BANKA CELJE GROUP ANNUAL 2010 - Osebne financee8602f98-da4a-4599... · 8 Banka Celje Group Annual...

Celje, 28th March 2011

BANKA CELJEGROUP ANNUALREPORT 2010

2 Banka Celje Group Annual Report 2010

Banka Celje Group

Consolidated Annual Report 2010, prepared in accordance with International Financial Reporting Standards, as adopted by the European Union.

3Banka Celje Group Annual Report 2010

Contents

A WORD BY THE PRESIDENT OF THE MANAGEMENT BOARD ...........................................................................................7REPORT OF THE SUPERVISORY BOARD OF BANKA CELJE, d.d. .........................................................................................8

I CONSOLIDATED BUSINESS REPORT .................................................................................................................................111 HIGHLIGHTS ...................................................................................................................................................................112 PRESENTATION OF THE BANK AND ITS SUBSIDIARY COMPANY .........................................................................123 REPORT ON THE OPERATIONS OF THE BANK AND ITS SUBSIDIARY COMPANY IN 2010 ................................134 SIGNIFICANT EVENTS ...................................................................................................................................................155 ECONOMIC AND BANKING ENVIRONMENT .............................................................................................................16

5.1 Economic environment ............................................................................................................................................165.2 Banking environment ................................................................................................................................................16

6 REPORT ON THE OPERATIONS OF THE BANK AND ITS SUBSIDIARY COMPANY IN 2010 ................................176.1 Consolidated financial result of the Bank and its subsidiary company ................................................................176.2 Consolidated financial position of the Bank and its subsidiary company ............................................................186.3 Bank and subsidiary company operations according to key areas ........................................................................21

6.3.1 Credit operations .............................................................................................................................................216.3.2 Deposits ............................................................................................................................................................226.3.3 Securities operations .......................................................................................................................................236.3.4 Payment operations ........................................................................................................................................25

6.4 Equity and shareholders ..........................................................................................................................................256.5 Risk management and control operations ..............................................................................................................266.6 Development of the bank and its subsidiary company ..........................................................................................306.7 Social responsibility of the Bank and its subsidiary company ..............................................................................316.8 The Internal Audit Department operations ............................................................................................................32

7 MANAGING BODIES OF THE BANK .............................................................................................................................338 ORGANIZATION STRUCTURE OF THE BANK ON 1 JANUARY 2011 .......................................................................349 THE GROUP ON 31 DECEMBER 2010 ...........................................................................................................................3510 RETAIL DIVISION OF THE BANK ON 1 JANUARY 2011 ............................................................................................3611 STATEMENT OF CORPORATE GOVERNANCE ...........................................................................................................3712 STATEMENT OF MANAGEMENT’S RESPONSIBILITIES ............................................................................................4313 REPORT OF THE AUDITORS ..........................................................................................................................................44

II CONSOLIDATED FINANCIAL STATEMENTS ....................................................................................................................461 CONSOLIDATED INCOME STATEMENT ......................................................................................................................462 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ..............................................................................473 CONSOLIDATED STATEMENT OF FINANCIAL POSITION .......................................................................................484 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY .........................................................495 CONSOLIDATED STATEMENT OF CASH FLOWS .......................................................................................................50

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ........................................................................................521. GENERAL INFORMATION ......................................................................................................................................522. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES .....................................................................................52

2.1 Basis for the presentation of financial statements .......................................................................................522.2 Consolidation ...................................................................................................................................................552.3 Segment reporting ..........................................................................................................................................552.4 Foreign currency translation ..........................................................................................................................552.5 Interest income and expense ..........................................................................................................................552.6 Fee and commission income ...........................................................................................................................552.7 Dividend income ..............................................................................................................................................552.8 Financial assets and liabilities ........................................................................................................................55

2.8.1 Financial assets ...................................................................................................................................552.8.2 Financial liabilities ..............................................................................................................................572.8.3 Derecognition of financial instruments ............................................................................................57

2.9 Impairment of financial assets .......................................................................................................................572.9.1 Assets carried at amortised cost ........................................................................................................572.9.2 Assets available-for-sale .....................................................................................................................582.9.3 Renegotiated loans ..............................................................................................................................59

2.10 Derivative financial instruments and hedge accounting ..............................................................................59


2.11 Offsetting ........................................................................................................................................................592.12 Sale and repurchase agreements ....................................................................................................................592.13 Cash and cash equivalents...............................................................................................................................592.14 Accounting for leases .......................................................................................................................................592.15 Investment property ........................................................................................................................................602.16 Property and equipment .................................................................................................................................602.17 Intangible assets ..............................................................................................................................................602.18 Taxation ............................................................................................................................................................602.19 Employee benefits ............................................................................................................................................602.20 Provisions .........................................................................................................................................................612.21 Financial guarantee contracts ........................................................................................................................612.22 Share capital .....................................................................................................................................................612.23 Comparatives ....................................................................................................................................................612.24 Financial risk management .............................................................................................................................61

2.24.1 Credit risk ............................................................................................................................................622.24.1.1 Measuring and managing credit risk .................................................................................622.24.1.2 Maximum credit risk exposure ..........................................................................................652.24.1.3 Credit risk exposure according to rating classes ...............................................................662.24.1.4 Credit risk exposure according to maturity ......................................................................672.24.1.5 Credit risk exposure according to impairment approach .................................................692.24.1.6 Exposure to credit risk from debt securities .....................................................................702.24.1.7 Concentration of exposures according to regions and activities .....................................702.24.1.8 Credit risk exposure from derivatives ...............................................................................732.24.1.9 Credit risk exposure from Credit Linked Notes (CLN) .....................................................73

2.24.2 Market risk ..........................................................................................................................................742.24.2.1 Measuring and managing market risk ..............................................................................742.24.2.2 Value-at-Risk analysis .........................................................................................................752.24.2.3 Sensitivity analysis for financial instruments included in banking book ......................752.24.2.4 Foreign currency risk ..........................................................................................................762.24.2.5 Interest rate risk ..................................................................................................................77

2.24.3 Liquidity risk .......................................................................................................................................792.24.4 Capital and capital adequacy ..............................................................................................................812.24.5 Fair value of financial assets and liabilities ......................................................................................83

2.25 Critical accounting estimates and judgements ..............................................................................................842.26 Segment reporting ...........................................................................................................................................85

NOTES TO INDIVIDUAL ITEMS INCLUDED IN CONSOLIDATED FINANCIAL STATEMENTS ..................................893 Net interest and similar income ..............................................................................................................................894 Dividend income........................................................................................................................................................895 Net fee and commission income ..............................................................................................................................906 Net gains from financial assets and liabilities not classified at fair value through profit or loss ......................907 Net (losses) / gains from financial assets and liabilities held for trading ............................................................908 Net (losses) from financial assets and liabilities designated at fair value through profit or loss .......................919 Changes in fair value from hedge accounting .........................................................................................................9110 Foreign exchange translation net gains ..................................................................................................................9111 Net gains from derecognition of assets ...................................................................................................................9112 Net other operating income .....................................................................................................................................9213 Administrative expenses ..........................................................................................................................................9214 Amortisation and depreciation ................................................................................................................................9215 Provisions ..................................................................................................................................................................9316 Impairment charges ..................................................................................................................................................9317 Income tax expense ...................................................................................................................................................9318 Basic and diluted earnings per share .......................................................................................................................9419 Cash and balances with the Central Bank ...............................................................................................................9420 Financial assets held for trading ..............................................................................................................................9421 Financial assets designated at fair value through profit or loss ............................................................................9522 Available-for-sale financial assets ...........................................................................................................................9623 Loans and advances to banks ...................................................................................................................................9724 Loans and advances to customers ...........................................................................................................................9825 Held-to-maturity investments .................................................................................................................................99


26 Property and equipment .........................................................................................................................................10127 Investment property ...............................................................................................................................................10228 Intangible assets......................................................................................................................................................10229 Income tax assets ...................................................................................................................................................103

29.1 Current tax assets ..........................................................................................................................................10329.2 Deferred tax assets ........................................................................................................................................103

30 Other assets .............................................................................................................................................................10431 Deposits from Central Bank ...................................................................................................................................10432 Financial liabilities held for trading ......................................................................................................................10533 Financial liabilities designated at fair value through profit and loss ..................................................................10534 Financial liabilities at amortised cost – deposits from banks .............................................................................10635 Financial liabilities at amortised cost – due to customers ...................................................................................10636 Financial liabilities at amortised cost – borrowings from banks ........................................................................10737 Financial liabilities at amortised cost – borrowings from customers .................................................................10738 Debt securities in issue ...........................................................................................................................................10839 Subordinated liabilities ...........................................................................................................................................10840 Financial liabilities associated to transferred assets ...........................................................................................10941 Hedging derivatives ................................................................................................................................................10942 Provisions ................................................................................................................................................................11043 Other liabilities .......................................................................................................................................................11044 Share capital ............................................................................................................................................................111

44.1 Subscribed capital ..........................................................................................................................................11144.2 Treasury shares bought .................................................................................................................................11144.3 Share premium ...............................................................................................................................................11144.4 Profit reserves ................................................................................................................................................11244.5 Revaluation reserve .......................................................................................................................................112

45 Dividend per share ..................................................................................................................................................11246 Contingent liabilities and commitments ..............................................................................................................11347 Cash and cash equivalents .....................................................................................................................................11448 Related party transactions .....................................................................................................................................114

48.1 Claims and commitments and contingent liabilities ..................................................................................11448.2 Gross amounts paid out to key management personnel .............................................................................11548.3 Gross amounts paid out to Management Board and Supervisory Board members ..................................115

49 Expenditure from subordinated liabilities ...........................................................................................................11650 Average number of employees in 2010 and at 31 December 2010 ......................................................................11651 Information on the results of organizational units abroad ................................................................................11652 Events after reporting date ...................................................................................................................................116


A WORD BY THE PRESIDENT OF THE MANAGEMENT BOARD

After the crisis ridden 2009, expectations for 2010 were quite positive. However economic recovery was still rather slow and lacked stability, with uncertain conditions continuing in the European financial markets. Due to the relatively high indebtedness of the economy, 2010 saw a deterioration of liquidity and financial liabilities settlement being over due.

Consequently, the Slovene banking system exhibited an increase in credit and income risk. This in turn affected the quality of the credit portfolio in banks, while also increasing the volume of impairment charges and provisioning.

We encountered similar problems at our bank also, which is why our primary concern was safety of operations. By holding our capital adequacy level at 15.19 % and the capital adequacy ration at 11.22 % we maintained a stable capital position, being one of the Bank’s key objectives. We were also efficient in managing operational and structural li-quidity.

The structure of our operations was continuously adapted to the business conditions. Looking at financing, we increased the value of deposits from the non-banking sector in spite of the decrease in deposits from the state. Liabilities to the Eurosystem were decreased, while liabilities to banks re-mained at the 2009 level. Even though foreign financial markets still exhibited conditions of uncertainty, we were able to enter into a new stand-by credit line agreement with the European Investment Bank and raised a syndicated loan in an amount of EUR 60 million. We also issued two new long-term bonds totaling EUR 60 million, thus replacing matured bonds and raising new long-term financing.

In 2010 we upgraded the Bank’s risk profile, thus allowing for the Bank to be exposed to risk only to an acceptable amount and for the risk profile to equal the Bank’s antici-pated risk profile, thus enabling stable and safe operations, whether it be times of normal operation or exceptional cir-cumstances.

Cost rationalisation measures continued to be implemented and 2010 saw decreased administrative costs and improved cost efficiency, measured by the costs per average assets. Our retail network is well developed and we expanded it in July by opening a new business unit in Koper, while closing two smaller agencies. Additionally, a comprehensive reorganisa-tion, valid from January 1, 2010, was performed in 2011.

The importance of the Bank’s position Slovenia, good capi-tal adequacy, liquidity position and cost efficiency are its comparative advantages, based on which Fitch Ratings, an international bank rating agency, reaffirmed the Bank’s good international rating in February 2010, which is a sig-nificant achievement for the Bank in the harsh economic conditions and shows the level of trust and respect it en-joys domestically and abroad. However, due to the current market conditions and the environment, in which the Bank operates, the agency changed the long-term outlook from stable to negative.

The Bank’s strategic policies, representing the key elements of continued long-term development, still place safety of op-erations first, followed by the development of new services and capital stability. In 2011, with the changing forecasts pertaining to the recovery of the global economic markets, no plans for significant growth in the volume of operations have been made.

In February 2011 the owners of the Bank entered into an agreement on the sale of 75% of its regular shares and a public announcement was made pertaining to the collection of written non-binding bids for the purchase of shares. We expect an eventual change in strategic ownership to have a positive effect on the Bank’s future operations.

Respected shareholders, business partners and co-workers, speaking in the name of the Management Board, I would like to express my appreciation for the good cooperation and the trust you have shown us.

Dušan Drofenik, M. Sc.President of the Management Board


REPORT OF THE SUPERVISORY BOARD OF BANKA CELJE, d.d.

The framework of the Supervisory Board’s operations and its responsibilities as well as its obligations is determined by the applicable legislation (the Banking Act, the Compa-nies Act, the Regulation on the diligence of members of the management and supervisory boards of banks and savings banks) and the Bank’s internal acts (the Articles of Associ-ation and the Rules of procedure related to the operations of the Supervisory Board and its committees) as well as other legal norms, which pertain to the Bank’s operations.

In its decision-making process during 2009, the Supervisory Board received expert support from the Audit Committee.

OPERATIONS OF THE SUPERVISORY BOARD

The Supervisory Board of Banka Celje was elected at the General Meeting of the Bank’s Shareholders in May 2007. It comprises 7 members with Alojz Jamnik as President, Tadej Tufek, M.Sc. as Vice President and the other members being: Ivan Ferme, Matej Narat, M.Sc., Borut Stanič, Štefan Špilak, Ph.D. and Bojan Šrot. The Supervisory Board members’ term of office expires on fourth anniversary of their election, being the General Meeting of Shareholders in 2011.

At the time of election in May 2007 the Supervisory Board comprised 7 members (for a term of four years): Alojz Ja-mnik as President, Tadej Tufek, M.Sc. as Vice President and the other members, namely: Borut Stanič, Ivan Ferme, Matej Narat, M.Sc., Štefan Špilak, Ph.D. and Bojan Šrot. At its 9th correspondent meeting on June 21, 2010 the Superviso-ry Board ascertained that due to the resignation of Matej Narat, M.Sc., his membership in the Supervisory Board of Banka Celje had been terminated. Since that date the Su-pervisory Board operated as a body comprising 6 members, who meet the requirements of Article 11 of the Decision by the Bank of Slovenia on the Diligence of Management and Supervisory Board members, as they operate independently from one another, do not enter into conflicts of interest and attend Supervisory Board meetings with due diligence.

In 2010 the Supervisory Board met at five regular meetings, dealing with 63 items on the agenda and at two correspon-dent meetings, where it addressed three agenda items. It received all the data and information it needed to regular-ly review the Bank’s operations in detail, to supervise the Bank’s management and to assess the results within the framework of its competencies. Information was exchanged regularly between the Supervisory and Management Board members pertaining to all the important decisions at the Bank or to the events in the business environment. Consul-tations of the Management Board with the president of the Supervisory Board were especially frequent.

At its 20th regular meeting the Supervisory Board also re-viewed the Bank's annual report for 2009, the report on the operations of the Internal Audit Service for the period from July to December 2009 as well as the report of the Service for 2009. It was also made aware of the letter of the auditors to the Management and Supervisory Boards after the conclusion of the 2009 audit and it approved the audited Annual Report 2009 as well as the Bank's State-ment on Compliance with the Corporate Governance Code. Additionally, it reviewed the entire documentation relating to the 25th Annual Regular Meeting of Shareholders and adopted the report to the Meeting of Shareholders on it own operations during 2009.

During the year the Supervisory Board monitored the Bank’s operations by reviewing reports on respective reporting pe-riods. The Management Board reported to it on the Bank’s liquidity situation and on denationalisation proceedings. The Internal Audit Service reported to it on its own operati-ons during the first half of the year. The Supervisory Board gave its consent with regard to exceeding exposure limits of 10, 15 and 20% of the Bank’s capital 3 times. It also gave consent to the membership of the Bank’s Management Bo-ard in various supervisory boards and other committees. It was made aware of the resignation of Matej Narat from the Supervisory Board and ascertained that with his resignation his Supervisory Board membership ceised also.

Pertaining to development policies the Supervisory Board put the Bank’s business policies and plan for 2011 on the agenda as well as the Bank’s development plan frome 2011 through 2013, the strategic plan of the Internal Audit for the 2010 to 2012 period and the 2011 to 2013 period as well as its 2010 and 2011 annual operations program, the strategy and policies on assuming and managing risk and the risk profile as well as the Bank's trading strategy for 2010 and 2011..

Based on the scope of activities conducted during 2010 and due to the fact that the Supervisory Board operated in full composition at its meetings, the President and the members of the Supervisory Board assess the work of the Supervisory Board in 2010 to have been performed with all due diligence and care without any deviations from good practice.

OPERATIONS OF THE AUDIT COMMITTEE

As the advisory body to the Supervisory Board the Audit Committee met four times in 2010. It adopted the plan of operations for 2010 and the report on its operations during 2009, reviewed the Bank’s plans for 2010 as well as its stra-tegies and policies pertaining to risk management (in 2010 and 2011). It also acquainted itself with the plans of the


Internal Audit for the periods from 2010 to 2012 and from 2011 to 2013 as well as its annual operational programmes for 2010 and 2011.

It also received detailed information on the Bank’s approach to the auditing process, including the audit agreement from 2008 and it cooperated in the process of entering into the agreement with the external auditor for 2009. The Audit Committee was also kept appraised of the findings of exter-nal supervisory institutions and with the current interim financial results. It took special care in reviewing the Bank’s and the Group’s annual reports for 2008 and the reports on the operations of the Internal Audit for 2008 and 2009. It also submitted a proposal to the Supervisory Board to name the auditor for 2009 at the General Meeting of the Bank’s Shareholders and reviewed the securities portfolio, the cre-dit portfolio and operations related to different projects. It enabled the Supervisory Board to adopt an updated Rules of Procedure on the operations of the Audit Committee.

It actively participated in the process of the selection of an external auditor for the 2010 business year (preparing the proposition to the Supervisory Board on the naming of the auditor for 2010 at the Bank's General Meeting of Shareholders), also reviewing the agreement pertaining to the audit in 2010.

During this whole time the Audit Committee was also kept appraised of all the findings based on reviews by external supervisory institutions and informed of all the activiti-es adopted with a view to the elimination of irregularities these reviews found. It was also informed of the interim business results, whereby it put special emphasis on the review of the Bank's and the Group's annual reports for 2009 (including the Letter to the Management Board and the Supervisory Board) and the first half of 2010 as well as the report on the operations of the Internal Audit for 2009 and the first half of 2010. It also continued reviewing the renewed Rulebook on the Operations of the Internal Audit and the Base Act on the System of Internal Controls, as well as the significant loss events, the denationalisation proceedings, the report on the performance of the ICAAP process at the Bank (as required by the Bank of Slovenia) and the letter received from the Bank of Slovenia on the findings based on this report.

