is classified at Stage 1 if during the probation period the financial instrument was not more than 30 days overdue and fulfils standard loan category requirements, and is classified at Stage 2 if the instrument was 30-90 days overdue during the cure period.
For restructured Stage 3 financial instrument the cure period is six months, after which the instrument is classified as Stage 2 (Performing Restructured) if the instrument was not more than 90 days overdue during the cure period.
As soon as the financial instrument is classified as Performing Restructured, starts one year probation period, after which the instrument is classified as Stage 1 if the instrument was not more than 30 days overdue during the probation period and fulfils standard loan category requirements.

If the instrument falls in 30-90 days overdue it remains in Stage 2.

One year probation period starts from the last month when the instrument last recovered from 30-90 days overdue.
PD estimation process For retail and corporate portfolios PD is estimated through macro model, which describes relationship between historical PDs for retail and corporate portfolios and macroeconomic variables such as real GDP growth, USD/GEL exchange rate and unemployment level.

Based on estimation results and predicted macro variables provided by the NBG conditional retail and corporate PDs are forecasted.
The model will be re-estimated annually and other macroeconomic variables will be incorporated if they improve explanatory power of the model.

With the forecasted conditional PD’s migration matrices are constructed, from which unconditional marginal PD’s are calculated that are further adjusted by age of the instrument in the portfolio.

PD for stage 3 financial instruments is considered as 100%.
For the loans, on which the Bank has surety from parent companies of the borrower, the Bank uses PDs of their parents.

Exposure at default The exposure at default (EAD) is calculated differently for Stage 1, Stage 2 and Stage 3 financial instruments.

EAD are reduced by cash cover amounts.

Off-balance commitments are considered through Cash Conversion Factor (CCF), specifically by 100% for corporate commitments and 50% for retail commitments.
For Stage 1, the EAD are calculated as a monthly average of outstanding amount of loans and off balance commitments taking into account CCF and cash cover amounts by the end of 12 months from the reporting date.

For Stage 2 and Stage 3, the EAD is calculated as the outstanding amount of the instrument by the reporting date taking into account CCF and cash cover amounts.

Loss given default For corporate and retail lending assets, LGD values are assessed annually.
LGD is defined as the likely loss arising in case of a counterparty defaults for unsecured exposures.

It provides an estimation of the exposure that cannot be recovered in a default event and therefore captures the severity of a loss.

LGD rate are calculated for corporate and retail portfolios.

LGD is statistically calculated based on historical loan recovery data and takes into account historical losses incurred on unsecured exposures.
While calculation LGD outlier recoveries are excluded from the calculation.

LGD is expressed as a percentage of the EAD.

Loss Given Liquidation of collateralized exposures (LGL): LGL represents the percentage of the exposure that cannot be recovered from collateral liquidation if the exposure is defaulted.

Loss Given Liquidation calculation takes into account LTV, adjusted by time to sale of movable and immovable collateral, real estate price index, EIR, and expected sales ratio of collaterals.
For uncollateralized exposures LGL is taken at 100%.

Average LGL ratios are calculated for five LTV bands separately for retail and non-retail borrowers, which then are assigned to each exposure depending on the LTV band the exposure falls.

Significant increase in credit risk (SICR) The Bank continuously monitors all assets subject to ECLs.
When assessing significance of increase in credit risk and whether the instrument is subject to 12m ECL or LTECL, the Bank compares the risk of default at the reporting date and risk of default occurring at the date of initial recognition.
To identify significant increase in credit risk since initial Page 50 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (continued) recognition of the financial asset at individual financial instrument level, the Bank is undertaking the holistic analysis of various factors, including those which are specific to a particular financial instrument or to a borrower.
The analysis includes considering of quantitative and qualitative information based on the Bank’s historical experience, credit risk assessment and forward looking information.

For individually significant exposures the Bank evaluates individually whether an objective evidence of significant increase in credit risk or impairment exists to recognise lifetime expected credit losses.

