FINANCIAL STATEMENTS Bank and FNE Position: 30.06.2017 Management Report – 1st half of 2017 1. A WORD FROM THE CEO Banco do Nordeste responds robustly to the challenges faced in a still adverse economic scenario. In the first half of 2017, Banco do Nordeste contracted 2.4 million transactions and injected R$ 11.2 billion in the economy in the northeast region of Brazil, which corresponds to an increase by 3.6% as compared with the first half of 2016. This was mostly directed to investments of a rural, industrial, agro-industrial, infrastructure, sales and services nature, in the amount of R$ 6.7 billion referring to long-term operations, which corresponds to approximately 60% of the total transactions contracted. In the first half of 2017, R$ 4.85 billion financed urban and rural micro entrepreneurs providing long and short-term credit, by means of the largest microcredit-oriented programs in Latin America, Crediamigo and Agroamigo. Key instruments for reducing inequalities and that constitute a way out of poverty, these programs allocate to the northeast region approximately 67% of the amount invested in the Brazilian monthly family stipend program [Bolsa Família], provide inclusion, social development and make a difference in people’s lives. In the first six months of the year, the Bank recovered R$ 2.6 billion unpaid receivables, 237.88% above the amount recovered in the first half of 2016. Over 100 thousand transactions were regularized, most of which deriving from the benefits of Law No. 13340/16, which allows rural debts to be renegotiated. The Bank held the I Fórum BNB de Infraestrutura [I BNB Infrastructure Forum], an event that gathered market agents and public managers from all over the Northeast region to map projects that can be financed by the FNE Infraestrutura Program. This initiative meets the requirements of FNE Application Plan for 2017, which establishes that R$ 11.4 billion should be applied in specific programs for financing economic infrastructure projects. As the first federal public institution to create an innovation hub, Hubine, BNB entered into a partnership with Coca-Cola Brasil, by means of which BNB will allocate R$ 20 million to innovation projects that make drinking water accessible in low-income rural and urban communities. BNB also participated in an exchange program in Israel, a country that is a world reference in innovation, in order to discuss projects for better living in the Semiarid, including participation of startups located in the northeast region. Aiming at building a governance platform for the forty major medium-sized cities located in its area of operation, BNB launched Fórum Banco do Nordeste de Médias Cidades [BNB Medium- sized Cities Forum]. G20+20 intends to create synergy in order to enable technical, technological and managerial capabilities, exchange experiences and share successful practices, thus generating a business structuring environment in these municipalities. The Bank also launched two technological innovation invitations to bid funded by the Fund for Economic, Scientific, Technological and Innovation Development (Fundeci), amounting to R$ 7 million and aimed at research institutions and private entities. In connection with In connection with Fundeci Invitation to Bid referring to economic grant for innovation in companies of the 2 Management Report – 1st half of 2017 northeast region, in the amount of R$ 4 million, the Bank will for the first time select private companies for receiving these funds. In short, Banco do Nordeste prioritizes investment programs and projects that allow for social and private returns, generate positive external effects for society and meet the objectives of reducing regional inequalities and providing sustainable development for the Region. This is how, preparing for tomorrow’s challenges, BNB celebrates its 65th anniversary – 65 years of hard work, whose result reflects the effort of the Bank’s employees, who enthusiastically have the goal of making a difference in the next 65 years. Marcos Costa Holanda CEO 3 Management Report – 1st half of 2017 2. BUSINESS MODEL Banco do Nordeste (BNB) invests funds in the region through loan and financing transactions, and offers financial products and services to economic agents, in order to produce results that will ensure corporate sustainability and the development of its core operations. The FNE, the main source of funds used by the Bank, has public resources intended for the financing of productive activities and contributing to the economic and social development of the Northeast region and the north of the states of Minas Gerais and Espírito Santo. Identified as Brazil’s development bank, BNB’s greatest challenge and main target is a more effective participation of the Northeast region in the Brazilian social and economic scenario, which drives its business model to a diversified credit assistance, adapted to the needs of the various production segments, by means of service channels that are in syntony with Brazil’s competitive national bank market. Therefore, from urban and rural informal entrepreneurs, relying on the productive microcredit- oriented methodology, to long-term financing transactions for large corporate projects, including infrastructure projects are supported by loans and financing granted by BNB. In addition, Banco do Nordeste adopts non-reimbursable strategies to support and promote scientific and technological development, innovation and territorial development. These mechanisms provide conditions for modernization, expansion and sustainability of the regional production capacity. In view of the current scenario faced by the bank segment, which presses financial institutions to urgently optimize human and financial resources in order to obtain sustainable results, Banco do Nordeste conducted an evaluation of its business units. This study indicated the need to adapt its branch network, seeking to maintain operational efficiency, preserving the presence of the Bank in its area of activity and matching the best use of its human capital to its clients’ and society’s demands. The activities of 19 branches located in 17 municipalities were closed down because of this adjustment. The undeployment of these units occurred in locations that had more than one branch, which prevented the credit assistance and service provision for those communities from ceasing. The Bank’s network counts on 292 branches, located in the Northeast region, and north of the states of Minas Gerais and Espírito Santo. The Bank offers the following face-to-face, online and digital service channels, in addition to its branch network, to consolidate BNB’s presence in its area of activity, intensifying and improving customer relationships, leveraging the fulfillment of its mission, vision and expanding its business: · Mobile branch; · Service Unit (PA); · Roving FNE; · Agroamigo and Crediamigo service unit; · ATMs using own network or network shared with Tecnologia Bancária (Tecban) and Banco do Brasil; · Internet Banking and Mobile Banking; · Citizen Information and Customer Relations Center (CRCIC); · Ombudsman. 4 Management Report – 1st half of 2017 2.1 Regional Development In order to promote sustainable regional development actions, the Bank has the Technical Office for Economic Studies of Northeastern Brazil (Etene), which plays a prominent role in the preparation, promotion and diffusion of studies, research and socioeconomic information, in the evaluation of policies and programs, and in conducting studies, producing and publishing technical work and other work of interest to the Bank, in partnership with institutions linked to regional development. In the first half of 2017, in addition to continuing with Etene periodicals – Diário Econômico, Caderno Setorial, Boletim Setorial, Cenário Bancário and Conjuntura Econômica - Etene launched another publication, named Conjuntura em Números e Gráficos, which presents the international macroeconomic scenario and the economy performance in Brazil and in the northeast, through charts and graphs on the level of activity in farming and stock breeding, industrial manufacturing, retail, services, tourism, foreign trade, labor market, government finance and financial brokerage, including data per state. In the first half of 2017, Etene structured the Fórum Banco do Nordeste de Médias Cidades [Banco do Nordeste Medium-sized Cities Forum], namely G20+20, an initiative whose purpose is to build a governance platform for 40 medium-sized cities located in the Bank’s area of activity, create synergy in order to render technical, technological and managerial capabilities feasible, exchange experiences and share successful practices, creating a business structuring environment and identifying sources of funds for investments, especially those linked to urban infrastructure. As regards econometric models, in the first half of the year, we stress the default forecasting models for the Bank’s micro and small companies, aimed at improving the efficiency of management actions and loan recovery. In sector studies and research, 11 analyses were carried out on economic activities of interest to the Bank, among which we highlight infrastructure (solar and wind power) and civil construction. We also highlight the following works of Etene in the first half of 2017. · Assessment of the impact caused by FNE on the economic growth of the municipalities in which it operates, which identified that FNE is positively related to per capita GDP, generation of jobs and overall salaries.