ANNUAL REPORT 2010

In line with the legislative requirements the Bank prepared the unconsolidated and the consolidated annual reports for

2010. The consolidated report includes the fully consolidated subsidiary company Posest, d.o.o., Celje, wherein the Bank holds a 100% interest. The subsidiary deals mainly with the realisation of bad debt, the marketing of own and the Bank’s real estate, own and other property engineering, property leasing, real estate and equipment appraisals and the su-pervision of purposeful use of loans granted to investors.

The Bank’s financial statements as well as the consolidated financial statements have been prepared in line with the International Financial Reporting Standards as adopted by the EU.

In 2010 the annual audit of the Bank’s unconsolidated and consolidated financial statements was conducted by the authorized auditors of PricewaterhouseCoopers, d.o.o., Ljubljana, which approved the Bank’s financial statements without reservation and confirmed the content as being in line with the Bank’s business report. It also issued a speci-al auditor's report on the compliance with the regulations pertaining to risk management as requested by the Bank of Slovenia, which does not form part of the annual reports of the Bank or the Banka Celje Group.

RESOLUTIONS AND POSITIONS OF THE SUPERVISORY BOARD

The Supervisory Board reviewed the audited unconsolida-ted and consolidated annual reports for 2010 at its 26th Regular meeting on April 15, 2011, giving its consent and approval without remark. The auditor's reports, forming integral parts of the unconsolidated and the consolidated annual reports respectively, were approved.

The Supervisory Board also confirmed the proposal of the Management Board on the forming of distributable profit in line with the legislation. The proposal on the use of dis-tributable profit shall be presented at the General Meeting of Shareholders jointly with the Management Board.

In addition to the aforementioned the Supervisory Board members ascertain that the Bank result in the uncertain macroeconomic conditions of the concluded business year was adequate, which they see as a result of teamwork by the Bank’s management and other employees, which is why it would like to express its appreciation for a job well done.

Alojz JamnikPresident of the Supervisory Board


I CONSOLIDATED BUSINESS REPORT

1 HIGHLIGHTS

– amounts in thousands of EUR

2010 2009 2008 IndexBalance Balance Balance 10/09 09/08

1. STATEMENT OF FINANCIAL POSITION (on 31 December)Total assets 2,599,217 2,560,233 2,415,041 102 106Total deposits from the non-banking sector 1,507,805 1,453,436 1,288,456 104 113 – legal and other entities 781,169 750,181 623,569 104 120 – private individuals 726,636 703,255 664,887 103 106Total amount of loans to the non-banking sector 1,707,367 1,700,739 1,596,314 100 107 – legal and other entities 1,375,778 1,394,652 1,305,421 99 107 – private individuals 331,589 306,087 290,893 108 105Total equity 200,702 199,391 189,421 101 105Impairment of financial assets at cost and provisions 111,318 88,892 70,011 125 127Commitments and contingent liabilities 471,867 455,688 614,908 104 74

2. INCOME STATEMENT (from 1 January to 31 December)Net interest and similar income 55,008 53,505 49,764 103 108Net non-interest income 21,595 23,462 27,506 92 85Staff costs, general and administrative costs 36,384 36,818 38,753 99 95Depreciation and amortisation 3,771 3,914 4,391 96 89Impairment and provisions 30,763 27,910 19,566 110 143Profit before income tax 5,685 8,325 14,560 68 57Income tax expense 926 1,773 2,988 52 59

3. NUMBER OF EMPLOYEES (on 31 December) 542 576 602 94 96

4. SHARESNumber of shareholders 703 703 697 100 101Number of shares 508,629 508,629 508,629 100 100Nominal share value (in EUR) 33 33 33 100 100Book value per share (in EUR) 393 391 371 100 105

5. RATIOS IN %CapitalCapital 298,141 299,729 283,591 99 106Capital adequacy 15.21 15.36 15.31Asset qualityImpairment charges on financial assets, measured at amortised cost, and provisions for guarantees and commitments / classified balance and off-balance sheet asset items 4.79 3.80 2.30ProfitabilityInterest margin 2.13 2.15 2.08Financial mediation margin 2.97 3.09 3.24Return on assets - before tax 0.22 0.33 0.61Return on equity - before tax 2.82 4.23 8.10Return on equity - after tax 2.36 3.33 6.44Operational costsOperational expenses / average assets 1.56 1.64 1.79LiquidityAverage liquid assets / average short-term deposits from non-banking sector 49.95 40.65 44.75Average liquid assets / average assets 20.38 19.25 20.59


2 PRESENTATION OF THE BANK AND ITS SUBSIDIARY COMPANY

Banka Celje, d.d., (the Bank) is an independent bank, esta-blished as a joint-stock company to perform all banking and other financial services as laid down by the Banking Act and the Companies Act.

Head office

The Bank’s head office is located in Celje, at Vodnikova 2.

The subsidiary company’s head office

The Posest, d.o.o., subsidiary company’s head office is located in Celje, at Vrunčeva 1.

Scope of operations

In line with Article 10 of the Banking Act, the Bank may per-form the following mutually recognized financial services:

– accepting deposits; – lending that also includes: consumer loans, mortgage

loans, factoring with or without recourse, financing of commercial transactions, including forfeiting;

– payment services and »e-money« issuing; – issuing and managing of other payment instruments

(such as travellers cheques and bank notes); – issuing guarantees and other commitments; – trading for own account or for the account of customers

in: foreign exchange, including currency exchange tran-sactions, financial futures and options, exchange and interest rate instruments;

– trading for own account in: money market instruments, transferable securities;

– safe custody services; – investment services and operations.

The Bank may also perform the following other financial services in accordance with Article 11 of the Banking Act:

– insurance brokerage in accordance with the act governing insurance business;

– marketing of mutual funds, sale of investment coupons or mutual fund shares.

The Bank complements its range of services on offer through its specialist subsidiary company Posest, d.o.o., Celje, which deals in real estate, leasing and offers advisory services in the recovery of bad debt.

Subsidiary company scope of operations

The company is registered to perform a number of different types of activities, with its core business comprising:

– realising the Bank’s bad debt; – marketing of real estate owned by the company and the

Bank; – owned and other property engineering; – property leasing; – property and equipment appraisals; – supervising purposeful use of loans as granted to inve-

stors.

History

The beginnings of the Bank reach as far back as 1864, when Hranilnica mestne občine Celje (a licensed deposit-taking institution of the Celje municipality) was established. In the form of a lending bank, Kreditna banka Celje joined Ljubljanska banka in 1971. The Bank was transformed into a joint-stock company in 1989 and remained part of the Ljubljanska banka system as a subsidiary until 1994.

Since 15 June 1994, the Bank has been operating indepen-dently under the name it holds today, namely Banka Celje, d.d. In line with the strategy of extending its operations out-side the Celje region, the Bank acquired Banka Noricum, d.d., Ljubljana in 1996 and transformed it into its main branch in Ljubljana, named Glavna Podružnica Ljubljana. The Bank also acquired Hmezad banka, d.d., Žalec in 1998 and first transformed it into a branch, namely Podružnica Hmezad (Hmezad branch), making it a business unit at the start of 2011. In September 2009 the Bank opened a business unit in Maribor and another in Koper in July 2010.

The Posest subsidiary company was established in 1991 as a limited liability company.


3 REPORT ON THE OPERATIONS OF THE BANK AND ITS SUBSIDIARY COMPANY IN 2010

The Bank’s Supervisory Board confirmed the development plan for the 2011 to 2013 period in October 2010, whereby it agreed with to reevaluate business policies and the business plan mid 2011, should the circumstances in the domestic and international financial environment change.

The Bank prepares a development plan for the coming three-year period supplementing it annually and prolonging it by an additional year. In the event of significant macroecono-mic or legislative changes it amends it on the basis of new reference points.

In its strategic development policies, representing key ele-ments in its further long-term development, the Bank puts safety of operations in first place, followed by quality of services and profitability.

Strategic policies have been taken into account in the pre-paration of strategic objectives. In the Bank’s view these objectives, due to their long-term nature, still include impro-ved internal efficiency in the sense of quick responsiveness to client needs, increased volume of operations, improved quality of services, optimal management of all banking risks, income effectiveness and the rationalization of ope-rations as well as professional competence and an efficient IT support of operations.

To attain strategic goals the Bank set key objectives for 2011, which include strengthening the market share in the non-banking operations segment, acquiring new long-term financing, active credit risk management, ensuring the required amount of capital and capital adequacy, optimising the number and structure of employees, reorganising some organisational parts of its structure.

The Bank will continue to improve the level of internal ef-ficiency by optimising the organization of operations in line with the changes pertaining to business processes and new trends in the banking sector. In retail operations it will analise the performance of its business units and look for alternative locations at more frequented spots based on the findings.

A 4 % nominal annual growth rate in the volume of opera-tions has been planned for the coming three-year period, due to continuing economic and financial uncertainty in the domestic and international environments. In relation to funding, activities will be directed at increasing the vo-lume of deposits in the sense diversifying their structure and toward ensuring an adequate ratio between loans to and deposits from the non-banking sector. The Bank will actively approach the process of obtaining new long-term funding. It plans to raise new loans with foreign banks, to

raise a new loan with the European Investment Bank or a comparable institution and to issue long-term bonds as well. Lending to corporates will see the Bank put special emphasis on investment quality and on the collection of outstanding liabilities. Growth levels of securities invest-ments is set to lag the growth of lending to the non-banking sector. Investments in prime debt securities will be adjusted to comply with the needs of secondary liquidity reserves, where matured debt securities will be reinvested in gover-nment bonds with the best ratings.

During the coming three-year period the Bank’s develo-pment activity in relation to risk will be aimed at improving the methodologies relating to the calculation of its internal capital, as required by the second pillar of the new European Capital Accord. In risk management the Bank will follow the requirements of the new CRD II directive, which came into effect on 31 December 2010, as well as the new Basel III guidelines, which are set to come into effect in 2013, with a transitional period expiring in 2018. Maintaining a strong capital position remains one of the Banks key objectives.

In addition to ensuring stable and safe operations, the co-ming three years will see the Bank work on maintaining profitability, while taking into consideration the conditions in the financial markets. The interest margin will remain at the level from 2010, however the net interest income will be higher than in 2010 due to an increased volume of operations. Operating expenses are set to remain at the 2010 level having a beneficial effect on the share of costs in net income, which should gradually decrease under 50 %. The Banks expects credit risk to remain high in the future, requiring high levels of established impairment charges and provisions provided. The planned operating income will enable the Bank to form an adequate volume of impairment charges and provisions, which, together with an efficient risk management, will ensure safety of operations.

The Bank expects that gradual remodelling of IT and busi-ness processes will enable it to continue to gradually dec-rease the total number of employees in the future also. At the same time, the Bank plans to improve the personnel structure from the education and age aspects. Special con-sideration shall be given to the identification and develo-pment of key personnel, which it deems important from the perspective of knowledge management.

Turning to operational IT support the Bank will use the co-ming three-year period to maximize the level of integration in all areas of banking operations. In 2010 the project of setting up a data warehouse was completed, with the Bank providing for its upgrading in the future. In payments and electronic banking integration and standardisation acti-


vites pertaining to European payment systems are set to continue. Hardware and software will be upgraded, with a consolidation of workstation use also being planned.

The Posest, d.o.o., Celje subsidiary company prepared its plan of operations for 2011, within the framework of which it plans to start an own small real-estate project, to disinvest the inventory of flats on Ljubljanska cesta and to perform leasing activities to a limited extent. The future will conti-nue to see the company follow its core mission, being the performance of activities to satisfy the Bank’s needs. It will monitor investment projects, supervise the purposeful use of loans given, value real-estate and movables, perform insurance brokerage and work on the recovery of the Bank’s investments.


4 SIGNIFICANT EVENTS

2010

– in February and in October the affirmation of current ratings by Fitch Ratings, the international rating agency, being long-term BBB, short-term F3, individual C, support 3, whereby the agency changed the long-term outlook from stable to negative in October as a result of the current market conditions;

– issue of regular bonds in the amount or EUR 40 million in March 2010 with the intention to replace maturing bonds and increase the quality of the Bank’s long-term funding for placement in long-term investments;

– signing of an agreement with the European Investment Bank (EIB) on a credit line in the amount of EUR 50 million, maturing in a period up to 12 years, in March 2010;

– signing of an agreement on a syndicated loan, maturing in three years and amounting to EUR 60 million, in July 2010;

– opening a new business unit in Koper, which started operating in July 2010; – issue of regular bonds in the amount of EUR 20 million at the start of October

2010; – preparation of proposals and the execution of the Bank’s reorganisation in effect

from 1 January 2011 onward; – signing of a new Collective agreement on banking in the Republic of Slovenia

in December 2010.

2011

– the drawing of the first tranche of the facility from the European Investment Bank, intended for long-term lending for the development of the economy and the public sector, in the amount of EUR 15 million;

– issue of regular five-year bonds in the domestic market in a total amount of EUR 34 million.


5 ECONOMIC AND BANKING ENVIRONMENT

5.1 ECONOMIC ENVIRONMENT

After 2008 and 2009 the international economic and finan-cial crisis continued in 2010. As some of the larger Asian countries reached high levels of economic growth in 2010 it was rather moderate in the euro area, reaching 1.9 % in the third quarter according to the most recent data on record. Distinct macroeconomic imbalances persist, reflected in high public deficits. The uncertainty in the financial markets moderated somewhat mid-2010, it however increased again in the second half of the year due to the deterioration of the public finance balances in some of the euro area countries.

In Slovenia economic growth reached 1.2 % in 2010, largely dependent on foreign demand. Gross fixed capital formation was 6.7 % lower than a year ago and has been decreasing for the past eight successive quarters. Final consumption already shows signs of recovery, as it increased by 0.6 %. The external balance of goods however had the most positive effect on economic activity. According to temporary data Slovenia exported 13.7 % more goods in 2010 than in 2009, while import was higher by 14.6 %. The import to export ration thus reached 92.9 %. Within the framework of pro-duction structure of the gross domestic product, industrial production increased by 6.4 % in 2010. The building sec-tor saw activity decrease by 14.4 % in 2010, with a gradual moderation of the negative trend in sight, as the budget memorandum provides for an increase in public funding for construction and national road maintenance as well as the modernisation of the rail infrastructure, where extensive co-financing from the EU budget is expected.

The registered number of unemployed persons increased dramatically in 2010, exceeding 110,000 persons. Decem-ber saw mainly older persons registering as unemployed, as these registered at the Employment Service of Slovenia with the intention to wait so that they could retire in accor-dance with the stipulations of the old pension legislation. The registered unemployment rate in 2010 amounted to 11.8 %, having reached 10.3 % in December 2009. The Po-murje region saw the highest unemployment rate, with it increasing the most in Koroška, the Obalno-kraška and the Notranjsko-kraška regions.

The public finance deficit during the final twelve moths until November 2010 reached 6.1 % of the estimated gross dome-stic product. Income increased for 0.2 %, with higher VAT, excise duty payments and income from EU budget, while the tax income from corporate income decreased. Expenses

were 1.4 % higher, based on decreased budget expenses due to restrictions, while public transfers for unemployment benefits, scholarships and sickness benefits increased.

In 2010 the Slovene annual inflation rate amounted to 1.9 %, measured using the harmonised index of consumer prices, which is used for the calculation of inflation rates in other European Monetary Union member countries also, it amo-unted to 2.2 % year-on-year. On average in the euro area consumer prices also increased by 2.2 %, increasing 2.6 % in the EU members states. The lowest annual inflation rate was recorded in Ireland, with the highest recorded in Ro-mania at 7.7 %. Price increases in Slovenia were influenced most by rising fuel prices, themselves being impacted by oil price increases in the global marketplace and by higher excise duties on electrical energy, natural gas and motor fuel.

5.2 BANKING ENVIRONMENT

The Slovene banking system was marked in 2010 by slow and unstable recovery of the domestic economy and by uncerta-inty in the European financial markets. Due to a relatively high indebtedness of the non-banking sector 2010 saw a deterioration of liquidity and an increase in outstanding financial liabilities.

The balance sheet of the Slovene banking system shrank by 2.6 % in 2010. Banks have paid down debt to the Eurosystem and foreign banks, while the state decreased its deposits with banks. At the same time banks increased the issue volumes of debt securities, with deposits from household increasing to a lesser extent. The investment side so banks increase loans to households, while the balance of loans to corporate decreased.

The shrinking of the balance sheet of banks was impac-ted most by increased credit and income risk as well as refinancing risk. Increased credit risk is reflected in the deterioration of the credit portfolio and in the increasing share of borrower obligations 90-day overdue. Income risk increases with increased dynamics of establishing impair-ments and providing provisions, whereby the probability of banks operating with a more permanent loss increases also. Refinancing risk has been less evident due to stagnant lending, it will however increase in the future due to limited funding and increasing funding prices. In spite of the risks the Slovene banking system remains safe from the point of view of the saver.


6 REPORT ON THE OPERATIONS OF THE BANK AND ITS SUBSIDIARY COMPANY IN 2010

6.1 CONSOLIDATED FINANCIAL RESULT OF THE BANK AND ITS SUBSIDIARY COMPANY

The Group concluded 2010, a year of extremely unstable operating conditions, with a pre-tax profit of EUR 5,685 thousand. Compared with the gross profit from 2009, it was 32 % lower. Data shows that the decrease in gross profit was mainly the result of the need for establishment of additional impairment charges and provisioning. Prior to the establishment of impairment charges and provisions profit in 2010 amounted to EUR 36,448 thousand, being 0.6 % higher than in 2009.

The return on average equity prior to tax amounted to 2.82 %, with the share of costs in net income representing 52.42 %.

Net profit amounted to EUR 4,759 thousand, with EUR 2,250 thousand already having been allocated to other profit reserves on the basis of a decision by the Supervisory Board at the end of 2010, made in line with the legislation.

Analysis of the Group’s net income and expenses in 2010:

The Group made EUR 55,008 thousand in net interest and similar income in 2010, being 3 % or EUR 1,503 thousand more than in 2009. Interest income fell by 6 % and inte-rest expenses by 14 %. The interest margin decreased from 2.15 % to 2.13 % in 2010.

Dividend income reached EUR 728 thousand, increasing in comparison with the 2009 figure by 1 %. In 2009 the Bank made 61 % of all dividend income from investments in held for trading investments, with the other 39 % based on divi-dend income from available-for-sale securities.

Net fee and commission income from banking services rendered amounted to EUR 16,260 thousand in 2010. The decrease in the amount of EUR 483 thousand as compared with 2009 was mainly the consequence of higher net fees and commissions from card operations in 2009 due to the exceptional receipt of the proportional part of assets from the sale of Banka Koper’s interest in the Mastercard and Visa card systems in the amount of EUR 578 thousand. The services accounting for the majority of the Group’s non-in-terest income from fees and commissions in 2010 include payments and card operations. Most of the expenses from banking services also came from card operations for the year.