Individually significant exposures are considered exposures to the group exceeding 1% of the regulatory capital.
The Bank collectively assesses loans that are not individually significant and loans that are individually significant but for which there is no objective evidence of significant increase in credit risk.

Individually significant loans SICR identification process for individually significant exposures includes performing a qualitative test.
To assess SICR for individually significant loans the Bank has established general trigger events for all types of exposures, specific trigger events for non-retail borrowers and specific trigger events for retail borrowers.

General trigger events include but are not limited to: ► Deterioration of macroeconomic, regulatory, political or technological outlook relevant to particular or group of borrowers; ► Adverse changes in the sector or industry conditions in which borrower operates.
Specific trigger events for non-retail borrowers include: ► ► ► ► ► ► Deterioration of borrowers’ financial performance that is quantified by adverse changes in financial coefficients; Being overdue more than 30 days but less than 90 days; Those restructurings which if had not been done would not lead to the instrument falling in more than 90 days overdue; Breaching the contract; Sale of crucial part of the business or property which is necessary for the borrower’s profit making operations; Fraud in borrower’s business, etc.
If significant increase in credit risk is identified, for lifetime ECL calculation it is assessed whether future cash inflows of the borrower are enough to cover the cash outflows for different scenarios.

Analysis of cash flow of the borrower includes analysis of existing and forecasted trends of industry within which the borrower operates.
The amount of impairment is measured as the difference between the carrying amount of the credit facility and the present value of estimated future cash flows, discounted at the credit facility’s original effective interest rate.

The estimated future cash flows will include any expected cash flows from the borrowers operations, any other sources of funds and the expected proceeds from the liquidation of collateral, where applicable.
Collectively assessed loans Non-retail exposures that are not individually significant are assessed for SICR based on overdue days (between 30 and 90 days), whether they are restructured and if not restructured whether they would fall in more than 90 days overdue, and deterioration of various financial coefficients (Payment To Income (PTI), Debt/EBITDA, Equity/Assets, Interest Coverage Ratio (ICR) and Debt Service Coverage Ratio (DSCR)).
Specific trigger events for retail borrowers include but are not limited to loan being overdue more than 30 days but less than 90 days, restructuring of an exposure which if would not be done would lead to the instrument falling in more than 90 days overdue, deterioration of PTI ratio, etc.
For the purpose of a collective evaluation of impairment, financial instruments are grouped within homogeneous pools on the basis of asset types – whether the instrument is retail or non-retail, and based on Loan to Value (LTV) ratio.

On the basis of LTV ratios financial instruments are grouped into five LTV bands.
Treasury and interbank relationships The Bank’s treasury and interbank relationships and counterparties comprise financial services institutions, banks, corporates and Georgian and Turkish governments.

PDs are assigned to issuers or banks according to external rating default rates.

The minimum PD is set to 0.03% according to Basel.

LGD is taken at 45%, according to the foundation approach of the Basel document.

For corporate securities LGD is taken at 44.89%.


This figure represents the average historical recoveries of the Bank starting from Page 51 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (continued) 2014.
EAD represents monthly average of outstanding exposures in the case of securities and sovereign bonds and monthly average outstanding amount of principal plus accrued interest for interbank exposures.

Forward-looking information and multiple economic scenarios In its ECL models, the Bank relies on the following forward looking information as economic inputs, such as: ► ► GDP growth; Foreign exchange rates.

The Bank calculates ECL on an individual basis for all financial assets.
ECL is calculated for three (Baseline 50%, Upside 25%, and Adverse 25%) scenarios and weighted ECL is computed as a weighted sum of all three scenario ECLs.

The Bank obtains the forward-looking information from the NBG.