Realization 2010 Realization 2009 Change IndexNet income and expenses 1 2 3=1-2 4=1:2

Net interest and similar income 55,008 53,505 1,503 103Dividend income 728 722 6 101Net fee and commission income 16,260 16,743 (483) 97Net gains from financial assets and liabilities not classified at fair value through profit or loss 1,397 1,345 52 104Net (losses) / gains from financial assets and liabilities held for trading (6,818) 4,230 (11,048) (161)Net (losses) from financial assets and liabilities designated at fair value through profit or loss (53) (705) 652 8Changes in fair value from hedging 98 — 98 —Foreign exchange translation net gains 9,663 314 9,349 3,077Net gains from derecognition of assets 26 29 (3) 90Net other operating income 294 784 (490) 38Administrative expenses (36,384) (36,818) 434 99Depreciation and amortisation (3,771) (3,914) 143 96Provisions 251 235 16 107Impairment charges (31,014) (28,145) (2,869) 110Profit before income tax 5,685 8,325 (2,640) 68Income tax expense (926) (1,773) 847 52Profit for the year 4,759 6,552 (1,793) 73


Net gains from financial assets and liabilities not classified as fair value through profit or loss amounted to EUR 1,397 thousand, being 4 % higher than in 2009. In trading equity and debt securities the Bank made a profit in the amount of EUR 1,637 thousand. Net profit from write-offs reached EUR 240 thousand.

Financial assets and liabilities held for trading resulted in a loss totalling EUR 6,818 thousand, while the item produced a profit in 2009. Trading in equity and debt securities produ-ced a profit of EUR 3,998 thousand, while profit from foreign exchange trading came in at EUR 329 thousand. In spite of a loss in trading with derivatives, individual derivative types had a net positive effect in relation to the underlying transaction, such as e.g. foreign currency swaps in relation to foreign exchange differences in the amount of EUR 778 thousand and the interest position hedging with an interest rate swap in relation to the Bank’s bonds amounting to EUR 575 thousand.

With regard to financial assets and liabilities designated at fair value through profit or loss, the Bank made a loss amo-unting to EUR 53 thousand. From the valuation of bonds, which have been hedged with the use of an interest rate swap, the result was a profit of EUR 108 thousand, while the valuation of own securities in issue resulted in a loss of EUR 161 thousand.

A profit in the amount of EUR 98 thousand was made from changes in fair value from hedge accounting. The Bank hedged the latest fixed coupon bond issue from interest rate risk with the use of an interest derivative and hedge accounting. In 2009 the Bank was not yet using the hedge accounting method.

Foreign exchange translation net gains amounted to EUR 9,663 thousand. Positive foreign exchange differences amo-unted to EUR 24,460 thousand, while negative differences came in at EUR 14,797 thousand.

Net gains from derecognition of assets other than non-current assets held for sale reached EUR 26 thousand in 2010. The gain represents the current carrying value of fixed assets at sale.

Net other operating loss reached EUR 294 thousand in 2010, while 2009 saw a profit of EUR 784 thousand. Revenue came in at EUR 1,058 thousand and expenditure amounted to EUR 764 thousand. With EUR 757 thousand the Group made most of the revenue from the sale of goods and servi-

ces through its subsidiary. The major part of the expenses for the year came from the refund of fees for withdrawals at other bank ATMs in the Republic of Slovenia during the period from 20 February 2006 to and including 14 May 2007, paid out in October 2010 in a total amount of EUR 298 thousand.

Administrative expenses accounted for EUR 36,384 thou-sand in 2010. Labour costs amounted to EUR 20,819 tho-usand, while general and administrative costs came in at EUR 15,565 thousand. Labour costs were EUR 588 thousand lower than in 2009, general and administrative costs on the other hand were EUR 154 higher. Within the general and administrative costs the Group decreased office supply costs and marketing costs the most, whereas IT costs as well as other administrative costs increased, the latter due to increased recovery activities.

Depreciation and amortization amounted to EUR 3,771 tho-usand in 2010, a 4 % decrease as compared to 2009.

The Group’s cost efficiency, measured through the share of operating costs in the Bank’s assets, improved from 1.64 % to 1.56 % in 2010. The cost/income ratio – the CIR came in at 52.42 %, whereas in 2009 it stood at 52.92 %.

In 2010 provisions were reversed in an amount reaching EUR 251 thousand, whereas 2009 saw a reversal of EUR 235 thousand. Additionally, in 2010 the Group provisioned EUR 268 thousand for denationalization proceedings and EUR 452 thousand in provisions for liabilities toward employees has been reversed based on an actuarial calculation. Pro-visions for commitments and contingent liabilities were reversed in an amount of EUR 67 thousand.

Impairment charges due to lending and receivables amo-unted to EUR 31,014 thousand and were 10 % higher as compared with 2009. The Group established impairment charges for securities totalling EUR 7,518 thousand, while credit risk impairment charges amounted in total to EUR 23,496 thousand.

6.2 CONSOLIDATED FINANCIAL POSITION OF THE BANK AND ITS SUBSIDIARY COMPANY

End 2010 the Group’s balance sheet amounted to EUR 2,599,217 thousand. As compared to 2009 the figure inc-reased by EUR 38,984 thousand or 2 %.


The Group’s most liquid assets increased by 219 % or EUR 88,084 thousand in 2010. Cash fell by 10 % to amount to EUR 10,691 thousand end December 2010, while balances with the Central Bank increased from EUR 28,426 thousand to EUR 117,633 thousand.

Held for trading financial assets decreased by 26 % or EUR 22,382 thousand, thus ending the year at EUR 65,365 tho-usand. Equity investments decreased by 42 % from EUR 35,823 thousand to EUR 20,697 thousand in 2010, in com-pliance with the business policies. Investments in debt se-curities also decreased - bond investments by 8 % or EUR 1,236 thousand and investments in certificates of deposit by 13 % or EUR 2,536 thousand. Receivables from the valu-ation of derivatives fell EUR 3,484 thousand due to reduced volume of operations reaching EUR 12,645 thousand at the end of 2010. Most of these receivables pertain to forward agreements based on securities and to interest rate swaps.

Investments in financial assets designated at fair value through profit or loss, amounted to EUR 29,445 thousand, having increased by EUR 11,008 thousand in 2010. The Group classifies structured bonds and bonds hedged with interest rate swap transactions into this category. The incre-ase in this item is mainly due to securities pledged in 2009, recorded in a separate balance sheet item.

In 2010 investments in available-for-sale financial assets increased by 1 % from EUR 234,067 thousand to EUR 236,029 thousand. In April 2010 the Bank sold part of the interests it held resulting from liquidation of collateral as repayment of a loan it executed in August 2009. The follo-wing months saw investments decrease gradually due to decreased reinvestments of debt securities, which matured or were sold and due to the impairment charges pertaining to some of equity securities it held. The increase of these

investments predominantly pertains to securities pledged in 2009.

Loans and advances to banks decreased by 3 % amounting to EUR 85,908 thousand end 2010. At sight deposits incre-ased by 60 % due to over-night deposits, while short-term loans decreased by 15 %, with long-term loans decreasing by 4 %. At sight deposits represented a 26 % share in the total structure of loans to banks at the end of 2010.

Loans and advances to customers increased by 0.4 % in 2010, reaching EUR 1,707,367 thousand by the end of the year. With a 66 % share these represent the strongest category in the Group’s investment operations. Loans to corpora-tes, comprising loans to companies and loans to private entrepreneurs, decreased by 1 % due to intensified recovery activities, impairment charges and larger repayments, thus reaching EUR 1,375,778 thousand at the end of the year. Retail loans grew 8 % to reach EUR 331,589 thousand.

Held-to-maturity investments increased from EUR 213,959 thousand to EUR 276,273 thousand. End 2010 this category included prime long-term bonds exclusively, while the Gro-up also recorded short-term treasury bills of the Republic of Slovenia under this item. The increase of investments results from a smaller volume of security pledges.

Assets pledged decreased by EUR 103,282 thousand in 2009 amounting to EUR 32,390 thousand at the end of the year. The Group still records pledged securities in its books, howe-ver in a separate item, with related repurchase obligations shown under financial liabilities associated with transferred assets.

The Group’s assets according to individual items:


2010 Str. 2009 Str. Change IndexGroup's assets 1 2 3 4 5=1-3 6=1:3

Cash and balances with Central Bank 128,324 5 40,240 2 88,084 319Financial assets held for trading 65,365 3 87,747 4 (22,382) 74Financial assets designated at fair value through profit or loss 29,445 1 18,437 1 11,008 160Avaliable-for-sale financial assets 236,029 9 234,067 9 1,962 101Loans and advances 1,793,275 69 1,789,240 70 4,035 100 – loans and advances to banks 85,908 3 88,501 4 (2,593) 97 – loans and advances to customers 1,707,367 66 1,700,739 66 6,628 100Held-to-maturity investments 276,273 11 213,959 8 62,314 129Assets pledged 32,390 1 135,672 5 (103,282) 24Property and equipment 19,658 1 20,629 1 (971) 95Investment property 1,807 — 306 — 1,501 591Intangible assets 5,256 — 5,342 — (86) 98Income tax assets 4,997 — 4,622 — 375 108Other assets 6,398 — 9,972 — (3,574) 64Total 2,599,217 100 2,560,233 100 38,984 102


Investments in property and equipment amounted to EUR 19,658 thousand, having decreased by 5 % in 2010, with in-vestments in buildings and equipment decreasing by the same percentage.

Investment property increased from EUR 306 thousand to EUR 1,807 thousand in 2010 and pertains to the current value of property and buildings, acquired for sale or operating leasing. The increase results from the transfer of housing property to investment property for operating leasing purposes.

Investments in intangible assets decreased by 2 % amounting to EUR 5,256 thousand end 2010. Long-term property rights amounted to EUR 4,991 thousand, while intangible long-term qualifying assets amounted to EUR 265 thousand. In spite of additional investments, the decrease is a result of the transfer of investments in the construction of a data warehouse to use.

Receivables for corporate income tax amounted to EUR 4,997 thousand end 2010, pertaining to corporate income tax over-paid in the amount of EUR 1,582 thousand while EUR 3,415 thousand was applicable to long-term deferred tax receivables.

The Group’s liabilities per item have been realized as follows:

End December 2010 loans from the European Central Bank amounted to EUR 70,013 thousand. During the year the Group repaid all of the aforementioned loans taken in 2009 and raised a new three-month facility in the amount of EUR 40 million as well as a one-week facility amounting to EUR 30 million, maturing on 5 January 2011.

Held for trading financial liabilities decreased by 1 % and amounted to EUR 6,014 thousand end 2010. They include liabilities from the valuation of derivatives.

Financial liabilities at fair value through profit or loss recor-ded EUR 40,050 thousand end 2010, thus remaining at the 2009 level. This item includes subordinated bonds issued in 2007 and maturing in 2017 as well as certificates of deposit

maturing in 2012, which the Bank includes in the capital requirement and the capital adequacy ratio calculations in the amounts allowed.

Financial liabilities at amortized cost increased by 3 % com-pared to 2009 and their amount of EUR 2,227,369 repre-sents 85 % of the Bank’s total liabilities.

Deposits and borrowings from banks amounted to EUR 473,770 thousand, which represents EUR 2,285 thousand less than the 2009 figure. Even though their share in the structure of the Group’s liabilities has gradually been dec-reasing, it remains the second most important funding category with an 18 % share. Despite some encouraging macroeconomic data access to long-term foreign funding


2010 Str. 2009 Str. Change IndexGroup's liabilities 1 2 3 4 5=1-3 6=1:3

Deposits from Central Bank 70,013 3 130,486 5 (60,473) 54Financial liabilities held for trading 6,014 — 6,051 — (37) 99Financial liabilities designated at fair value through profit or loss 40,050 2 39,851 1 199 100Financial liabilities at amortised cost 2,227,369 85 2,159,899 85 67,470 103 – deposits and borrowings from banks 473,770 18 476,055 19 (2,285) 100 – due to customers 1,507,805 58 1,453,436 57 54,369 104 – debt securities in issue 160,436 6 134,774 5 25,662 119 – subordinated liabilities 85,358 3 95,634 4 (10,276) 89Financial liabilities associated to transferred assets 30,993 1 — — 30,993 —Derivative financial instruments designated for hedging 348 — — — 348 —Provisions 13,268 1 13,981 1 (713) 95Other liabilities 10,460 — 10,574 — (114) 99Total liabilities 2,398,515 92 2,360,842 92 37,673 102

Share capital 16,980 1 16,980 1 — 100Share premium 51,542 2 51,542 2 — 100Revaluation reserve 3,971 — 4,660 — (689) 85Profit reserves 125,731 5 123,074 5 2,657 102Treasury shares (31) — (31) — — 100Profit for the year 2,509 — 3,166 — (657) 79Total equity attributable to equity holders of the parent 200,702 8 199,391 8 1,311 101Total liabilities and equity 2,599,217 100 2,560,233 100 38,984 102


remained limited during 2010. Consequently, loans from foreign banks decreased by 13 % and amounted to EUR 217,705 thousand end 2010.

Due to customers increased by 4 % or EUR 54,369 thousand, coming up to EUR 1,507,805 thousand at the end of 2010. Liabilities to corporates increased by 4 % or EUR 30,988 thousand, while liabilities to retail increased by 3 % or EUR 23,381 thousand. In line with the business policies long-term deposits increased most in value, namely by EUR 154,646 thousand, amounting to EUR 499,673 thousand end 2010. At sight deposits were 16 % higher, while short-term deposits fell by 22 %.

Liabilities from debt securities in issue amounted to EUR 160,436 thousand end 2010 and include liabilities from issued plain vanilla bonds and certificates of deposit. In 2010 liabilities pertaining to this item increased by 19 % or by EUR 25,662 thousand due to two bond issues.

Subordinated liabilities decreased by 11 % or EUR 10,276 thousand due to the maturity of the seventh subordinated bonds issue. The Group did not issue any new subordinated bonds in 2010.

Financial liabilities associated to transfer assets, include interbank short-term repo transactions. At the end of 2010 liabilities from interbank repo transactions amounted to EUR 30,993 thousand, whereas the Group did not enter into interbank repo transactions in 2009.

End 2010 the Group formed provisions amounting to a total of EUR 13,268 thousand. Compared with 2009 provisioning went down by 5 % or EUR 713 thousand. Provisions for denationalization proceedings increased by EUR 268 thousand amounting to EUR 8,169 thousand at the end of the year. Provisions for liabilities toward employees were reversed or utilised in an amount of EUR 624 thousand, while provisions for commitments and contingent liabilities were reversed in the amount of EUR 67 thousand and the provisions from the National Housing Savings Scheme in the amount of EUR 290 thousand.

Group capital increased by EUR 1,311 thousand or 1 % in 2010 to amount to EUR 200,702 thousand at the end of the year. The increase was positively impacted by net profit for the current year, while capital was negatively impacted by the distri-bution of profit for the payment of dividends and the revaluation of available-for-sale financial assets to a lower fair value.

6.3 BANK AND SUBSIDIARY COMPANY OPERATIONS ACCORDING TO KEY AREAS

6.3.1 Credit operations

The Group places free assets with corporate and retails clients and, to a lesser extent, uses the interbank market. In 2010 credit operations saw the best results achieved in long-term lending.


2010 Str. 2009 Str. Change IndexLoans 1 2 3 4 5=1-3 6=1:3

Loans to banks 85,908 5 88,501 5 (2,593) 97Loans to non-banking sector 1,375,778 77 1,394,652 78 (18,874) 99Retail loans 331,589 18 306,087 16 25,502 108Total loans according to borrower 1,793,275 100 1,789,240 100 4,035 100

Loans according to maturity 1,793,275 100 1,789,240 100 4,035 100Short-term loans 709,901 40 839,290 47 (129,389) 85Long-term loans 1,083,374 60 949,950 53 133,424 114

Within the framework of credit operations loans to the non-banking sector, which represent the most significant category in terms of value, decreased by 1 %. In 2010 the difficulties faced by some of the Slovene economic sectors continued to deepen, especially pertaining to construction, corporate management and real estate. These meant a num-ber of insolvency announcements, compulsory settlement proceedings and bankruptcies. Consequently, the Group

directed special attention to recovery activities and care-ful selection of corporate borrowers. It actively cooperated with SID bank, where it attained guarantees for certain projects and obtained cheaper funding as well. In 2010 the Group also actively marketed funding from the European Investment Bank, intended for eco-project funding and the funding of projects aimed at energy efficiency.


Retail loans increased by 8 % in 2010, reaching EUR 331,589 thousand. To promote retail loans, the Group introduced favourable housing loan offers and a new form of dedicated lending – NATUR housing and mobile loans, providing clients with more favourable conditions for the funding of eco-projects.

Risk bearing commitments and contigent liabilities increased by 6 % in 2010.

According to volume assumed liabilities and guarantees have proven the most significant.

Assumed liabilities, having increased by 28 % in 2010, include liabilities from the undrawn stand-by credit lines, liabilities from approved and undrawn loans, liabilities from spot transactions, liabilities from issued letters of intent and in 2010 also short-term loans to cover for letters of credit. Undrawn loans to corporate increased the most in value for the year.

Other categories within commitments and contingent liabilities also include liabilities based on an agreement to gradually enter into foreign investment funds, potential liabilities from premiums received for national housing savings schemes and a potential exposure from derivatives.

6.3.2 Deposits

The Group obtains funding from the deposits of the non-banking sector, the deposits and loans from banks and from loans raised with the European Central Bank as well as from interbank repos transactions. Short-term liabilities of the Group remained at the level from 2009, while long-term liabilities increased by 2 %.


2010 Str. 2009 Str. Change IndexRisk weighted commitments 1 2 3 4 5=1-3 6=1:3

Guarantees 80,261 32 79,819 34 442 101Open, non-covered documentary letters of credit — — 6,019 2 (6,019) —Other 430 — 849 — (419) 51Assumed liabilities 167,373 67 130,871 55 36,502 128Derivatives 3,201 1 20,457 9 (17,256) 16Total 251,265 100 238,015 100 13,250 106


2010 Str. 2009 Str. Change IndexGroup's liabilities from deposits and loans 1 2 3 4 5=1-3 6=1:3

Deposits from Central Bank 70,013 3 130,486 6 (60,473) 54Financial liabilities associated to transferred assets 30,993 1 — — 30,993 —Deposits and borrowings from banks 473,770 23 476,055 23 (2,285) 100Deposits from the non-banking sector 781,169 38 750,181 37 30,988 104Retail deposits 726,636 35 703,255 34 23,381 103Total deposits 2,082,581 100 2,059,977 100 22,604 101

Deposits according to maturity 2,082,581 100 2,059,977 100 22,604 101Short-term loans 1,195,683 57 1,194,085 58 1,598 100Long-term loans 886,898 43 865,892 42 21,006 102

Deposits from the Central Bank comprise loans the Group raised with the European Central Bank having pledged se-curities. At the start of July the Group paid off loans taken in June 2009 with a maturity of 12 months amounting to EUR 80 million, while in September loans matured in a to-tal of EUR 40 million and the remaining EUR 30 million of 12-month funding matured in December. At maturities the Group participated in the European Central Bank’s special auctions in accordance with its needs.

Financial liabilities associated to transferred assets, include interbank repo transactions, which the Group did not enter into during 2009, but has started to again in 2010 due to more favourable conditions as compared with the European Central Bank instruments.

Deposits from banks remained at the 2009 level due to re-payments, despite new loans having been raised. Foreign financial markets still exhibited a lack of confidence, which


was reflected in unwillingness to provide funding, especially for long-term assets. In spite of this the Group actively appro-ached the market in search of long-term funding. In March 2010 it signed an agreement with the European Investment Bank pertaining to a credit line in the amount of EUR 50 million, maturing in 12 years. In July 2010 it signed an agreement on a three-year syndicated loan in an amount of EUR 60 million with a syndicate of nine foreign banks. It also entered into a few one-year bilateral facilities, having also renewed and prolonged some.