The tables below show the values of the forward looking economic variables/assumptions used in each of the economic scenarios for the ECL calculations.
The figures for “Subsequent years” represent a long-term average and so are the same for each scenario as at 31 December 2020: Key drivers GDP growth, % ECL scenario Assigned probabilities, % 2021 2022 2023 Subsequent years USD/GEL exchange rate, % change Upside Base case Downside Upside Base case Downside 25% 50% 25% 25% 50% 25% 6% 5% 1% -5% 0% 10% 5% 4.5% 4% -5% 0% -5% 5% 4.5% 4% 0% 0% 0% 5% 4.5% 4% 0% 0% 0% The figures for “Subsequent years” represent a long-term average and so are the same for each scenario as at 31 December 2019: Key drivers GDP growth, % ECL scenario Assigned probabilities, % 2020 2021 2022 Subsequent years USD/GEL exchange rate, % change Unemployment rate, % Upside Base case Downside Upside Base case Downside Upside Base case Downside 25% 50% 25% 25% 50% 25% 25% 50% 25% 5.5% 4.5% 2.5% -5% -3% 10.0% 12.0% 12.7% 14.2% 5.5% 5.0% 4.0% -3% -3% -5% 5.0% 5.0% 4.5% 0% -3% -5% 5.0% 5% 4.5% 0% 0% 0% 11.5% 12.5% 14.5% 11.2% 12.2% 14.5% 11.2% 12.2% 14.5% Page 52 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (continued) The figures for “Subsequent years” represent a long-term average and so are the same for each scenario as at 31 December 2018: Key drivers GDP growth, % ECL scenario Assigned probabilities, % 2019 2020 2021 Subsequent years USD/GEL exchange rate, % change Unemployment rate, % Upside Base case Downside Upside Base case 25% 50% 25% 25% 50% 6.5% 5% 2% 5.5% 5% 3% -3% 0% -2% 0% 5% 5% 4% -2% 0% Downside 25% 15% 10% -5% 5% 5% 4% 0% 0% 0% Upside Base case Downside 25% 50% 25% 10.1% 11% 12.6% 9.6% 10.8% 13.1% 9.4% 10.6% 13.3% 9.4% 10.6% 13.3% (f) Liquidity risk Liquidity risk is defined as the risk that the Bank does not have sufficient liquid financial resources to meet obligations associated with financial liabilities that are settled by delivering cash or another financial asset.
Liquidity risk arises because of the possibility that the Bank might be unable to meet its payment obligations when they fall due as a result of mismatches in the timing of the cash flows under both normal and stress circumstances.

The Bank maintains liquidity management with the objective of ensuring that funds will be available at all times to honour all cash flow obligations as they become due.

The liquidity policy is reviewed and approved by management.
The Bank seeks to actively support a diversified and stable funding base in order to be able to respond quickly and efficiently to unforeseen liquidity requirements.

The liquidity management policy requires: ► ► ► ► Maintaining a diverse range of funding sources; Managing the concentration and profile of debts; Maintaining debt financing plans; Monitoring liquidity ratios against regulatory requirements.
The liquidity position is monitored by the Finance Management Division and the Risk Management Division.

Under the normal market conditions, information on the liquidity position is presented to the management on a weekly basis.

Decisions on liquidity management are made by ALCO and implemented by the Treasury Division.

In addition, the Bank monitors on a regular basis the liquidity ratio calculated in accordance with the NBG requirements.
Page 53 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (Continued) The following tables show the undiscounted cash flows on financial assets, liabilities and credit-related commitments on the basis of their earliest possible contractual maturity.
The total gross inflow and outflow disclosed in the tables is the contractual, undiscounted cash flow on the financial assets, liability or credit related commitment.

For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee can be called.
Demand and less than 1 month From 1 to 3 months From 3 to 6 months From 6 to 12 months From 1 to 5 years More than 5 years Total gross amount inflow (outflow) Carrying amount Non-derivative liabilities Deposits and balances form banks Current accounts and deposits from customers Other borrowed funds and subordinated debt Other liabilities Total financial liabilities Credit related commitments (80,686) (9,989) (40,949) (5,299) - (40,687) (8,873) (2,074) (23,314) (1,297) - (3,141) (124,614) (74,830) - (159) (19,021) - - (721) (43,744) - - (125) (28,738) - (33,156) - (34,453) - - - - - - - (136,923) (136,521) (76,245) (75,820) (33,156) (4,246) (250,570) - (29,188) (4,246) (245,775) (74,830) The maturity analysis for financial liabilities as at 31 December 2019 is as follows: Demand and less than 1 month From 1 to 3 months From 3 to 6 months From 6 to 12 months From 1 to 5 years More than 5 years Total gross amount inflow (outflow) Carrying amount (74,094) (8,769) (16,245) (35,346) - - (134,454) (133,656) (20,293) (4,801) (3,573) (6,565) (2,016) - (37,248) (36,862) Non-derivative liabilities Deposits and balances form banks Current accounts and deposits from customers Other borrowed funds and subordinated debt Other liabilities * Total financial liabilities Credit related commitments - *As disclosed in note 3, the bank adopted IFRS 16 on 1 January 2019 and recognised relevant lease liabilities.
- - - - - - (145) (13,715) (221) (20,039) (452) (42,363) (3,653) (98,040) (60,363) (18,601) (1,041) (21,658) - - - - - (18,601) (5,512) (195,815) - (15,674) (5,512) (191,704) (60,363) Page 54 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (Continued) The maturity analysis for financial liabilities as at 31 December 2018 is as follows: Demand and less than 1 month From 1 to 3 months From 3 to 6 months From 6 to 12 months From 1 to 5 years More than 5 years Total gross amount inflow (outflow) Carrying amount Non-derivative liabilities Deposits and balances form banks Current accounts and deposits from customers Other borrowed funds and subordinated debt Other liabilities Total financial liabilities Credit related commitments (36,336) (10,764) - (45,006) (16,018) (16,103) (9,093) (8,114) (4,675) (695) - (637) (1,790) (4,653) (30,448) (8,949) (61,388) (42,820) - - - - (20,494) (9,904) (54,334) (47,161) - - - - - - - - - - (108,124) (106,509) (38,680) (38,352) (37,528) (8,949) (193,281) (42,820) (31,916) (8,949) (185,726) (42,820) Under Georgian law, individuals can withdraw their term deposits at any time, forfeiting in most of the cases the accrued interest.
Accordingly, these deposits are shown in the table below in accordance with their stated maturity.
The classification of these deposits in accordance with stated maturity dates is presented below: Demand and less than 1 month From 1 to 3 month From 3 to 12 month From 1 to 5 years More than 5 years 2020 13,675 7,828 6,153 1,240 - 28,896 2019 6,308 4,629 7,541 1,909 - 20,387 2018 6,135 8,235 4,444 300 - 19,114 Page 55 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (Continued) The table below shows an analysis, by expected maturities, of amounts recognized in the statement of financial position as at 31 December 2020: Demand and less than 1 month From 1 to 3 month From 3 to 12 month From 1 to 5 years More than 5 years No maturity Total Assets Cash and cash equivalents Amounts due from banks Mandatory reserves at the NBG Investment securities Loans to customers