Deposits from the non-banking sector increased by 4 % in 2010. Deposits from the Ministry of Finance amounted to EUR 197 million in total deposits from the non-banking sector, having decreased by EUR 55 million for the year.

Retail deposits increased by 3 % in 2010. The Group provided its clients with a number of special offers related to savings, which got a positive response and brought a number of new clients to the bank. Retail deposits are extremely important for the Group’s stability, which is why it actively adapts its deposit services to cater for the needs and wishes of its clients.

The Group also provides its savers with alternative savings instruments. It has been selling investment products and insurance services for a number of years. In relation to the investment products on offer it accepts and forwards orders to buy or sell asset units of the NLB Skladi umbrella fund with the related sub-funds and the NFD umbrella fund with the related sub-funds. In cooperation with insurance companies NLB Vita, Zavarovalnica Maribor, Zavarovalnica Triglav and Adriatic Slovenica the Group offers its clients a number of different insurance service types, with insurance in the event of unemployment requiring special mention due to increased volumes, as well as tourist insurance and additional payment card holder insurance.

In addition to the classical counters, the Group has been offering its clients more modern services that it continuously de-velops and has been upgrading for a number of years. These comprise non-cash and self-service operations, phone banking as well as the ever more popular e-banking. A modern e-banking branch has been available to clients since July 2000 and it enables quick, safe and simple performance of most of the services offered by the Bank. E-banking is constantly adapting to the new modern technologies. Safety has been provided for with the use of the most modern internet technologies.

In non-cash operations the Group offers a wide spectrum of card services. It issues payment cards of the Activa Maestro, Activa / Mastercard and Activa / Visa brands, distinguished by recognition value and applicability in Slovenia and abroad.

With regard to self-service operations clients had at their disposal 96 ATMs at the end of 2010, connected into the BA network across Slovenia. Constant monitoring of the number of transactions at ATMs allowed the Group to correspon-dingly relocate existing ATMs to locations more accessible to clients, as well as increase security of these transactions.

6.3.3 Securities operations

The Bank performs securities and derivatives operations, while the subsidiary company does not.

The volume of securities investments decreased by 7 % compared with 2009. Investments in all financial asset categories fell, with investments in available-for-sale financial assets dropping most.

According to maturity, 89 % of investments was represented by investments in long-term securities, which increased by an additional 12 % in 2010.


2010 Str. 2009 Str. Change IndexSecurities investments 1 2 3 4 5=1-3 6=1:3

Investments according to type 639,502 100 689,882 100 (50,380) 93Financial assets held for trading 65,365 10 87,747 12 (22,382) 74Financial assets designated at fair value through profit or loss 29,445 5 18,437 3 11,008 160Avaliable-for-sale financial assets 236,029 37 234,067 34 1,962 101Held-to-maturity investments 276,273 43 213,959 31 62,314 129Assets pledged 32,390 5 135,672 20 (103,282) 24

Investments according to maturity 639,502 100 689,882 100 (50,380) 93Short-term security investments 69,313 11 181,043 26 (111,730) 38Long-term security investments 570,189 89 508,839 74 61,350 112


Held for trading financial assets comprise investments in equity and debt securities, which the bank holds in its portfolio as well as the valuation of derivative financial instruments. More than half of the held for trading portfolio was the object of forward sales. In line with the Bank’s business policies 2010 saw a decrease in investments in tradable securities.

Financial assets designated at fair value through profit or loss include structured bonds and bonds hedged with the use of an interest rate swap. The increase is a result of securities pledged in 2009, while there have been so such pledges in 2010.

Available-for-sale financial assets represent part of the secondary liquidity reserve and are intended for the management of foreign exchange, currency and interest rate risk. Investments in equity securities dropped, reason being the sale of part of the securities the Bank acquired in 2009 by liquidating collateral for the repayment of a loan. Investments in debt securities decreased due to a decrease in reinvestment of matured and sold bonds. Even though the investments in equity and debt securities decreased, 2010 saw the item increase as a result of a large amount of securities pledged in 2009, while the Bank did not pledge any of these securities in 2010.

Held to maturity financial assets include fixed income securities, which the Bank expects to be able to hold until final maturity. In January and in February 2010 short-term Republic of Slovenia treasury bills matured, which the Bank gra-dually replaced with investments in securities issued by prime issuers. The increase in investments in 2010 is the result of a decrease in the amount of securities pledged.

Securities issued increased by a total of 6 % in 2010.


2010 Str. 2009 Str. Change IndexSecurities issued 1 2 3 4 5=1-3 6=1:3

Own securities issued 285,844 100 270,259 100 15,585 106Financial assets designated at fair value through profit or loss 40,050 14 39,851 15 199 100Debt securities in issue 160,436 56 134,774 50 25,662 119Subordinated liabilities 85,358 30 95,634 35 (10,276) 89

Own securities issued according to maturity 285,844 100 270,259 100 15,585 106Own short-term securities issued 6,555 2 7,029 3 (474) 93Own long-term securities issued 279,289 98 263,230 97 16,059 106

Financial liabilities recognized at fair value through profit or loss remained at the 2009 level in 2010 and include subordi-nated bonds issued in February 2007 at a nominal value of EUR 37 million, maturing in 2017 as well as certificates of deposit issued in June 2007 at a nominal value of EUR 1.5 million, maturing in 2012. The Bank hedged these securities with the use of an interest rate derivative instrument.

Debt securities in issue increased by 19 % and include re-gular bonds and certificates of deposit. In March the Bank issued a new regular long-term bond in an amount of EUR 40 million to replace the matured BCE9 regular bond and the BCE7 subordinated bond and also acquired new additi-onal long-term funding sources. In October the Bank issued another regular bond in an amount of EUR 20 million. The Bank hedged the latest fixed coupon bond it issued from interest rate risk by using an interest rate derivative instru-ment and applying hedge accounting.

Subordinated liabilities decreased by 11 % in 2010 due to the maturity of the seventh issue of bonds in the amount of EUR 10 million. In 2010 the Bank did not issue any new subordinated bonds.

In 2010 in line with its business policies the Bank continued to actively trade derivative financial instruments. It con-ducted foreign currency forward transactions and entered into forwards pertaining to shares, certificates of deposit and bonds. To hedge interest rate positions it entered into interest rate swaps. The total volume of derivative financial instrument operations was 8 % lower in 2010 as compared with 2009. The increase mainly came from an increased vo-lume of interest rate swap transactions, while bond futures also had a smaller effect.


6.3.4 Payment operations

The Bank performs international and domestic payment operations, while the subsidiary company does not.

In 2010 the Bank performed activities related with the introduction of the new Payment Services and Systems Act, while most of its attention was directed at activity in pertaining to SEPA. It stands for Single Euro Payment Area, a unified area for euro payments and includes payment instruments most frequently used in Europe, being credit payments, direct debits, payment cards and euro cash. In 2010 the Bank began effecting SEPA credit payments and direct debits, with preparations for the migration of direct credits still underway.

The Bank is also preparing to introduce e-accounts, which is why it formed a dedicated workgroup in September.

In 2010 the Bank performed 7.6 million of payment transactions totalling EUR 52,864 million. For the main part these were domestic payment transactions, while international payments, amounting to EUR 2,053 million, show Germany remains on top with a 22.4 % share in the total international payments flow.

End 2010 the Bank maintained 6,375 transaction accounts belonging to corporates and 5,674 transaction accounts belon-ging to private entrepreneurs and to private undertakings, which represents a 7 % increase as compared with the end of 2009. A total of 341 corporate accounts amounting to EUR 71.9 million as well as 416 private entrepreneur and private undertaking accounts in the amount of EUR 10.5 million were frozen. The Bank was also authorised to execute final court decisions in a total amount of EUR 37.5 million.

6.4 EQUITY AND SHAREHOLDERS

The Group’s equity comprises share capital, share premium, revaluation reserve, profit reserves and net profit, while own shares decrease it. In 2010 the equity increased by EUR 1,311 thousand to amount to EUR 200,702 thousand at the end of the year.

Equity in 2010 is shown in the table below:


2010 Str. 2009 Str. Change IndexDerivatives - receivables 1 2 3 4 5=1-3 6=1:3

Currency swaps 75,306 33 87,653 36 (12,347) 86Interest rate swaps 95,303 42 84,758 34 10,545 112Share forwards 26,616 12 44,819 18 (18,203) 59Certificate of deposit forwards 16,083 7 17,928 7 (1,845) 90Bond forwards 3,441 2 1,102 1 2,339 312Options 10,000 4 10,000 4 — 100Total 226,749 100 246,260 100 (19,511) 92


2010 Str. 2009 Str. Change IndexEquity 1 2 3 4 5=1-3 6=1:3

Share capital 16,980 8 16,980 8 — 100Share premium 51,542 26 51,542 26 — 100Revaluation reserve 3,971 2 4,660 2 (689) 85Profit reserves 125,731 63 123,074 62 2,657 102Treasury shares (31) — (31) — — 100Profit for the year 2,509 1 3,166 2 (657) 79Total 200,702 100 199,391 100 1,311 101


The share capital of the Bank in the Group comprises 508,629 no par value shares after the increase of capital from approved capital completed in 2008. Changes in 2010 pertain to the fluctuation of the revaluation reserve, the net profit for the year and to the distribution of distributable profit for 2009. The revaluation reserve decreased by EUR 689 thousand to EUR 3,971 thousand in 2010 due to the valuation of most available-for-sale securities to a lower fair value. In September 2010 the Bank paid dividends for 2009 totalling EUR 2,796 thousand, with the remaining profit for 2009 in the amount of EUR 589 thousand being distributed to profit reserves. Unpaid dividends from pre-vious year were also transferred to profit reserves in a total of EUR 37 thousand. In 2010 the Bank made a total profit of EUR 4,759 thousand. Profit in the amount EUR 2,250 thousand was allocated to other profit reserves as at 31 December 2010 based on the decision by the Management Board and the Supervisory Board brought in accordance with the legislation.

In 2010 the Bank did not purchase or sell own shares. As at 31 December 2010 it held 251 regular shares in its port-folio in the amount of EUR 31 thousand, which represents only 0.05 % of its total equity. It did not acquire any own shares indirectly, with 1,038 shares having been pledged as security.

The book value of the Bank’s share amounted to EUR 393 as at 31 December 2010. In 2010 the shareholders received dividends for 2009 amounting to EUR 5.50 per regular and preference share in line with the decision made at the Me-eting of Shareholders.

End 2010 the share register showed 708 shareholders, 224 of which were corporates while 484 were private individuals. Nova Ljubljanska banka remains the Bank’s largest share-holder, holding a 40.99 % ownership share and a 49.42 % share of the voting rights end of 2010.

The following companies represent the Bank’s 10 largest shareholders:

6.5 RISK MANAGEMENT AND CONTROL OPERATIONS

In its operations the Group is exposed to a number of diffe-rent risks, which is why it developed a number of different procedures and methods for their management. The qua-lity of assessing all risk types and responding to them in a timely manner as well as decreasing exposure to risk are important factors for the attainment of the Group’s strategic goals. It has prepared a strategy of assuming and managing risk together with nine policies, which feature detailed de-scriptions of procedures in connection with identifying, measuring or assessing, managing and monitoring risk. The strategy and policies of assuming and managing risk are up-dated annually, whereby environmental conditions and the Group’s operating conditions are taken into consideration as well as the newly acquired experience and know-how in the area of risk management. The Group’s largest exposure pertains to credit risk, followed by interest rate, market and liquidity risk, with operational risk gaining in importance as well as profitability risk and capital adequacy.

The following includes definitions of individual banking risk types.

Credit risk

Credit risk, representing the risk of loss resulting from a debtor’s inability to meet its obligation to the Group, is con-sidered one of the most important banking risks, therefore special attention is paid to it.

The aim of assuming and managing credit risk is for the Group to ensure up-to-date management and assessment of debtor risk or the risk related with investments and the cre-dit portfolio. The Group measures the risk associated with a debtor prior to granting a loan as accurately as possible and measures the exposure to credit risk for the entire duration of the credit relationship thereafter. The Group directs in-vestments toward debtors with a high rating and toward less risky sectors and regions. It builds the risk associated with the investment into the interest rate and ensures the best possible collateral. The Group limits portfolio concentration by setting up limits toward debtors or toward groups of re-lated entities, by setting limits in connection with portfolio structure (according to sector, region, type of transaction, activity). Most of the transactions are entered into within the Republic of Slovenia, with treasury transactions and low risk investments being performed in other European Union members, while selectively entering the SEE region with corporate lending activities. The Group has set up a system of early increased credit risk detection and is actively working on collection of receivables past due. In the event of objective evidence on increased credit risk, the Group assesses loss from credit risk and recognizes impairment charges and provisions in line with international financial reporting standards, while ensuring their adequacy on an ongoing basis later on.

– in %

10 largest shareholders as at 31 December 2010 Ownership share

Nova Ljubljanska banka d.d. Ljubljana 40.99Slovenska odškodninska družba d.d. Ljubljana 9.36NFD 1 Investicijski sklad d.d. Ljubljana 9.21Abanka Vipa d.d. Ljubljana 4.00Unior d.d. Zreče 3.88Zavarovalnica Triglav d.d. Ljubljana in Kritni sklad 3.75Nova Kreditna banka Maribor d.d. Maribor 2.67Juteks d.d. Žalec 2.43Opus Invest d.o.o. Velenje 1.79Polzela d.d. Polzela 1.53Total 79.61


The Group calculates credit risk capital requirements using the standardised approach. It also calculates an internal assessment of capital requirements to cover for unexpected loss from credit risk on a quarterly basis. It also estimates the assessed internal capital requirements based on exter-nal factors and performs stress tests, while also measuring the effect extraordinary, but probable, events have on inco-me and the Group’s financial position.

To improve credit risk management internal credit rating systems and the methods of monitoring and managing cre-dit risk are the subject of ongoing improvements. In 2010 the methodology of setting indebtedness ceilings per indi-vidual debtor or group of related parties, pertaining to cor-porates as well as banks, and the methodology of assessing impairment charges for receivables from retail clients were upgraded, a number of reports on the credit portfolio were also prepared, serving as a base for the adjustments of the Group’s business policies to the environment and the adop-tion of measures for the reduction of exposure to credit risk.

The slow and unstable recovery of the domestic economy and the uncertainty in the European financial markets continu-ed to have an effect on the deterioration of the credit por-tfolio. The share of defaulted obligors and non-performing receivables increased. By carefully managing its investment policies and the credit portfolio the Group is attempting to mitigate the effects of the crisis on its performance and financial position as much as possible. In 2011 it is going to continue to implement measures to decrease the negative effects of the crisis (regular monitoring of debtor operations and their rating, active collection of receivables due, stricter lending conditions, acquiring additional collateral, granting new loans to financially stable companies and financing investments in core business, granting housing loans, etc.). It will also continue to follow the strategy of maximizing diversification and limiting investments to sectors and re-gions it estimates as high risk.

Market risk

In its operations the Group assumes market risk, being the risk of a change in the fair value of financial instru-ments due to the change in risk factors, being interest rates, currency rates and financial instrument prices. The most significant risk type within market risk is positional risk in equity and debt financial instruments and derivatives. Exposure to currency risk is low.

In trading with financial instruments the Group is predomi-nantly active in the Slovene financial market, the European Union (securities transactions with prime banks and sove-reigns) and, to a lesser extent, in other low risk countries (investment-grade countries). The Group defines invest-ments and trading in financial instruments by applying limits to a number of different factors (according to issuer, transaction type, region, etc.). These have been adjusted in 2010 to take into account the conditions in the financial markets and the Group’s business strategy. Additionally, it has also adopted stop-loss limits.

The Group also enters into transactions with foreign curren-cy and interest rate derivatives. Its basic policy in connec-tion with derivatives trading is entering into transactions for the purpose of hedging own positions and for client positions, whereby the latter transactions are hedged with counter positions. Transactions are entered into with prime foreign banks.

In relation to foreign currency risk, the Group’s policy is that of a closed position across individual foreign currencies. Ma-naging the open currency positions is performed through prompt transactions and with the use of foreign currency derivatives in line with the limits set. Limits are low and are meant for the management of currency open positions within the scope of regular operations, not intended for speculative trading.

The Group calculates market risk capital requirements using the standardised approach. At the same time it also calcula-tes capital requirements with the use of advanced methods such as the statistical method of value-at-risk (VaR). Addi-tionally, it calculates the internal estimated capital require-ment to cover for unexpected loss from market risk by using the value-at-risk method (VaR) and performs stress tests. It also measures the effect of extraordinary, but probable, events on income and the financial position of the Group.

By continuously adapting the system of limits cope with the uncertain conditions in the financial markets and by implementing the investment policies aimed at decreasing equity holdings and at channelling investments into prime debt instruments, the Group is decreasing its exposure to credit risk.

Interest rate risk

The risk of change in interest rates pertains to the exposure of the Group’s financial balances to unfavourable fluctuati-ons in interest rate. It affects the Group’s earnings and the economic value of its equity.

The Group analyzes exposure to interest rate risk using the method of interest rate gaps, calculating the effects that changes in interest rates have on net interest income. It also analyzes interest rate risk with the use of the duration model, where it assesses the effect that of change in interest rates on the economic value of equity.

In relation to interest rate risk the Bank follows the policy of a closed net banking book position, meaning that the objective is to minimise the amount of interest rate gaps. The interest rate risk associated with the trading book is analysed within the framework of market risk.

In the event that the implementation of measures to dec-rease interest risk is required, the Group uses traditional balance sheet transactions, such as lending, securities pur-chases, deposit taking, issue of securities, etc. In addition to the aforementioned transactions, the Group also enters into agreements based on interest derivatives to hedge indi-


vidual transactions and close interest rate gaps. It does not enter into interest derivative transactions for speculative purposes.

The Group will continue to close interest rate gaps in 2011 by using on-balance sheet instruments and by entering into interest derivatives, which will allow it to decrease the im-pact on the income statement resulting from a change in the fair value of an interest derivative with the use of hedge accounting.

On a quarterly basis the Group calculates internal capital requirement estimates to cover for unexpected loss from banking book interest rate risk in line with internal me-thodologies.

Liquidity risk

Liquidity risk is the risk type that includes the risk of pro-viding liquidity funding, when the Group is unable to set-tle all of its due obligations or is forced to obtain sources of liquidity at significantly higher costs. It also includes market liquidity risk, pertaining to positions in financial instruments, which cannot be sold or replaced in a short period of time without significantly affecting the market price. From the aspect of time liquidity risk management is separated into operational liquidity management and structural liquidity management.

The Group provides for efficient management of operational and structural liquidity, representing the management of cash flows for a chosen time interval while taking into consi-deration the liquidity of available assets and the stability of asset sources. Based on simulations done in relation to the maturity of asset sources on the one side and the maturity of assets and the categorization of assets according to their capacity for prompt realization on the other, limits pertai-ning to the largest open liquidity position have been set. In connection with structural liquidity the Group has defined target value indicators and limits for the management of liquidity risk. Structural liquidity limits have been set up so as to ensure the required reserves on the basis of struc-tural liquidity surpluses in accordance with the Decision on minimal requirements for ensuring adequate liquidity for banks and savings banks. Based on scenarios pertaining to extraordinary liquidity conditions, the Group determined the structure of the liquidity reserve and set its minimum amount, while also defining the contingency plan for its actions at the first sign of a liquidity crisis. By employing a system of limits, the Group is also following its goal of maximizing diversification of funding sources.