Property, equipment and intangible assets And ROU Other assets Total assets Liabilities Deposits and balance from banks Current accounts and deposits from customers Other borrowed funds and Subordinated debt Other liabilities Total liabilities Net position 32,485 - 36,217 2,999 8,330 - 4,749 84,780 80,672 40,684 - 3,241 124,597 (39,817) - 9,190 - - 58,848 - - 68,038 9,928 8,836 - 159 18,923 49,115 - - - 1,490 57,835 - - 59,325 45,921 25,059 5,161 721 76,862 (17,537) - - - 13,549 74,848 - - 88,397 - 1,241 24,027 125 25,393 63,004 - - - - 37,094 - - 37,094 - - - - - 37,094 - - - - - 2,354 - 2,354 - - - - - 2,354 32,485 9,190 36,217 18,038 236,955 2,354 4,749 339,988 136,521 75,820 29,188 4,246 245,775 94,213 Page 56 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (Continued) The table below shows an analysis, by expected maturities, of amounts recognized in the statement of financial position as at 31 December 2019: From 1 to 3 month From 3 to 12 month From 1 to 5 years More than 5 years No maturity
 Total Assets Cash and cash equivalents Amounts due from banks Mandatory reserves at the NBG Investment securities Loans to customers Property, equipment and intangible assets Other assets Total assets Liabilities Deposits and balance from banks Current accounts and deposits from customers Other borrowed funds and Subordinated debt Other liabilities* Total liabilities Net position Demand and less than 1 month 57,013 - 24,609 - 3,356 - 812 85,790 74,058 20,290 - 3,653 98,001 (12,211) - 1,627 - - 18,965 - - - - - 14,574 51,974 - - - - - 15,991 52,667 - - - - - 3,139 28,458 - - 20,592 66,548 68,658 31,597 8,705 4,777 - 145 13,627 6,965 50,893 9,886 4,521 673 65,973 575 - 1,909 11,153 1,041 14,103 54,555 - - - - - 31,597 2,541 *As disclosed in note 3, the bank adopted IFRS 16 on 1 January 2019 and recognised relevant lease liabilities.
- - - - - 2,541 - 2,541 - - - - - 57,013 1,627 24,609 33,704 155,420 2,541 812 275,726 133,656 36,862 15,674 5,512 191,704 84,022 Page 57 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (Continued) The table below shows an analysis, by expected maturities, of amounts recognized in the statement of financial position as at 31 December 2018: Demand and less than 1 months From 1 to 3 months From 3 to 12 months From 1 to 5 years More than 5 years No maturity Total Assets Cash and cash equivalents Amounts due from banks Mandatory reserves at the NBG Investment securities Loans to customers Property, equipment and intangible assets Other assets Total assets Liabilities Deposits and balance from banks Current accounts and deposits from customers Other borrowed funds and subordinated debt Other liabilities Total liabilities Net position 38,031 1,400 26,567 - 6,260 - 11,257 83,515 36,280 16,099 153 8,949 61,481 22,034 - 3,478 - - 8,148 - - - 277 - 6,430 69,482 - - - - - - - - 13,612 58,045 5,419 14,536 - - - - 11,626 76,189 71,657 19,955 10,707 44,339 15,183 9,033 12,559 661 2,321 - 22,061 (10,435) 12,360 17,082 - - 69,258 6,931 32,926 38,731 - - - - - 19,955 984 - - - - - 984 - 984 - - - - - 38,031 5,155 26,567 25,461 156,471 984 11,257 263,926 106,509 38,352 31,916 8,949 185,726 78,200 Page 58 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 22 Risk management, corporate governance and internal control (Continued) (g) Operational and business risk Operational risk is the risk of loss arising from system failure, human error, fraud and external events.
When controls fail to operate effectively, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss.