The Group calculates the internal estimate of capital requi-rements to cover for unexpected loss from liquidity risk in line with its internal methodologies on a quarterly basis. In doing so it takes into account stress test results.

In line with its specific characteristic the Group utilises the conservative approach to liquidity risk management, which is reflected through its system of limits, the spectrum and

size of banking book investments in securities and in its the methodology of monitoring liquidity flows.

In 2010 the Group managed liquidity risk in line with adop-ted policies, however the conditions in relation to accessing liquidity changed. The Group did not have any problem in relation to operational liquidity, as it provided for sufficient liquidity reserves (highly liquid assets, which are also eligi-ble to be pledged as collateral pertaining to obligations to-ward the European Central Bank and in the interbank repo market) to manage the required level of operational security. More of the activities pertained to securing an adequate level of structural liquidity by obtaining funding from re-tail and corporate clients, with emphasis on the long-term segment and an adequate diversification. It also followed its objective of covering loans to the non-banking sector with deposits from the non-banking sector. To achieve greater diversification, matured foreign funding sources, matured non-banking sector deposits and matured securities issued have been replaced with the issue of debt securities and the raising of loans with foreign banks.

Operational risk

Operational risk pertains to the risk of loss as a consequence of inadequate or unsuccessful execution of internal proces-ses, the actions of individual persons or the functioning of systems or due to external factors.

Due to fast development and the characteristics of the fi-nancial system, the importance of operational risk is gro-wing. It requires the setting up of a solid and reliable system for assuming and managing this risk type. In defining the way it assumes and manages operational risk, the Group takes into consideration its size and development as well as the nature and complexity of its business activities. It has prepared a comprehensive review of its potential exposure to operational risk according to business processes, which is based on exposure according to category of operational risk, the probability of the event occurring and the risk impacts.

The Group has prepared a list of operational processes, whi-ch served as basis for the preparation of a profile of poten-tial exposure to operational risk according to individual processes, for the Group as a whole, for the preparation of a catalogue of all operational risk it identifies and for the preparation of a matrix of links between organisational units in the business processes.

The Group calculates capital requirements for operational risk according to the basic indicator approach. It calculates the internal capital assessment and the capital require-ments to cover for unexpected loss from operational risk in line with adopted methodologies on a quarterly basis.

Continuous operation of the Group is regulated by the rulebook defining procedures, activities and processes of operation and organisation in the event of a crisis, which are part of operational risk. The purpose of the plan for continuous operation is to ensure the safety of employees


and clients and to set up smooth operation of key business processes in the shortest possible time at the existing and the alternate location. All business processes performed by the Group have plans in place for their performance in the event of non-functional IT. The goal of organised operations is to reduce operating and financial damage, which would materialise should activities and procedures be suspended, which are defined in the continuous operation plans for the Group and in the recovery plan.

Profitability risk

Profitability risk pertains to an inadequate structure or diversification of income or to the Group’s inability to pro-vide ample and constant levels of profitability. Underlying documentation for profitability risk management within the Group is based on adopted policies of assuming and managing profitability risk.

Profitability is an important factor of the Group’s financial position and is often also the first indicator of problems in the Group’s operations. The operations and further de-velopment of the Group depend on the attainment of an adequate return on assets and equity. Profit enables growth, preserves or increases competitiveness and strengthens the Group’s capital base. Loss threatens capital and liquidity and can thus shake public trust. Profitability is however not defined solely through profit as the operating result rather it is characterized by the quality and stability of income and the moderation and structure of costs.

In line with the adopted methodology the Group calculates the internal estimate of capital requirements to cover for unexpected loss from profitability risk on a quarterly basis.

Capital and capital adequacy

In its operations the Group must always have at its dispo-sal an adequate amount of capital, which depends on the volume and types of services the Bank provides and on its strategy. An adequate capital base represents a contingency reserve pertaining to different risk types, which the Group is exposed to in its operations. To cover unexpected loss, the capital of any bank must always amount to at least the sum of the capital requirements for the credit, market and operational risk, while capital adequacy, representing the ratio between capital and the sum of risk-adjusted items, must always amount to at least 8 %. The management of the capital and capital adequacy within the Group is based on adopted policies of assuming and managing capital risk and in line with annual business principles, also expressed in the need for adequate regulatory capital.

With an aim to provide for safe and profitable operations, the Group maintains an adequate level of capital at all times along with its appropriate structure. With the intention of assessing the capacity for assuming risk, the Group prepa-res a plan of movement in capital and capital requirements once a year as well as the plan of the internal capital asses-sment and capital requirements for a period of three years

in line with its annual business plan and the three-year development plan, which shows the fluctuations of capital adequacy ratios in accordance with the planned volume of operations. In the event that planned fluctuations of capi-tal adequacy ratios deviate from target values, the Group will commence activities to increase regulatory capital or decrease exposure to risk.

Should the Group not improve capital adequacy with the measures aimed at decreasing exposure to risk or will still not be able to adequately cover all of its capital requirements and needs, it will turn to measures aimed at increasing ca-pital.

As a matter of priority the Group increases capital with an adequate dividend policy and allocation of net profit to other profit reserves. Thus it ensures an adequate amount of capital pertaining to the volume and types of services it provides and in relation to the risks it is exposed to whi-le performing these services. The Group also assesses the ownership structure, as a responsible dividend policy de-fined by the owners is essential from the aspect of capital risk, as well as the capital structure and quality. Within the framework of capital structure and quality, the Group provides continuity, availability for the coverage of loss and legislative subordination to the right of investors and other creditors.

In 2010 the CRD II directive was adopted (valid from 31 December 2010), pertaining to changes in the calculation of regulatory capital. Most of the changes deal with the de-finition and treatment of hybrid instruments, where stricter criteria will apply to their classification in the calculation of Tier 1 capital as compared with the characteristics of existing innovative instruments. The Basel III proposal was also adopted, which, in addition to requirements for impro-ved quality and transparency of the capital base, also intro-duces contingency reserves. In capital and capital adequacy management the Group is going to follow the changes in regulation pertaining to capital and capital adequacy ratio planning and simulation.

Strategic risk

Strategic risk pertains to the risk of loss from erroneous operational decisions, the inappropriate implementation of decisions made or due to too low responsiveness to the changes in the operating environment. Managing strategic risk is based on the adopted policies of assuming and ma-naging strategic risk.

The management of strategic risk within the Group is based on the definition of an own vision, the clarity and conserva-tive nature of strategy, on ensuring correct strategic policies and the required capital and personnel as well as technolo-gy to support the execution of strategic goals. To this aim the Group prepares framework strategic documents and regularly verifies their implementation, which allows it to adapt to the changes in the internal and external business environments in time.


In line with its risk profile the Group did not calculate any capital requirements in 2010.

Reputation risk

Reputation risk represents the risk of loss due to a nega-tive image, which the Group has in the eyes of its clients, business partners, owners, investors and supervisors. This image impacts the establishment of new business relation-ships and services as well as the managing of existing ones. Negative effects include loss of revenue, a deterioration of operational results, a decrease in at sight deposits and other funding sources, a decline in the number of clients, drop of share value, etc.

The Group’s business policy has been set up so as to ensure that at achievement of the goals set, the image it has will not represent a greater element of risk than usual. The Bank pays special attention to communication at special or extra-ordinary events.

ICAAP process

In line with the new Basel II capital accord the Group is setting up a process of assessing adequate internal capital (the ICAAP process), which:

– is based on the identification, measurement and asses-sment of risk, the preparation of an aggregate risk esti-mate and the monitoring of significant risk types;

– allows for ensuring adequate internal capital levels in relation to the risk profile of the Bank;

– is appropriately included in the management process (de-cision-making, risk management, etc.).

For the purpose of assessing internal capital the Group calculates internal capital requirement estimates for risks it deems significant on the basis of the risk profile or it determines through the procedure of risk identification, measurement or assessment, management and monitoring that these might significantly impact its operations, thus requiring it to ensure appropriate capital levels. The Group calculates the internal capital assessment and capital requi-rements on a quarterly basis, with the calculation being confirmed at the Risk Committee and considered at ALCO.

In 2010 the Group continued to perform a number of acti-vities in relation to the implementation of the ICAAP pro-cess. It developed new methodologies and perfected existing methodologies of the calculation of internal capital requi-rement estimates, prepared and implemented stress tests, calculated the amount of internal capital assessment on a quarterly basis and planned an internal capital estimate as well as the internal capital requirements for the coming three-year period.

The Group re-assessed the level of the exposure to individual risk types in major business lines and the quality of the control environment. It calculated the Bank’s risk profile and prepared a risk matrix. Based on the risk profile the

Bank’s exposure to risk is acceptable, with it being most exposed to credit, liquidity, market, interest rate, opera-tional and profitability risk. The calculation corresponds with the required risk profile, as defined in the Strategy of assuming and managing risk, and allows for the Group’s stable and safe operations in the ordinary and extraordinary course of business, despite its small size and vulnerability.

6.6 DEVELOPMENT OF THE BANK AND ITS SUBSIDIARY COMPANY

The Bank in the Group offers its clients universal banking services. Further development is of continuous importance and is made possible by investing in efficient IT support systems, its business network and employee development and training.

Retail and internal organisation

The Bank only has business units in Slovenia. Through a well developed business network it operates in all major towns of the Celje region as well as in Ljubljana, being the financial centre of Slovenia and has opened a business unit in Maribor in September 2009 as well as one in Koper in July 2010. It follows modern trends and is adapting to individual client needs by investing in its retail network. Based on an analysis of the volume of operations in agencies, the Bank closed two agencies in 2010, namely the Otok and Petrovče agencies. The subsidiary company does not have any branch offices.

In addition to the above the Bank prepared a comprehensive internal reorganisation, which came into effect on 1 Janua-ry 2011. The Hmezad branch was reorganised into a business unit, it reorganised payments and back office operations as well as the general, legal and personnel divisions. Due to the complexity of the field it also formed a new department of debt enforcement and a new department of compliance operations, having also reorganised the field of disputed receivables management.

Investments

The Bank earmarked EUR 2,703 thousand for investments in 2010. Most of the funds were used for the purchase of POS terminals, ATMs, signal safety devices and a disc sy-stem, application upgrades, among them safety upgrades of electronic banking for private individuals, licenses, exter-nal advisory services pertaining to the setting up of a data warehouse, the upgrading of retail IT, the renovation of business premises and equipment. In the area of research and development the Bank’s subsidiary company performed activities within the scope of its operations and the volume required for the performance of its current and anticipated operations.

Information technology

One of the most significant projects in the field of informa-tion technology in 2010 is represented by the construction


of a data warehouse, which the Bank already started in 2005 in line with the recommendations of the Bank of Slovenia. The project was performed in cooperation with an external consultant in three phases, which included the purchase of hardware and software, the seting up of a business model and the system of data feeding and mining as well as the preparation of reports, primarily for reporting to the Eu-ropean Central Bank. At the same time a number of other reports have been developed for the purposes of reporting to the regulators and to support the decision-making pro-cess within the Bank. These improved reporting quality and the management of operational processes. The development of the data warehouse was concluded in January 2011, with its upgrading set to continue, because of the advantages it brings in the sense of reporting quality and improved management of operations.

A large part of other activities was aimed at software ad-justment and upgrading. Assignments mainly dealt with the adaptations related to the migration of card operations to eXact within the Activa system, the rationalisation of operations, with ensuring alternative IT solutions in retail operations and the requirements of the SISBON (electronic private individual rating system) and SEPA projects.

The Bank offers its clients universal banking services. De-velopment and recognition are continuously taken care of. Further development is made possible by investing in effici-ent IT support systems, its business network and employee development and training. It achieves recognition in the domestic and international markets by appearing in dome-stic and foreign expert publications and through the coope-ration with internationally acknowledged rating agencies.

Human resources

In 2010 the number of employees in the Bank decreased from 571 to a total of 538, with the average complement over the past year amounting to 566 employees. During the year there were 53 employment terminations and 20 new employees. At the end of the year 15 employees were employed on temporary employment contracts.

The average age of employees in 2010 was 44.2 years. As regards age structure the dominant age group was the 51 to 55 years of age group with a share of 22.9 %, with the lowest structural share of 0.2 % coming from the 21 to 25 and over 60 age groups. Due to the nature of the work, most of the employees are female. Since 2004 the structural share according to gender practically did not change, with over 79.2 % of employees being female.

The average work time efficiency was 81.4 %, with absentee-ism predominantly coming from annual leave usage, while sick leave absenteeism amounted to 5.1 %.

In relation to actual educational structure the share of high school educated employees remained strongest, however the share did decrease from 45.4 % to 40.3 % in 2010. In line with the human resources policy of improving the educatio-

nal structure the share of employees educated at the higher education level and at university level increased, namely from 50.1 % to 56.0 %.

The subsidiary company employed 4 people at the end of 2010, while there were 5 in 2009. In 2010 the assistant direc-tor retired. One of the employees in the subsidiary company holds a Master’s Degree in Economics, two have university degrees in finance and architecture, while another holds a high school diploma. Two employees have acquired a num-ber of licenses in the field of real estate appraisal, one also acquired a licence for conducting real estate brokerage, with two employees taking classes at the Slovenian Institute of Auditors to obtain an authorized real estate appraiser’s li-cence. In addition to its regular employees the company also cooperaties with two external appraisers, is in a contractual relationship with a real-estate broker and has outsourced its accounting.

The implementation of strategic goals and the need to en-sure a competitive advantage require the Bank to direct investments in the development of employee knowledge and skills. This is why it is the most important assignment of the Personnel Division in cooperation with the management to ensure optimal human resource capacity for the satisfaction of the workspace requirements. With the rationalisation of work procedures, the development of IT support and reallo-cation of operations, the Bank continues to follow its policy of reducing the number of employees, while improving the educational and age structure with new recruitment.

6.7 SOCIAL RESPONSIBILITY OF THE BANK AND ITS SUBSIDIARY COMPANY

The Bank has successfully been operating for over 145 years, continuously improving its operations in every way. The Bank’s Management Board continues to operate with due skill, care and diligence, manages the Bank with prudence, takes care of investor interests and fulfils liabilities toward shareholders, the Supervisory Board and the general public, all the while actively and transparently communicating with the interested public as well as operating within the framework of established risk management mechanisms. All of the above is done with the purpose of sustainable long-term development and with an aim of increasing the Bank’s reputation.

It is aware of the fact that its continued efficiency and su-ccess depend on the support of the environment and the trust given to it by different groups of interest. Therefore in line with its vision and strategy, the Bank operates with a high degree of social responsibility to the local community and the wider social and economic environment, its emplo-yees, all business partners and the natural environment.

It supports sports and culture through sponsorship, takes part in a number of charity events and is actively engaged in community and social activities. It is also an active partner in social and welfare activities.


6.8 THE INTERNAL AUDIT DEPARTMENT OPERATIONS

The operations performed by the Internal Audit are con-sistent with the internal audit standards of professional practice, the code of internal auditing principles and the internal auditor’s professional ethics code. In its operations the service also takes into account the provisions of the Ban-king Act pertaining to internal auditing and the Rulebook on the Operation of the Internal Audit. It is an independent department, which reports directly to the Management Board. The aforementioned gives its employees the possi-bility to give opinions, assessments and recommendations while relying on internationally established professional internal audit standards and to operate independently of other parts of the Bank.

The two basic planning documents of the Internal Audit comprise the three-year strategic plan and the annual ope-rational program, which the Management Board adopts annually, with approval given by the Supervisory Board, after due discussion at the Audit Committee. Both docu-ments are based on the Bank’s risk profile, its annual and development plan, the fundamental characteristics of the environment in which it operates, while taking into con-sideration the requirements by the Supervisory Board on compulsory internal auditing of certain operational areas.

The planned activities of the service are detailed in semi-annual operational plans, which the Management Board adopts. To monitor the Internal Audit’s activities on an ongoing basis the Management Board and the Supervisory endorse semi-annual reports on its activities, showing the significant activities performed by it as well as an overview of issued and implemented recommendations. The reports are also considered at the Supervisory Board’s advisory body, the Audit Committee. In line with the legislation the Supervisory Board is regularly kept appraised of the audits conducted by external supervisory institutions and of the status of the implementation of warnings and recommen-dations issued.

The assignments of Internal Audit are defined by the le-gislation and pertain foremost to quality assessment in connection with the management of all types of risk (in-cluding the setting up of an adequate system of internal controls) and the monitoring of compliance of the Bank’s operations with regulations and internal rules as well as the principles of rational operations. A framework system for comprehensive monitoring of implementation of the annual operational program (as approved by the Manage-ment Board, the Supervisory Board and the Bank’s Audit Committee) has been set up comparing the plan and exe-cution of internal audits. The Bank’s Management Board is made aware of the realization of all recommendations after internal auditing has been performed on at least two levels: first after every internal audit has been completed and after

that a comprehensive annual report on the implementation of all the recommendations is given. The Internal Audit also coordinates activities in connection with the selection of the external auditors (through the Management Board, the Audit Committee and the Supervisory Board).

The annual operational program provided for audits of the Bank’s 22 business areas and the completion of 4 internal audits from 2009, with the assumption there would be no large scale extraordinary assignments (a total of 26 internal audits). Actually, 22 planned internal audits were comple-ted by end February 2011, with 2 still running and 1 not yet having been conducted due to a change in legislation (the operations of bank loan brokers is no longer subject to annual auditing), while one is set to be performed in 2011. Additionally, 3 extraordinary audits were performed, while 3 extraordinary audits from 2009 were completed in 2010. The Internal Audit prepared 21 expert opinions for different areas of operation. There were a total of 49 instances where internal audits were performed and expert advice was given in 2010, 2 are still running.

The following represent the most important functions or areas of operation, which were audited in 2009: quality of IT security and a comprehensive review of information protection management, management of credit risk asso-ciated with corporates, private entrepreneurs and retail, the adequacy of the archiving process, money laundering prevention, the adequacy of cash maximums, correct use of financial assets eligible for pledging with the Eurosystem, compliance of operations with the changes in legislation.

In all internal audits and reviews special emphasis was given to: identification of procedures built-in for the management of risk, assessing the current situation, the quality of inter-nal control systems, compliance with the legislation and internal rules, the possibilities for improvement of existing procedures, all aimed at further raising the quality of the Bank’s operations. The Internal Audit Service gave a number of professional opinions pertaining to different fields of operation with the basic goal of improving risk manage-ment. Special attention is directed at the areas subject to new regulations (external or internal).

All of the Internal Audit’s assignments described were per-formed in 2010 by five employees (the figure includes the department General Manager). One of the employees is a certified internal auditor, another is a certified information systems auditor (CISA) and is a Master of Science. All the employees are educated at least at the university level. Ad-ditionally, one employee holds an insurance broker licence and three employees hold the European Banking Certifica-te. One of the employees continued with a post-graduate Master’s course in 2010. As in previous years 2010 saw edu-cation and training of employees remain a constant mission, with additional knowledge attained in internal auditing, banking operations, computer and language skills courses.