The bank cannot expect to eliminate all operational risks, but it endeavours to manage these risks through a control framework and by monitoring and responding to potential risks.
Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment procedures, such as the use of internal audit.

23 Credit related commitments The Bank has outstanding credit related commitments to extend loans.

These credit related commitments take the form of overdraft facilities.

The Bank provides financial guarantees to guarantee the performance of customers to third parties.
These agreements have fixed limits and generally extend for a period of up to five years.

The Bank applies the same credit risk management policies and procedures when granting credit commitments and financial guarantees as it does for granting loans to customers.

The contractual amounts of credit related commitments are set out in the following table by category.

The amounts reflected in the table for credit related commitments assume that amounts are fully advanced.
The amounts reflected in the table for guarantees represent the maximum accounting loss that would be recognised at the reporting date if the counterparties failed completely to perform as contracted.
Contracted amount Undrawn overdraft facilities Letter of credit Guarantees 2020 2019 2018 52 1,782 72,996 74,830 72 684 59,607 60,363 89 - 42,731 42,820 The total outstanding contractual credit related commitments above do not necessarily represent future cash requirements, as these credit related commitments may expire or terminate without being funded.
Of these credit related commitments as at 31 December 2020 accounting GEL 46,501 thousand are to six banks (2019: GEL 28,487 thousand; 2018: GEL 23,668 thousand) .This exposure represents a significant concentration of credit risk exposure to the Bank.

All credit related commitments are allocated to Stage 1.

ECL recognized for credit related commitments as at 31 December 2020 was GEL 275 thousand and there were no significant movements in ECL during the year (Note 7).
24 Contingencies (a) Insurance The insurance industry in Georgia is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available.

(b) Litigations In the ordinary course of business, the Bank is subject to legal actions and complaints.

Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations.
Page 59 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 24 Contingencies (Continued) (c) Operating environment As an emerging market, Georgia does not possess a well–developed business and regulatory infrastructure that would generally exist in a more mature market economy.

Operations in Georgia may involve risks that are not typically associated with those in developed markets.
However, over the last few years the Georgian government has made a number of developments that positively affect the overall investment climate of the country, specifically implementing the reforms necessary to create banking, judicial, taxation and regulatory systems.

This includes the adoption of a new body of legislation (including new Tax Code and procedural laws).

In the view of the management, these steps contribute to mitigate the risks of doing business in Georgia.
The existing tendency aimed at the overall improvement of the business environment is expected to persist.

The future stability of the Georgian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the Government.

However, the Georgian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world.

The negative effect of COVID 19 pandemic on the Georgian economy has been severe.
Tourism, the most affected sphere all around the world, had been the major driver in the economic growth of Georgia in the past several years, involving many interrelated sectors such as hotels, restaurants, travel agencies, real estate and development and other.

Based on the preliminary assessments Georgian GDP shrank by 6.1% in 2020, the level of unemployment reached 12%, GEL devaluated against USD by 14% for the period from 1 January 2020 to 31 December 2020 and current account deficit reached 12%.
The level of inflation during 2020 remained around 4%, which was expected in the result of weakening internal demand and government subsidies on utilities for population on the backdrop of the pandemic.

As of the year end the NBG expects to stay at the present levels of the rate of refinancing of 8% in the observable future, continuing to target the 3% inflation level.
The government has been implementing the anti-crisis economic recovery plan, which includes financial support to vulnerable groups of population and entrepreneurs, deferral of property and income tax payments for companies operating in the tourism sector, providing opportunity to borrowers to restructure their loans with commercial banks and other.

Georgia’s international partners have allocated 3 billion USD to aid the recovery of the country’s economy.
In line with the overall developments in the Georgian banking sector, the Bank has also suffered from the effects of the economic downturn caused by COVID 19 with significant deterioration of the performance and credit risk of the borrowers operating in the vulnerable sectors.

It should be mentioned that vulnerable sector is not significant for the bank in respect of credit exposure.
As mention in Note-14 (Loans to customers) the most vulnerable sector is Hotels, restaurant and tourism, but for the bank borrower of this sector is considered to have minimal ECL.

As the COVID-19 outbreak continues and the uncertainty remains about further developments of pandemic duration and the extent of the possible economic recovery in the nearest future, the management of the Bank continues to closely monitor the situation to timely assess and respond to related challenges and risks.
The decline in the coronavirus cases recorded as of the date of issue of this financial statements and government’s actions to pursue the mass vaccination process and remove the earlier imposed restrictions somewhat strengthen recovery prospects towards year 2021.
(d) Taxation contingencies The taxation system in Georgia continues to evolve and is characterized by frequent changes in legislation, official pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities.

Taxes are subject to review and investigation by a number of authorities which have the authority to impose severe fines, penalties and interest charges.
In the event of a breach of tax legislation, no liabilities for additional taxes, fines or penalties may be imposed by the tax authorities after three years have passed since the end of the year in which the breach occurred.