7 MANAGING BODIES OF THE BANK

GENERAL MEETING OF

SHAREHOLDERS

MANAGEMENTBOARD

MANAGEMENT BODY

IT COMMITTEE

CREDIT COMMITTEE

LIQUIDITY COMMITTEE

ASSETS LIABILITY COMMITTEE – ALCO

OTHER BOARDS ANDCOMMITTEES

AUDIT COMMITTEE

SUPERVISORYBOARD

ORGANIZATIONALUNITS


8 ORGANIZATION STRUCTURE OF THE BANK ON 1 JANUARY 2011

MANAGEMENT BOARDMember of the

Management Board

Aleksander Vozel, M.Sc.President & CEO

Dušan Drofenik, M.Sc.

Member of the Management Board & Deputy CEO

Davorin Leskovar

ACCOUNTING DIVISION

FINANCIAL MARKETS DIVISION

LEGAL AFFAIR, DEBT ENFORCEMENT

AND COMPLIANCE OPERATIONS

DIVISION

PERSONNEL AND ORGANISATION

SERVICES

SECRETARIAL SERVICES

DEPARTMENT

PR DEPARTMENT

GENERAL AFFAIRS

EXECUTIVE DIRECTOR

MAIN BRANCH LJUBLJANA

PAYMENTS DIVISION AND OPERATIONAL

SUPPORT

INTERNAL AUDIT

CORPORATE DIVISION

EXECUTIVE DIRECTOR

IT DIVISIONRETAIL DIVISION

RISK MANAGEMENT DIVISION


9 THE GROUP ON 31 DECEMBER 2010

The Bank is a 100 % owner of the Posest, d.o.o., Celje subsidiary company.

The Posest, d.o.o., Celje company was established in 1991. It is registered as a li-mited liability company to perform a number of different types of activities, with the core business comprising:

– realizing the Bank’s bad debt, – marketing of real estate owned by the company and the Bank, – owned and other property engineering, – property leasing, – property and equipment appraisals, – supervising purposeful use of loans as granted to investors, – advising the Bank in connection with real estate project financing.

The company has 4 employees with Davor Zavasnik as director. The company has no significant impact on the Bank’s operations.

The company’s operations in 2010

The company continued the business cooperation it started in 2005 pertaining to a building in Prebold, which it leased using two financial leasing agreements.

Posest, d.o.o. has actively been marketing the completed commercial and residen-tial building Ljubljanska in Celje since 2007. Even though the conditions in the real estate market have been unfavourable since the second half of 2008, the company made big strides in sales having implemented promotional activities in 2010. By the end of the year, it had sold the commercial part of the building, 83 flats and 103 parking spaces, with 12 flats and 19 parking spots having been lent out.

Additionally, the company supervised the purposeful use of loans granted to investors and conducted property appraisals. In 2010 it prepared 266 appraisals of property and equipment.

POSEST d.o.o.BANKA CELJE d.d.


10 RETAIL DIVISION OF THE BANK ON 1 JANUARY 2011

MANAGEMENT BOARD

RETAIL DIVISION

Celje Business Unit

Slovenske Konjice Business Unit

Hmezad Žalec Business Unit

Koper Business Unit

Šentjur Business Unit

Laško Business Unit

Rogaška Slatina Business Unit

Maribor Business Unit

3 branch offices1 branch office for c. & p.i.*7 agencies

1 branch office1 branch office for c. & p.i.*2 agencies

1 branch office1 branch office for c. & p.i.*7 agencies

1 branch office1 branch office for c. & p.i.*

1 branch office1 branch office for c. & p.i.*1 agency

2 branch offices1 branch office for c. & p.i.*3 agencies

1 agency

1 agency

Ljubljana Branch Office


11 STATEMENT OF CORPORATE GOVERNANCE

The Bank’s Corporate Governance statement has been pre-pared in line with the provisions of the Companies Act (the ZGD-1) and includes the Statement on conformity with the Corporate Governance Code dated 5 February 2007 and the revised Corporate Governance Code dated 8 December 2009 made by the Management Board and the Supervisory Board under item 11.1, which the Bank observes and has been used since its adoption in the latter part of 2010 (together: the Code), while items 11.2.1 through 11.2.13 include additional Notes in accordance with Paragraphs 5 and 6 of Article 70 of the Companies Act.

11.1 STATEMENT OF THE BANKA CELJE D.D., MANAGEMENT BOARD AND SUPERVISORY BOARD ON COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE

As a public company Banka Celje, d.d., which has bonds listed on the Ljubljana Stock Exchange d.d., is compliant with the Banking Act (the ZBan-1) and the Companies Act as well as the Market in Financial Instruments Act (the ZTFI) and the Rules of the Ljubljana Stock Exchange and with all the additional general rules, dealing with topics that are dealt with in the Corporate Governance Code, which is in the public domain, attainable at the Ljubljana Stock Exchange website at http://www.ljse.si/ under (“za izdajatelje/predpisi, brošure”).

Banka Celje, d.d., Celje complies with the Corporate Governan-ce Code dated 8 December 2009 (the Code) except for some deviations or particularities, explained below (item 11.1.1):

11.1.1 Compliance with the new Code

Clause 1The Bank’s goals are defined in its annual and development plan, both of which are approved by the Supervisory Board and are not separately defined in its Articles of Association.

Clauses 2, 2.1 in 2.2As of yet the Bank has not prepared or adopted the Bank Ma-nagement Policy as an independent document, rather this area is regulated with different internal documents, such as prescribed by the Bank of Slovenia, the ZGD-1, the ZTFI and other sector-specific legislation.

Clause 4.2The Bank would like to see large and institutional sharehol-ders inform the public with their management policies, this decision however is up to them.

Clause 5.2 (second paragraph)The Bank does not publish data on the costs it incurred from

the collection of powers of attorney, these are included in the cost of the organisation and execution of the annual General Meeting of Shareholders.

Clause 5.4The Bank’s shares are currently not listed on the stock exchange.

Clause 5.5The proposal to the General Meeting of Shareholders for the nomination of Supervisory Board members includes all of the legally required data, the rest is public domain data.

Clause 5.6The Bank, in line with general practice, as a rule, nominates the members of the Supervisory Board collectively.

Clause 5.7 The Supervisory Board sets the policy of remuneration of the Management Board.

Clause 5.8The General Meeting of Shareholders of Banka Celje decides on the use of distributable profit separately, however it decides on the discharge of the Management Board and the Supervisory Board by single unified vote.

Clause 5.9 Financial statements form part of the annual report, which together with the auditor’s opinion is presented to the General Meeting of Shareholders. A representative of the Bank’s autho-rised auditor is not invited to the Meeting. Were however the Meeting authorised to adopt the annual financial statements, a representative of the authorised auditor would be invited.

Clause 8Statements with which the Supervisory Board members would take a position on the fulfilment of each of the criteria per-taining to independence from item C.3 of Supplement C has not been signed up until now, nor has there been any such announcement made on the website. In the future the Bank will endeavour to regulate area in compliance with the re-commendation.

Clause 8.9The Supervisory Board of the company has not formed a Per-sonnel Committee nor any other body, which would set the criteria and recommendations pertaining to the nomination of the Management Board in advance. The Bank will deal with this option in the future also.

Clause 8.12In its report the Supervisory Board also includes all of the requirements from the decision of the Bank of Slovenia pertai-


ning to the due care and professional diligence of Management Board and Supervisory Board members and endeavours to in-clude as much information as possible to adequately represent its activities during the year. In the future the recommenda-tions from Clause 8,12 will be observed as much as possible.

Clause 11In its operations up until now the Supervisory Board has not yet nominated a secretary. In accordance with consensus be-tween the Management Board and the Supervisory Board this job is performed by the expert department of the company.

Clauses 11.1 and 11.2 The Supervisory Board secretary has not been named, so this job is performed by the expert department of the company.

Clause 12.2The Bank will assess the option of a proposal to introduce reimbursement to the Supervisory Board members with a decision taken at the General Meeting of Shareholders in line with the stipulations from the Code.

Clause 13 The Personnel Committee and the Nomination Committee have not been named, thus the Bank will endeavour to comply with this recommendation in the future.

Clauses 13.1 to 13.6The Personnel Committee and the Nomination Committee have not been named, thus the Bank will endeavour to comply with this recommendation in the future.

Clauses 16.5 and 16.6The Banka has no option plan or comparable financial instru-ments in place which would provide for variable reimburse-ment of the Management Board members.

Clause 17.2Statements on compliance with individual items from supple-ment C.3 of Supplement C (Conflict of Interest) of the Code have not been signed by Supervisory Board members at re-placement or at each change, nor were these presented to the Supervisory Board. Supervisory Board members were already signing Statements on Conflict of Interest pertaining to the Code previously in effect. The Bank will endeavour to comply with this recommendation in the future.

Clause 17.3The Bank will endeavour to comply with this recommendation in the future.

Clause 17.4 The Bank will endeavour to comply with this recommendation in the future.

Clause 20.2Individual areas of communication have been regulated by individual internal acts until now, however the Bank will en-deavour to comply with this recommendation in the future.

Clause 20.3The Bank has not special internal act in place in connection with the limitations and disclosures pertaining to treasury share transactions, as it considers this to be sufficiently regu-lated by the existing legislation. All of the persons with access to internal information have been informed of the Decision and their reporting duties, while also having been put on a relevant list.

Clause 20.4 In making significant shareholder and public announcements the Bank considers statutory time limits, which is why it does not prepare a calendar of significant announcements. It will endeavour to comply with this recommendation in the future.

Clause 22.2The company does not prepare a separate sustainability report as this area forms part of the annual report.

Clause 22.3In line with the ZGD-1, the ZBan-1 and the ZTFI the Bank informs the competent authorities on the acquisition of a qualifying share.

Clause 22.7At disclosure of Management Board and Supervisory Board member’s reimbursements the Bank fully observes the stipu-lations of the Companies Act and will endeavour to expand the disclosures in line with the recommendations.

Clause 23The Statement of Corporate Governance is published in the annual report, it is however not published separately at the Bank’s website. The Bank will endeavour to publish the Sta-tement on its website.

11.2 ADDITIONAL NOTES IN LINE WITH PARAGRAPHS 5 AND 6 OF ARTICLE 70 OF THE ZGD-1

11.2.1 Compliance with the Code from 5 February 2007:

Clause 1.1.1 The Bank’s goals are defined in its annual and development plan, both of which are approved by the Supervisory Board and are not separately defined in its Articles of Association.

Clause 1.3.10The General Meeting of Shareholders’ proposal for the nominati-on of the Bank’s Supervisory Board members includes complete data as required by law, other data is in the public domain.

Clause 1.3.12The Bank collects the power of attorney for the voting at the General Meeting of Shareholders by sending each one of the shareholders a power of attorney in line with Clause 1.3.11 of the Code. The power of attorney includes all the necessary data and the appropriate instructions for the shareholders. The Bank does not publish this data additionally on its web site.


Clause 1.3.18In keeping with general practice, the Bank votes on the Su-pervisory Board members collectively.

Clause 1.3.19The vote on discharging the management and supervisory bodies is not held separately, as the Management Board as well as the Supervisory Board are both responsible for the Bank’s operations.

Clause 1.3.21In line with clause 1.3.20 of the Code the Bank publicly an-nounces the General Meeting’s decisions and the information on possible challenging actions, as declared at the General Meeting and places the notification on its own website also, while shareholders’ queries and the replies are not published separately.

Clause 3.1.10 The Supervisory Board assesses its operations after the closing of every individual meeting, as it deems that to be the most adequate way of improving efficiency.

Clause 3.1.11In its annual report to the General Meeting the Supervisory Board takes into account all statutory requirements, as it re-ports to the General Meeting as a collective body.

Clause 8.2The Bank publishes the consolidated annual report in the En-glish language, however individual public announcements are not translated.

Clause 8.6In its significant announcements to shareholders and the pu-blic the Bank takes into account statutory time limits, therefo-re it does not prepare a calendar of significant announcements.

Clause 8.15.5The Bank does not prepare a separate internal act in connec-tion with the limitations and disclosures on the trading with treasury shares, as it maintains that existing legislation deals with the matter sufficiently.

Clause 8.17.2The Bank has not appointed any person to be responsible for investor relations, as the Bank’s shares are not listed on the stock exchange. The public relations and the relations with investors are handled through the PR Department.

11.2.2 The main characteristics of internal controls and risk management in connection with financial reporting

The Bank has always had a system of internal controls set up during its operations, as it is the duty of the Bank’s Manage-ment Board to conduct its operations in a manor ensuring an adequate risk management system in relation to all the business partners, owners and supervisory institutions. The system of internal controls is connected into a comprehensive

whole in the sense of an umbrella act, determining all of the dimensions of the control activities.

The internal control system at the Bank, has been set up in a way as to provide adequate assurances on the following ac-tivities:

– the Bank’s operations must be managed with great care and conducted on the basis of the approved development plan as well as the Bank’s approved annual policies and financial plan resulting in profitable operations,

– all operating activities, which have the potential to increase the Bank’s liabilities, must be approved by the authorized person, with a segregation of responsibilities clearly defined,

– assets must be secured appropriately, receivables insured, liabilities monitored,

– a strategy and policies for risk management must be prepa-red, special prudence must be given to the monitoring of the Bank’s capital adequacy, liquidity and credit risk, interest rate and operational risk, profitability and market risk,

– a system for the prevention of loss due to irregularities, especially in connection with timely detection of fraud, abu-se, anomalies or errors must be set up,

– the system of financial records needs to provide timely, re-liable, up-to-date and complete information,

– a system for the transmission of reliable, timely, up-to-date and complete information for reporting to owners and other institutions must be set up,

– a supervised system for the introduction of new financial services and new banking products as well as entering new markets needs to be provided for.

11.2.3 Significant direct and indirect ownership of the Bank

Qualifying holdings, as defined by the law dealing with takeo-vers, in the Bank’s equity are held by three companies, namely:

– Nova Ljubljanska banka, holding 201,096 regular shares, thus having a 49.42 % share in the voting rights,

– NFD1 Investicijski sklad, holding 39,276 regular shares, thus having a 9.65 % share in the voting rights and

– Slovenska odškodninska družba, holding 27,247 regular shares, thus having a 6.70 % share in the voting rights.

The voting rights of the Bank’s other owners do not exceed the qualifying shares as defined by the act dealing with takeovers.

11.2.4 Holders of securities ensuring special rights of control

The Bank’s shares do not give their holders any special rights of control.

11.2.5 Restrictions related to voting rights

The shareholder’s voting right depends on the number of shares held and is not limited to a certain share or a certain number of votes on the basis of the Articles of Association.


The right to vote at the General Meeting of Shareholders is given to shareholders – holding registered shares with voting rights entered into the register at least 10 days prior to the General Meeting of Shareholders and which remain so regi-stered until the end to the meeting.

The convenor of the General Meeting may restrict the voting rights of an individual shareholder, which acquired shares contrary with the regulations.

Agreements, which, with the Bank’s cooperation, would mean financial rights based on shares have been separated from ownership of the shares, do not exist.

11.2.6 The Bank’s rules on: – appointment and replacement of the management or super-

visory body members – changes in the Articles of Association

The Bank’s rules on appointment and replacement of the members of its management or supervisory body and on the changes in the Articles of Association are defined in the Banka Celje, d.d., Articles of Association and in the Working Rules on the Operations of the Banka Celje, d.d., Supervisory Board.

The Supervisory Board is appointed and discharged at the General Meeting of the Bank’s shareholders. To be appointed Supervisory Board member one must fulfil membership condi-tions for bank supervisory boards as defined by the Companies Act and the Banking Act.

Supervisory Board members are appointed for a period of 4 years and may be re-appointed. The term for Supervisory Board members expires on the day of the General Meeting held in the fourth year after being appointed.

In the event of an early termination of appointment of Super-visory Board members having been appointed at the General Meeting of Shareholders, replacements are appointed at the following General Meeting. The replacement is appointed until the end of the originally appointed member’s term. Each mem-ber of the Supervisory Board may resign prior to the expiry of their term on giving a three month notice. A written letter of resignation is to be sent to the President of the Supervisory Board, in the event of resignation by the President of the Su-pervisory Board it is to be sent to his deputy and the Bank’s Management Board.

At the General Meeting of Shareholders individual members of the Supervisory Board or the Supervisory Board collectively may be recalled early. Such a resolution shall be adopted with at least a three-quarter majority of votes present at the Meeting.

Supervisory Board members appoint an Audit Committee, serving as a body of the Supervisory Board.

The president and members of the Bank’s Management Board are appointed and discharged by the Supervisory Board. Only a candidate, fulfilling all the conditions for appointment as defined by the Companies Act and the Banking Act may be

appointed to the post of president or member of the Mana-gement Board.

The President and Members of the Bank’s Management Board are appointed for a term of five years and may be re-appointed.

The President and Members of the Bank’s Management Board may be recalled early in line with the applicable legislation. Each member of the Bank’s Management Board may resign prior to the expiry of their term on giving six months notice. A written letter of resignation is to be sent to the President of the Supervisory Board.

The Articles of Association may be amended based on the decision made at the General Meeting of Shareholders, such a decision having been adopted by a majority of at least three quarters of votes present. Should an amendment of the Arti-cles of Association alter the existing ratio of the share classes to the detriment of one of the classes, consent by the affected shareholders is required, effected with a special resolution

The General Meeting of the Bank’s shareholders may authorize the Supervisory Board to amend the Articles of Association to harmonise the text with the adopted resolutions in effect.

11.2.7 Authorizations of the Management Board

Based on the amendment to the Articles of Association ha-ving been entered into the Court’s Companies Register on 28 May 2008 during a five year period following the entry the Management Board, under approval by the Bank’s Supervisory Board, is authorized to increase share capital by no more than EUR 7,045,952.26 (authorized capital) by issuing no more than 211,061 new shares, being 168,849 regular and 42,212 non-voting rights shares.

The Bank may acquire and dispose of own shares in line with the Companies Act. The Management Board decides on the conditions of the acquisition and disposal of own shares and must report own share transactions at the General Meeting.

11.2.8 Data on the activity of the General Meeting of the Bank’s shareholders, its key responsibilities, description of shareholder rights and how these are exercised

The Bank’s Management Board calls the Meeting of Sharehol-ders. It convenes at least once a year. The Supervisory Board calls the Meeting in the following cases:

– if the Management Board does not call it at least once a year; – if the Management Board does not call it upon request of

the minority as stipulated in the Articles of Association.

The General Meeting of Shareholders passes decisions on:

– the use of distributable profit and the discharge to the Ma-nagement Board and Supervisory Board;

– the adoption of the annual report in cases as defined by the Companies Act;


– the appointment and recall of Supervisory Board members; – amendments to the Articles of Association; – measures taken to increase or decrease capital; – changes in status; – the appointment of the auditor; – authorization of the Management Board to acquire own

shares in accordance with the Companies Act; – other matters within the scope of its competencies in accor-

dance with the Companies Act the Banking Act.

Shareholders, holding 5 % of the share capital in total, may request, in writing, the General Meeting to be convened. Such a request must include a reason for the Meeting to be convened and the matter that the Meeting is to pass decision on. In such an event the Management Board is required to call the Mee-ting no later than 5 weeks after receiving a written request.

Shareholders, holding 5 % of the share capital collectively, may request, in writing, for a certain item to be included in the agenda of the General Meeting of Shareholders. The Bank’s Management Board must accede to such a request, if it includes a prepared proposition of a decision falling under the respon-sibilities of the General Meeting and if the request was made in writing three days after the call of the General Meeting at the latest, so that the item may be made public at least 10 days after the General Meeting has been called in the publications as defined by the Articles of Association.

11.2.9 Data on the composition and activities of management and supervisory bodies and their commissions

The Supervisory Board monitors and supervises the manage-ment of the Bank and its operations. It conducts its assignment in accordance with the provisions of the statutory acts dealing with the operations of banks and companies and in accordance with the Bank’s Articles of Association. It was elected at the General Meeting of Shareholders in May 2007 and acted in the following composition until 22 June 2010: Alojz Jamnik as President, Tadej Tufek, M.Sc. as Vice President, and Ivan Ferme, Matej Narat, M.Sc., Borut Stanič, Štefan Špilak, Ph.D. and Bojan Šrot as members. At its 9th Correspondence Session on 21 June 2010 the Supervisory Board established that due to resignation, the membership in the Supervisory Board of Banka Celje, d.d. has been terminated for Matej Narat, M.Sc.

In 2008 the Supervisory Board of Banka Celje, d.d., established a consulting body, namely the Audit Committee of Banka Celje, d.d., with the following members: Borut Stanič, President, Tadej Tufek, M. Sc., Member and Marina Poboljšaj, Member

– independent expert. Their term of office expires when it expi-res for the members of the Supervisory Board, namely at the General Meeting of Shareholders in 2011.

The Management Board represents and manages the Bank’s operations according to the principles of joint liability. In ac-cordance with the Articles of Association and since the be-ginning of 2010 comprises three members: President of the Management Board, Dušan Drofenik, M. Sc., Member of the Management Board, Davorin Leskovar and Member of the

Management Board, Aleksander Vozel, M.Sc. The Bank’s Ma-nagement Board usually meets once a week and considers ma-terials from areas as defined by the Banking Act and the Banka Celje, d.d., Management Board Working Rules at its meetings.

The President of the Management Board, Dušan Drofenik, M.Sc. is a member of the Supervisory Board at The Bank As-sociation of Slovenia, a member of the Supervisory Board at the Slovene-German Chamber of Commerce and a member of the Supervisory Board at the Skupna pokojninska družba, d.d. Davorin Leskovar’s membership in the Supervisory Board of Finetol, d.d. expired and he is no longer a member of any supervisory boards nor is Aleksander Vozel, M.Sc.

The Credit Committee defines the conditions and criteria for acquiring and placement of assets, makes decisions on lending and guarantee transactions and decides on distribution in line with its operational rulebook. In 2010 it comprised: the President of the Management Board at the post of President of the Credit Committee, the Vice President of the Management Board at the post of Vice President of the Credit Committee and the following members: Member of the Management Bo-ard, both Executive Directors, General Manager of the Risk Management Division, General Manager of the Main Branch Ljubljana, General Manager of the Retail Division and the General Manager of the Financial Markets Division. The President of the Credit Committee may invite other General Managers to the Credit Committee meetings. When proposals from the Retail Division are being considered, business unit Heads are also invited.

The Liquidity Committee comprised six members in 2010: General Manager of the Financial Markets Division as Com-mittee President and the following members: Vice President of the Management Board, Executive Director, General Manager of the Retail Division and General Manager of the Risk Mana-gement Division. The Liquidity Committee meets at least three times a week and supervises the Bank’s liquidity position. It performs its duties in line with the Liquidity Committee Working Rules.

The Bank’s Management Body operates as the Management Board’s advisory and information body. In 2010 it comprised the Bank’s Management Board, the Executive Directors, Ge-neral Managers of the functionally independent organisati-onal units, who in accordance with their operative functions answer directly to the Management Board and the Director of the subsidiary company.

The Management Board may also appoint other attendees to the Management Body’s meetings. Operational rules are set with the Management Body Working Rules and meetings are usually held once a month and are intended for the presenta-tion of the financial and income position of the Bank as well as the consideration of the execution of project assignments and allow for discussion on other significant decisions to be made in relation to the Bank’s operations.

The Assets and Liabilities Committee – the ALCO monitors the conditions in the financial markets, analyzes the balances


and changes in the Bank’s statements and prepares the deci-sions aimed at the attainment of an adequate balance sheet structure. In line with the Working Rules on its operations the Committee meets once a month. The members: the Pre-sident of the Management Board at the post of President of the Committee, Member of the Management Board, General Manager of the Accounting Division, General Manager of the Risk Management Division and the General Manager of the Financial Markets Division.

The IT Committee is the Management Board’s counselling body in connection with the execution of its rights and liabi-lities related to IT. In addition to the President of the Mana-gement Board, the Vice President of the Management Board and Member of the Management Board it also comprised the General Manager of the IT Division and the Assistant Gene-ral Manager of the Retail Division in charge of IT. Standing invitations were extended the internal auditor in charge of IT and the security systems engineer.

11.2.10 Structure of share capital, with special reference to: – rights and liabilities, ensured by shares or shares in indivi-

dual classes, and – should multiple share classes exist, the proportion of share

capital represented by an individual class

The Bank’s share capital is represented by 508,629 no par va-lue shares, 406,904 or 80 % of which are regular shares and 101,725 or 20 % being preferred shares.

Shareholders exercise their rights in the matters of the Bank’s operations at the General Meeting of Shareholders. Regular shares are voting right shares, whereby each share ensures one vote at the Meeting.

Preferred share holders do not have the right to vote at the Meeting, except when deciding on the amendments to the Ar-ticles of Association, which pertain to the ratio of the number

of these shares to the share capital and in connection with changes in status. In the event that the holders of preferred shares were not paid the entire dividend for an individual year they are allowed to vote as holders of regular shares for the period. In such an event preferred shares are taken in to consideration in the calculation of the required majority of capital. Preferred shares carry the right to priority in the payment of fixed dividends in the amount of at least 6 % of the amount attributed to a no par value share in the share capital. In cases where the payment of dividends in full is not possible it is effected partially.

11.2.11 Share transfer restrictions, especially: – restriction of security ownership and – explanatory note on the requirement to acquire permission

from the company or other holders of securities for the transfer

The Bank’s shares are transferred in line with the regulations pertaining to dematerialized securities. Current shareholders have priority, in proportion with their portion of the share capital, to subscribe new shares from the authorized capital. There is no other shareholding restrictions imposed by the Bank, whereas acquiring a qualifying share requires the appro-val by the Bank of Slovenia. There is no need to get approval by the Bank or other shareholders to transfer shares.

11.2.12 Employee stock options

The Bank does not have an employee stock option scheme in place.

11.2.13 Shareholder agreements that could result in the restriction of the transfer of shares or voting rights

Agreements between shareholders that could result in the restriction of the transfer of shares or voting rights are not in force.

Celje, 15th April 2011

11.2.14 Statement of the Posest, d.o.o., subsidiary company

The subsidiary company Posest, being a limited company, does not use codes in its operations.


12 STATEMENT OF MANAGEMENT’S RESPONSIBILITIES

The Management Board herewith confirms the consolidated financial statements for the year ended 31 December 2010 on the pages 46 to 51 and the accounting policies and notes to the accounting policies on the pages 52 to 116 of the con-solidated annual report.

The Management Board is responsible for the preparation of the consolidated annual report in a way as to be a true and fair representation of the Group’s assets and the results of its operations for the year ended 31 December 2010.

The Management Board additionally confirms that appropriate accounting policies were consistently used and that the accounting estimates were prepared according to the principles of precaution and good management. The Management Board furthermore confirms that the consolidated financial statements together with the notes have been prepared on the basis of the assumption of continued operations of the Group and in line with the existing legislation and the IFRS, as adopted by the European Union.

The Management Board is also responsible for appropriate accounting practice, for the adoption of appropriate measures for the insurance of property and for the prevention and identification of fraud and other irregularities or unlawfulness.

The tax authorities may at any time within 5 years from the day of the tax charge verify the operations of the company, which in turn may cause the obligation of an additional tax payment, default interest payment and penalty from Corporate Income Tax or other taxes or duties. The Management Board is not aware of any circumstances, which could result in any such potentially significant obligation.

Celje, 28th March 2011


13 REPORT OF THE AUDITORS


II CONSOLIDATED FINANCIAL STATEMENTS

1 CONSOLIDATED INCOME STATEMENT

The Notes form an integral part of the Consolidated Financial Statements.


Note1 January to

31 December 20101 January to

31 December 2009

Interest and similar income 3 112,628 120,432Interest and similar expense 3 (57,620) (66,927)Net interest and similar income 3 55,008 53,505

Dividend income 4 728 722

Fee and commission income 5 18,811 19,003Fee and commission expense 5 (2,551) (2,260)Net fee and commission income 5 16,260 16,743Net gains from financial assets and liabilities not classified at fair value through profit or loss 6 1,397 1,345Net (losses) / gains from financial assets and liabilities held for trading 7 (6,818) 4,230Net (losses) from financial assets and liabilities designated at fair value through profit or loss 8 (53) (705)Changes in fair value from hedging 9 98 —Foreign exchange translation net gains 10 9,663 314Net gains from derecognition of assets 11 26 29Net other operating income 12 294 784Administrative expenses 13 (36,384) (36,818)Depreciation and amortisation 14 (3,771) (3,914)Provisions 15 251 235Impairment charges 16 (31,014) (28,145)

PROFIT BEFORE INCOME TAX 5,685 8,325Income tax expense 17 (926) (1,773)

PROFIT FOR THE YEAR 4,759 6,552Basic and diluted earnings per share 18 9 13


2 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

The Notes form an integral part of the Consolidated Financial Statements.


1 January to31 December 2010


PROFIT FOR THE YEAR 4,759 6,552

OTHER COMPREHENSIVE INCOME (689) 8,427Net (losses) / gains from available for sale revaluation reserve (861) 10,593Valuation (losses) / gains taken to other comprehensive income (8,041) 1,702Transferred to income statement 7,180 8,891Income tax relating to other comprehensive income 172 (2,166)

TOTAL COMPREHENSIVE INCOME FOR THE YEAR AFTER TAX ATRIBUTABLE TO EQUITY HOLDERS OF THE PARENT 4,070 14,979

48

3 CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The Notes form an integral part of these Consolidated Financial Statements. These Consolidated Financial Statements have been approved for issue by the Management Board on 28th March 2011 and signed on its behalf by:


31 DecemberNote 2010 2009

Cash and balances with Central Bank 19 128,324 40,240Financial assets held for trading 20 65,365 87,747Financial assets designated at fair value through profit or loss 21 29,445 18,437Available-for-sale financial assets 22 236,029 234,067Loans and advances 1,793,275 1,789,240 – loans and advances to banks 23 85,908 88,501 – loans and advances to customers 24 1,707,367 1,700,739Held-to-maturity investments 25 276,273 213,959Assets pledged 21, 22, 25 32,390 135,672Property and equipment 26 19,658 20,629Investment property 27 1,807 306Intangible assets 28 5,256 5,342Income tax assets 29 4,997 4,622 – current tax assets 1,582 1,862 – deferred tax assets 29.2 3,415 2,760Other assets 30 6,398 9,972TOTAL ASSETS 2,599,217 2,560,233

Deposits from Central Bank 31 70,013 130,486Financial liabilities held for trading 32 6,014 6,051Financial liabilities designated at fair value through profit or loss 33 40,050 39,851Financial liabilities at amortised cost 2,227,369 2,159,899 – deposits from banks 34 54,435 56,610 – due to customers 35 1,498,958 1,453,436 – borrowings from banks 36 419,335 419,445 – borrowings from other customers 37 8,847 — – debt securities in issue 38 160,436 134,774 – subordinated liabilities 39 85,358 95,634Financial liabilities associated to transferred assets 40 30,993 —Derivative financial instruments designated for hedging 41 348 —Provisions 42 13,268 13,981Other liabilities 43 10,460 10,574

2,398,515 2,360,842TOTAL LIABILITIESShare capital 44 16,980 16,980Share premium 44 51,542 51,542Revaluation reserve 44 3,971 4,660Profit reserves (including retained earnings) 44 125,731 123,074Treasury shares 44 (31) (31)Profit for the year 44 2,509 3,166TOTAL EQUITY ATRIBUTABLE TO EQUITY HOLDERS OF THE PARENT 200,702 199,391TOTAL LIABILITIES AND EQUITY 2,599,217 2,560,233

Banka Celje Group Annual Report 2010


4 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

The Notes form an integral part of these Consolidated Financial Statements.


Share capital

Share premium

Revaluation reserve

Profit reserves

Retained earnings

Treasury shares

Total equity

(including net profit for the year)

BALANCE AT 1 JANUARY 2009 16,980 51,542 (3,767) 115,917 8,780 (31) 189,421Comprehensive income for the year after tax — — 8,427 — 6,552 — 14,979Dividends paid — — — — (5,043) — (5,043)Allocation of net profit to profit reserves — — — 6,746 (6,746) — —Other — — — 34 — — 34BALANCE AT 31 DECEMBER 2009 16,980 51,542 4,660 122,697 3,543 (31) 199,391

BALANCE AT 1 JANUARY 2010 16,980 51,542 4,660 122,697 3,543 (31) 199,391Comprehensive income for the year after tax — — (689) — 4,759 — 4,070Dividends paid — — — — (2,796) — (2,796)Allocation of net profit to profit reserves — — — 2,839 (2,839) — —Other — — — 37 — — 37BALANCE AT 31 DECEMBER 2010 16,980 51,542 3,971 125,573 2,667 (31) 200,702


5 CONSOLIDATED STATEMENT OF CASH FLOWS




A. CASH FLOWS FROM OPERATING ACTIVITIESInterest received 106,470 123,498Interest paid (53,168) (62,984)Dividends received 728 722Fee and commission received 18,829 18,967Fee and commission paid (2,562) (2,270)Realized gains from financial assets and financial liabilities not classified as fair value through profit or loss 2,416 1,456Realized (losses) from financial assets and financial liabilities designated at fair value through profit or loss (574) (80)(Losses) from financial assets and financial liabilities held for trading (6,773) 3,525Payments to employees and suppliers (36,100) (37,470)Operating income 355 1,330Operating expenses (1,203) (1,246)

a)Cash flows from operating activities before changes in operating assets and liabilities 28,418 45,448

b) Decreases / (increases) in operating assets 8,197 (117,186)Net decrease in trading assets 22,016 20,553Net decrease in financial assets, designated at fair value through profit or loss 348 3,910Net decrease / (increase) in available-for-sale financial assets 13,051 (29,936)Net (increase) in loans and advances (29,262) (113,251)Net decrease in other assets 2,044 1,538

c) Increases in operating liabilities 48,901 128,836Net (decrease) / increase in deposits from Central Bank (29,008) 9,009Net increase / (decrease) in financial liabilities held for trading 227 (4,503)Net increase in financial liabilities designated at fair value through profit or loss 28 3,982Net increase in deposits and loans measured at amortised cost 51,646 87,005Net increase of debt securities issued measured at amortised cost 25,662 35,653Net increase of hedging derivative financial liabilities 348 -Net (decrease) in other liabilities (2) (2,310)

č) Cash generated from operating activities (a + b + c) 85,516 57,098d) Income tax (payment) (1,121) (6,219)e) Net cash provided by operating activities (d + e) 84,395 50,879


The Notes form an integral part of these Consolidated Financial Statements.


Note1 January to

31 December 20101 January to

31 December 2009

B. CASH FLOWS FROM INVESTING ACTIVITIESa) Receipts from investing activities 133,032 90,543

Proceeds from sale of property and equipment and investment property 71 110Redemption of held-to-maturity investments 131,971 89,254Other receipts from investing activities 990 1,179

b) Payments from investing activities (114,410) (112,417)(Purchase of property and equipment and investment property) (730) (1,307)(Purchase of intangible assets) (1,461) (1,998)(Purchase of held-to-maturity investments) 25 (112,219) (109,112)

c) Net cash provided by investing activities (a - b) 18,622 (21,874)

C. CASH FLOWS FROM FINANCING ACTIVITIESa) Proceeds from financing activities — 12,147

Issue of subordinated liabilities — 12,147b) Payments from financing activities (18,278) (12,552)

(Dividends paid) (2,796) (5,043)(Subordinated liabilities repayed) (15,482) (7,509)

c) Net cash used in financing activities (a - b) (18,278) (405)

D. Effects of exchange rate changes on cash and cash equivalents 850 918

E. Net increase in cash and cash equivalents (Af + Bc + Cc) 84,739 28,600

F. Cash and cash equivalents at beginning of year 126,449 96,931

G. Cash and cash equivalents at end of year (D + E + F) 212,038 126,449


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

Banka Celje d.d. (“the Bank”) is a Slovene joint stock com-pany, providing universal banking services. Its largest share-holders are Nova Ljubljanska banka d.d., with an ownership share of 40.99 % and Slovenska odškodninska družba d.d. Ljubljana, with an ownership share of 9.36 %.

These are Consolidated Financial Statements of the Bank and its subsidiary company Posest, d.o.o. (“the Group”) for the year ended on 31 December 2010.

Based on permission issued by the Bank of Slovenia the subsidiary company is not included in the consolidated su-pervision in accordance with the decision by the Bank of Slovenia on Supervision of Banks and Savings Banks on a Consolidated Basis, as from the aspect of the aim of the supervision the subsidiary does not represent any signifi-cant impact.

After the annual report has been confirmed by the Super-visory Board Consolidated Financial Statements can not be amended any more.

Amounts in these Consolidated Financial Statements are expressed in thousands of euros, except otherwise stated.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparati-on of these Consolidated Financial Statements are set out below and have been used consistently for both presented years

2.1 Basis for the presentation of financial statements

The Group’s Consolidated Financial Statements have been prepared in accordance with International Financial Repor-ting Standards (“IFRS”) as adopted by the European Union.

The Consolidated Financial Statements comprise the con-solidated income statement and consolidated statement of comprehensive income showing as two statements, the consolidated statement of financial position, the conso-lidated statement of changes in shareholder’s equity, the consolidated statement of cash flows and the notes.

The Consolidated Financial Statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and financial liabilities at fair value through profit

or loss, all derivative contracts, which have been measured at fair value.

The Group classifies its expenses by the nature of expense method.

The disclosures on risks from financial instruments are pre-sented in a separate document according to the Regulation on disclosures by banks and saving banks.

The consolidated statement of cash flows shows the chan-ges in cash and cash equivalents arising during the period from operating activities, investing activities and financing activities. Cash and cash equivalents include highly liquid investments and are shown in Note 47.

The Group prepares the consolidated statement of cash flows using the direct method, by amending the appropriate items from the consolidated income statement with income and expenses or changes in operating assets and liabilities from investments and financing during the period. Interest paid and received has been classified as operating cash flows except where they are based on financing.

The preparation of Consolidated Financial Statements in accordance with IFRS requires the use of certain estimates and presumptions, which influence the value of reported assets and liabilities as well as the disclosure of potential assets and liabilities on the reporting date and the amount of income and expenses during the reported period. Even though the estimates used are based on the best knowledge of current events and activities, the actual results may differ from estimates.The Group adjusts the accounting estimates and assumptions continuously and recognises their effects in the year in which the change occurs. The most important estimates and judgements are disclosed in note 2.25.