These circumstances may create tax risks in Georgia that are substantially more significant than in other countries.
Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Georgian tax legislation, official pronouncements and court decisions.

However, the interpretations of the relevant authorities could differ and the effect on the financial position, if the authorities were successful in enforcing their interpretations, could be significant.
Page 60 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 25 Related party transaction In accordance with IAS 24 “Related Party Disclosures”, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.
In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.

Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties.

All transactions with related parties disclosed below have been conducted on an arm’s length basis.
(a) Control relationships The Bank is ultimately controlled by Isbank Members’ Supplementary Pension Fund.

No publicly available financial statements are produced by the Bank’s ultimate controlling party.

However, such financial statements are produced by Türkiye İş Bankası Anonim Şirketi, which is an intermediate controlling party of the Bank.
(b) Transactions with the key management personnel Total remuneration included in personnel expenses for the years ended 31 December 2020, 2019 and 2018 is as follows: Short-term employee benefits 2020 2,133 2019 1,653 2018 1,135 Loans to and deposits from the key management personnel and respective interest income and expenses were immaterial as at 31 December 2020, 2019 and 2018 and for the years then ended.

(c) Transactions with the Parent.
The outstanding balances and related profit or loss amounts of transactions as at and for the year ended 31 December 2020,2019 and 2018 are as follows: 2020 2019 2018 Statement of financial position Assets Cash and cash equivalents - In TRY - In EUR - In USD Liabilities Deposits and balances from banks - In EUR - In USD - In GBP - In TRY Other borrowed funds and subordinated debt - In EUR - In USD Income/(expanse) Interest income Interest expense 13 19 8 1,388 13,915 711 - - - 7 (263) 33 19 7 32,144 26,386 598 - - - 12 (493) 44 13 - 7,074 24,889 345 51 108 12,985 10 (4,161) The deposits from the Parent as at 31 December 2020 mature according to contractual maturity as follows: GEL 16,014 thousand matures in less than 12 months (2019:GEL 59,128 thousand matures in less than 12 months ; 2018: GEL 37,569 thousand in less than 12 months, GEL 7,883 thousand during 1 to 5 years).
Page 61 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 26 Fair Value measurement (a) Fair values estimates and assumptions The estimates of fair value are intended to approximate 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.
However, given the uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realizable in an immediate sale of the assets or transfer of liabilities.

The following describes the methodologies and assumptions used to determine fair values for assets and liabilities recorded at fair value in the financial statements and those items that are not measured at fair value in the statement of financial position, but whose fair value is disclosed.
Assets for which fair value approximates carrying value For financial assets and financial liabilities that are liquid or having a short term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value.

This assumption is also applied to demand deposits and savings accounts without a specific maturity.
Derivatives Derivatives valued using a valuation technique with market observable inputs are mainly interest rate swaps, currency swaps and forward foreign exchange contracts.

The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations.

The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates and interest rate curves.
Derivatives valued using a valuation technique with significant non-market observable inputs are primarily long dated option contracts.

These derivatives are valued using the binomial models.

The models incorporate various non-observable assumptions, which include market rate volatilities.

Trading securities and investment securities Trading securities and investment securities valued using a valuation technique or pricing models primarily consist of unquoted equity and debt securities.
These securities are valued using models which sometimes only incorporate data observable in the market and at other times use both observable and non-observable data.

The non-observable inputs to the models include assumptions regarding the future financial performance of the investee, its risk profile, and economic assumptions regarding the industry and geographical jurisdiction in which the investee operates.
Financial assets and financial liabilities carried at amortised cost Fair value of the quoted notes and bonds is based on price quotations at the reporting date.
The fair value of unquoted instruments, loans to customers, customer deposits, amounts due from credit institutions and amounts due to the NBG and credit institutions and other financial assets and liabilities, obligations under finance leases is estimated by discounting future cash flows using rates currently available for debt on similar terms, credit risk and remaining maturities.
(b) Fair value hierarchy The Bank measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements: ► ► ► Level 1: quoted market price (unadjusted) in an active market for an identical instrument.

Level 2: inputs other than quotes prices included within Level 1 that are observable either directly (i.e., as prices) or indirectly (i.e., derived from prices).
This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.

Level 3: inputs that are unobservable.


This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation.

This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
Page 62 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 26 Fair value measurement (Continued) For the purpose of fair value disclosures, the Bank has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.
Set out below is a comparison by class of the carrying amounts and fair values of the Bank’s financial instruments.

The table does not include the fair values of non-financial assets and non-financial liabilities.
31 December 2020 Assets measured at fair value Debt securities measured at FVOCI Assets for which fair values are disclosed Loans to customers Liabilities for which fair values are disclosed Amounts due to customers 31 December 2019 Assets measured at fair value Debt securities measured at FVOCI Assets for which fair values are disclosed Loans to customers Liabilities for which fair values are disclosed Amounts due to customers Level 1 Level 2 Level 3 Total fair Value Carrying amount 18,038 - - 18,038 18,038 - - 236,955 236,955 236,955 - 212,341 - 212,341 212,341 Level 1 Level 2 Level 3 Total fair Value Carrying amount 33,704 - - 33,704 33,704 - - 155,420 155,420 155,420 - 170,518 - 170,518 170,518 Management believes that the fair value of other financial assets and liabilities approximates their carrying amounts.
The principles for determining fair values is disclosed in Note 3.
31 December 2018 Assets measured at fair value Debt securities measured at FVOCI Assets for which fair values are disclosed Loans to customers Liabilities for which fair values are disclosed Amounts due to customers Level 1 Level 2 Level 3 Total fair Value Carrying amount 15,022 10,439 - 25,461 25,461 - - 156,676 156,676 156,471 - 144,900 - 144,900 144,861 Page 63 of 64 JSC Isbank Georgia Notes to the Financial Statements For the year ended 31 December 2020 (In thousands of GEL) 27 Presentation of financial instruments by measurement category For the measurement purposes, IFRS 9, classified financial assets into the categories discussed in Note 3.The following table provides a reconciliation of classes of financial assets with these measurement categories as of 31 December 2020: Amortized cost FVOCI FVPL Total Assets Cash and cash equivalents Amounts due from banks Mandatory reserves at NBG Investment Securities Loans to customers Other assets Total financial assets 32,485 9,190 36,217 - - - - 18,038 236,955 4,749 319,596 - - 18,038 - - - - - - - 32,485 9,190 36,217 18,038 236,955 4,749 337,634 The following table provides a reconciliation of classes of financial assets with these measurement categories as of 31 December 2019: Amortized cost FVOCI FVPL Total Assets Cash and cash equivalents Amounts due from banks Mandatory reserves at NBG Investment Securities Loans to customers Other assets Total financial assets 57,013 1,627 24,609 - - - - 33,704 155,420 812 - - 239,481 33,704 - - - - - - - 57,013 1,627 24,609 33,704 155,420 812 273,185 The following table provides a reconciliation of classes of financial assets with these measurement categories as of 31 December 2018: Amortized cost FVOCI FVPL Total Assets Cash and cash equivalents Amounts due from banks Mandatory reserves at NBG Investment Securities Loans to customers Other assets Total financial assets 38,031 5,155 26,567 - - - - 25,461 156,471 11,257 237,481 - - 25,461 - - - - - - - 38,031 5,155 26,567 25,461 156,471 11,257 262,942 28 Events after
 reporting date The following non-adjusting events occurred after the reporting period: ► On 24 February 2021 bank took new borrowing with amount of 5,000 thousand USD from International Finance Corporation.
(IFC) There were no additional significant events after the reporting date that need to be presented in the financial statement.

Page 64 of 64