In 2010 the Group implemented all the new and revised Standards and Interpretations, issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) and adopted by the EU, the use of which is mandatory for the accounting period beginning on 1 January 2010.

a) Accounting standards adopted in 2010 by the Group, with amendments:

– IAS 27: Consolidated and Separate financial statements. The objective of IAS 27 is to enhance the relevance, relia-bility and comparability of the information that a parent entity provides in its separate financial statements and in its consolidated financial statements for a group of enti-ties under its control, which is not relevant for the Group.


– IAS 39 (amendment): Financial instruments: Recogniti-on and measurement – hedging instruments. Should an option bought based on unilateral risk be assessed as a hedging instrument in its entirety, hedging in such a way will not be complete. The supplement also specifies that inflation may not be defined as hedged risk.

– IFRS 1 (amendment): First Time Adoption of IFRS. Revi-sions pertain to the reorganisation of the content and the transfer of most of the numerous exceptions and exemp-tions to addenda. The Committee removed the outdated transitional provisions and effected minor changes to the wording. The amendments are of no relevance to the Group.

– IFRS 1 (amendment): First Time Adoption of IFRS. The supplements exempt entities using the full cost method from retrospective application of IFRSs for oil and gas assets. Entities with leasing agreements in place are also exempt from the requirement to re-evaluate the classifi-cation of these agreements in line with IFRIC 4, “Deter-mining whether an Arrangement Contains a Lease”, when the fulfilment of their national accounting requirements would mean the same result.The amendments are not relevant for the Group.

– IFRS 3 (amendment): Business combination. The objective of the IFRS is to enhance the relevance, reliability and comparability of the information that an entity provides in its financial statements about a business combination and its effects. The use of the above standards shall not affect the Group’s financial statements, and shall apply only to the manner of disclosure of individual segments of operations. The amendments are of no relevance to the Group.

– IFRS 2: Share based payment - Group Cash-settled Share-based Payment Transactions. The amendments make clear that: (1) An entity that receives goods or services in a sha-re-based payment arrangement must account for those go-ods or services no matter which entity in the group settles the transaction, and no matter whether the transaction is settled in shares or cash; (2) the cross-effects of IFRS2 and other standards. The Committee explains that in IFRS 2 a ‘group’ has the same meaning as in IAS 27 Consolidated and Separate Financial Statements, that is, it includes only a parent and its subsidiaries. The amendments to IFRS 2 also incorporate guidance previously included in IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2–Group and Treasury Share Transactions. As a result, the IASB has withdrawn IFRIC 8 and IFRIC 11. The Group does not settle transactions with share-based payments.

– IFRIC 12: Service concession arrangements. The interpre-tation gives instructions to the operators in agreements on concessions between the public and private sectors in connection with accounting recognition of such ar-rangements. This interpretation holds no significance to the Group.

– IFRIC 15: Agreements for the Construction of Real Estate. This interpretation holds no significance to the Group.

– IFRIC 16: Hedges of a Net Investment in a Foreign Opera-tion. The interpretation determines: (i) foreign currency risk, which that qualify as a hedged risk and the amount to be hedged; (ii where, within a group, hedging instru-

ments can be held to qualify for hedge accounting; and (iii) what amount needs to be recognised in the Income Statement, if foreign operation is sold. This interpretation holds no significance to the Group.

– IFRIC 17: Distribution of non-cash assets to owners. It addresses how the non-cash dividends distributed to the shareholders should be measured. This dividend obligati-on should be recognised at the fair value of the net assets to be distributed. This interpretation holds no significance to the Group.

– IFRIC 18: Transfers of Assets from Customers. The inter-pretation clarifies the accounting for transfers of assets by entities, which obtain them from customers. The in-terpretation is not relevant for the Group.

– Annual improvements to the IFRS 2009: The improve-ments consist of a mixture of substantive changes and clarifications. Amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after July 1, 2009. Amendment in IFRS 2 clarifies, that contribution of business in common control transactions and formation of joint ventures are not within the scope of IFRS 2. IAS 38 is supplemented for measuring the fair value of an intangible asset, acquired in a business combi-nation. Amendment in IFRIC 9 excludes embedded deriva-tives in contracts acquired in common control transaction and joint ventures from its scope. Amended IFRIC 16 re-moves the restriction that hedging instrument may not be hold by the foreign operation, that itself is being hedge. Amendments that are affective for annual periods begin-ning on or after January 1, 2010, with earlier application permitted are amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 18, IAS 36 and IAS 39. IFRS 5 sets disclosure requirements for non-current assets or disposal groups classified as held for sale or discontinued operations. IAS 7 is amended, such that only expenditure which results in a recognized asset is eligible for classification as investing activities. IAS 17 permits the classification of certain long-term land leases as finance leases even without transfer of ownership of the land at the end of the lease. IAS 18 provides additional guidance for determining whether an entity acts as a principal or an agent. IAS 36 clarifies that a cash generating unit shall not be larger than an operating segment before aggregation. Amended IAS 39 includes in its scope option contracts that could result in business combinations, clarifies the period of reclassifying gains or losses on cash flow hedging instruments (if a hedged instrument is a forecast transaction) from other compre-hensive income to profit or loss for the year and states that a prepayment option is closely related to the host contract if upon exercise the borrower reimburses economic loss of the lender. The amendments do not significantly affect the Group’s financial statements.

b) Standards and interpretations not yet in effect:

– IAS 12 (amendment) – Deferred Tax: Recovery of Un-derlying assets – (effective for annual period beginning on or after January 1, 2012). The amendment relates to investment property measured at fair value. The invest-ment will be recovered with the continuing use if the pre-


sumption of recovery through sale will be overcome. The deferred tax assets are calculated based on the tax rate that is consistent with the expected manner of recovery or settlement. The amendments replace Interpretation SIC 21 Income Taxes - Recovery of revalued Non-Depre-ciable differences. The amendment does not affect on the Group’s financial statements.

– IAS 24: Related party disclosures. IAS 24 was amended in 2009 by: (a) simplifying the definition of a related party, clarifying its intended meaning and eliminating inconsi-stencies; and (b) providing a partial exemption from the disclosure requirements for government-related entities.

– IAS 32: Financial instruments: Presentation – classifi-cation of rights issues. The amendment deals with the classification of rights issues, denominated in a cur-rency different from the issuers domestic currency. The amendment requires, if certain conditions are met, such issues to be classified as equity regardless of the currency in which the exercise price is denominated. It comes into effect for periods starting on 1 February 2010 or later. The amendment is no relevant for the Group.

– IFRS 1: First Time Adoption of IFRS - limited exemption from comparative IFRS 7 disclosures for first time IFRS adopters. It exempts first time IFRS adopters from pro-viding additional disclosures introduced in March 2009 by Improving Disclosures about Financial Instruments (Amendments to IFRS 7). It is in effect since 1 July 2010. The amendment does not affect the Groups financial sta-tements.

– IFRS 7 (amendment) - Disclosures, Transfers of Financial Assets (effective for annual periods beginning on or after July 1, 2011). The amendment requires additional disclo-sures in respect of risk exposures arising from transferred financial assets. The amendment includes a requirement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party yet remain on the entity’s statement of financial position. Disclosures are also required to enable a user to under-stand the amount of any associated liabilities, and the relationship between the financial assets and associated liabilities. Where financial assets have been derecognized but the entity is still exposed to certain risks and rewards associated with the transferred asset, additional disclo-sure is required to enable the effects of those risks to be understood. The Group is currently assessing the impact of the amended standard on disclosures in its financial statements.

– IFRS 9: Financial Instruments, published by the IASB on 12 November 2009. On 28 October 2010 the IASB reissued IFRS 9 incorporating new requirements on accounting for financial liabilities (phase 1) and carrying over from IAS 39 the requrements for derecognition of financial assets and financial liabilities. The standard uses a unified appro-ach to the classification of a financial asset, whether it is measured according to amortised cost or fair value, with which it replaces a number of different rules from IAS 39. The IFRS 9 approach is based on the entity’s business mo-del for managing its financial instruments (the business model) and the contractual cash flow characteristics of

the instrument. The new standard also requires the use of a unified method of impairment charging, replacing a number of different methods of establishing impairment from the IAS 39. New requirements on classification of financial liabilities eliminate the problem of inconsistent results, being the consequence of the issuer’s decision to measure his debt at fair value. IASB decided to preserve the existing measurement at amortised cost for most of the liabilities and to limit the changes to those, required for the elimination of the problem of own credit. In line with the new requirements the entity, which decides to measure its liabilities at fair value, will show part of the fair value change, being the consequence of changes in its own credit risk, in other comprehensive income within the Income Statement, not in the operating result.

– IFRIC 14, IAS 19: The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction. IFRIC 14 clarifies provisions of IAS 19 regarding the me-asurement of a defined benefit asset within the context of post-retirement defined benefit plans, when a minimum funding requirement exists. In effect for annual periods starting on 1 January 2011 or later.

– IFRIC 19: Extinguishing Financial Liabilities with Equity Instruments. This IFRIC clarifies the accounting when an entity renegotiates the terms of its debt with the creditor, who agrees to accept in full or partial settlement of the financial liability debtor’s shares or other equity instru-ments. In effect for periods starting on 1 July 2010 or later.

– Annual improvements to IFRS 2010: The improvements consist of a mixture of substantive changes and clarifi-cations and are affective for annual periods beginning on or after January 1, 2011, with earlier application permit-ted. IFRS 1 First-time Adoption of the IFRS and IFRIC 13 Customer Loyalty Programmes do not affect the Group’s financial statements. IAS 27 clarifies the transition rules for amendments to IAS 21, 28 and 31 made by the revised IAS 27 (as amended in January 2008). Amendments in IAS 34 refer to interim financial reporting and affect the presentation of the Group’s interim financial statement. Disclosure requirements in IFRS 7 emphasize the link be-tween quantitative and qualitative disclosures regarding the nature and extent of financial risk and eliminates disclosures for renegotiated loans that would otherwise be past due or impaired, while disclosures regarding the fair value of collateral is replaced with a more general requirement, i.e. clarification of effect of collateral on mitigating the credit risk. Amendments to IFRS 3 require measurement of non-controlling interests at fair value, in certain cases provides guidance on an acquirer’s share-ba-sed payment arrangements that were not replaced or were voluntarily replaced as a result of a business combinati-on, and requires that the contingent considerations from business combinations that occurred before the effective date of revised IFRS 3 are calculated using the previous IFRS 3. The amendment in IAS 1 clarifies the require-ments for the presentation and content of the statement of changes in equity. Reconciliation between the carrying amount at the beginning and the end of the period for each component of equity must be presented in the sta-tement of changes in equity, but its content is simplified


by allowing an analysis of other comprehensive income by item for each component of equity to be presented in the notes. The amendments do not significantly affect the Group’s financial statements.

The adoption of stated standards and interpretations is not expected to have significant influence on the Group’s Con-solidated Financial Statements.

The Group did not early-adopt new or amended standards.

2.2 Consolidation

The financial statements of the consolidated subsidiary were prepared as of the Bank’s reporting date. The consolidation principles remained unchanged for all the periods presented.

The subsidiary has been fully consolidated since the day of the acquisition of control and will be excluded from conso-lidation on the date control is lost. Where necessary, acco-unting policies for subsidiary have been changed to ensure consistency with the policies adopted by the Group.

All intercompany transactions, balances and unrealised gains and losses on intergroup transactions have been eli-minated.

2.3 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker, deciding on funding, investments and the Groups operating performance. The Group has determined Assets Liability Committee (ALCO).

The criterion for defining segments within the Group is ba-sed on the sectorial definition of individual items, which are allocated to the following operating segments due to similar characteristics: retail, corporate, public sector and banking.

2.4 Foreign currency translation

a) Functional and presentation currency

Items, reported in these Consolidated Financial Statements, are measured using the currency of the primary economic environment in which the Group operates (the functional currency). The Consolidated Financial Statements are re-ported in euros, which is the Group’s functional and pre-sentation currency.

b) Transactions and balances

Foreign currency transactions are translated into the func-tional currency according to the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transacti-ons and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign cur-rencies are recognised in the consolidated income statement.

Translation differences related to fair value changes of mo-netary assets denominated in foreign currency classified as available-for-sale are recognised in consolidated income statement.

Translation differences on non-monetary financial instru-ments, such as equities held at fair value through profit or loss, are reported in income statement. Translation dif-ferences on non-monetary financial instruments, such as equities classified as available-for-sale financial assets, are included in the fair value reserve in equity.

Gains and losses from foreign exchange transactions are shown in the consolidated income statement under »Net gains/(losses) from financial assets and liabilities held for trading«.

2.5 Interest income and expense

Interest income and expense from interest-bearing financial instruments, are recognised for all debt instruments using the effective interest method. The aforementioned method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating financial reve-nue and expenses over the relevant period pertaining to the financial instrument. Interest income includes interest from fixed income investments and investments in securi-ties held at fair value through profit or loss as well as from discounts and premiums from bonds. The effective interest rate includes all fees paid as well as transaction costs. In the event that a financial asset or a group of related assets becomes impaired, the interest revenue is recognised on the basis of the effective interest rate used to discount future cash flows for the purposes of the impairment calculation.

2.6 Fee and commission income

Fees and commissions are generally recognised as the ser-vice is provided. Fee and commission income includes fees and commissions from guarantees to companies by the Group, from international payment operations and foreign exchange as well as from credit card operations. Fees and commissions included in the calculation of the effective interest rate are shown in interest income and expenses.

2.7 Dividend income

Dividends are recognised in the consolidated income state-ment when the Group’s right to receive payment has been established.

2.8 Financial assets and liabilities

2.8.1 Financial assets

As a rule the Group classifies its financial assets in the follo-wing categories at initial recognition: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets.


a) Financial assets at fair value through profit or loss

A financial asset is classified in the held for trading catego-ry if acquired principally for the purpose of selling in the short term. Derivatives are always categorised as held for trading unless they are designated as hedging instruments. Financial assets held for trading consist of equity and debt instruments, as well as financial assets with embedded de-rivatives. They are recognised in the consolidated statement of financial position as »Financial assets held for trading«.

Financial instruments included in this category are reco-gnised initially at fair value and transaction costs are taken directly to the consolidated income statement. Gains and losses arising from changes in fair value are included direc-tly in the consolidated income statement and are reported as »Net gains/(losses) on financial instruments classified as held for trading«. Interest income and expense and di-vidend income and expenses on financial assets held for trading are included in »Net interest income« or »Dividend income«, respectively.

Financial assets are designated at fair value when the fol-lowing conditions are met:

– in doing so the Group eliminates or significantly reduces measurement or recognition inconsistencies that would arise from the valuation of financial assets on different bases or

– financial assets, containing one or more embedded de-rivatives, which may significantly modify its cash flows.

Financial assets for which the fair value option is applied are recognised in the consolidated statement of financial position as »Financial assets designated at fair value«. Fair value changes relating to financial assets designated at fair value through profit or loss are recognised in »Net gains/(losses) on financial instruments designated at fair value through profit or loss«.

b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:

– those that the Group intends to sell immediately or in the short term, which are classified as held for trading, and those that the Group upon initial recognition designates as at fair value through profit or loss;

– those that the Group upon initial recognition designates as available-for-sale; or

– those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration.

Loans and receivables are initially recognised at fair value – which is the cash consideration to originate or purchase the loan including any transaction costs – and measured subsequently at amortised cost using the effective inte-

rest rate method. Loans and receivables are reported in the consolidated statement of financial position as loans and advances to banks or customers. Interest on loans and re-ceivables is included in the consolidated income statement and is reported as »Interest and similar income«. In the case of impairment, the impairment loss is reported as a deduction from the carrying value of the loan / receivable and recognised in the consolidated income statement as »Iimpairment charges«.

c) Held-to-maturity financial assets

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed ma-turities that the Group has a positive intention and ability to hold to maturity.

These are initially recognised at fair value including direct and incremental transaction costs and measured subsequen-tly at amortised cost, using the effective interest method.

Interest on held-to-maturity investments is included in the consolidated income statement and reported as »Interest income«. In the case of impairment, the impairment loss is been reported as a deduction from the carrying value of the investment and recognised in the consolidated income sta-tement as »Impairment charges«. Held-to-maturity invest-ments are government and bank bonds and treasury bills.

d) Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets, which the Group intends to hold for an in-definite period of time and which it may sell in response to liquidity needs or due to changes in interest rates, exchange rates or equity prices.

Available-for-sale financial assets are initially recognised at fair value, which is the cash consideration including any transaction costs, and measured subsequently at fair value with gains and losses being recognised in the consolidated other comprehensive income, except for impairment losses and foreign exchange gains and losses, until the financial asset is derecognised. If an available-for-sale financial as-set is determined to be impaired, the cumulative gain or loss previously recognised are included in the consolidated income statement. Interest calculated using the effective interest method, foreign currency gains and losses on debt securities classified as available-for-sale and received divi-dends from equity securities classified as available-for-sale are recognised in the consolidated income statement.

e) Recognition

Regular way purchases and sales of financial instruments at fair value through profit or loss, held to maturity and available for sale, are recognized on trade date. Loans are recognized when cash is advanced to the borrowers.


2.8.2 Financial liabilities

The Group is holding financial liabilities at fair value thro-ugh profit or loss (including financial liabilities held for trading and those designated at fair value) and financial liabilities at amortised cost.

a) Financial liabilities at fair value through profit or loss

This category comprises two sub-categories: financial liabi-lities classified as held for trading, and financial liabilities designated by the Group at fair value through profit or loss upon initial recognition.

The Group includes derivatives in the financial liabilities held for trading and shows them in an individual line in the consolidated statement of financial position.

Gains and losses arising from changes in fair value of fi-nancial liabilities classified as held for trading are included in the consolidated income statement and are reported as »Net gains/(losses) from financial assets and liabilities held for trading«.

Upon initial recognition the Group designated certain debt securities, which were hedged against interest rate risk using an interest rate swap, as at fair value through profit or loss. This designation cannot be changed subsequently.

Financial liabilities for which the fair value option is applied are recognised in the consolidated statement of financial position as »Financial liabilities designated at fair value through profit or loss«. Fair value changes relating to finan-cial liabilities designated at fair value through profit or loss are recognised in »Net gains/(losses) from financial assets and liabilities designated at fair value through profit or loss«.

b) Other liabilities measured at amortised cost

Financial liabilities that are not classified as at fair value through profit or loss fall into this category and are mea-sured at amortised cost. Financial liabilities measured at amortised cost are deposits from banks, due to customers, debt securities in issue for which the fair value option is not applied and subordinated liabilities.

c) Determination of fair value

For financial instruments traded in active markets, the de-termination of fair values of financial assets and financial liabilities is based on quoted market prices.

A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. If the above criteria are not met, the market is regarded as being inactive.

For all other financial instruments, fair value is determi-ned using valuation techniques. In these techniques, fair values are estimated from observable data in respect of similar financial instruments, using models to estimate the present value of expected future cash flows existing at the reporting date.

The Group uses widely recognised valuation models for determining fair values of non-standardised financial in-struments of lower complexity, such as options or interest rate and currency swaps. For these financial instruments, inputs into models are generally market observable and also unobservable.

Fair value hierarchy is disclosed in Note 2.24.5.b).

2.8.3 Derecognition of financial instruments

Financial assets are derecognised when the contractual ri-ghts to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substanti-ally all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the Group tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognition). Financial liabilities are derecognised when they have been discharged, cancelled or have expired.

Collateral (shares and bonds) provided by the Group under standard repurchase agreements and securities lending and borrowing transactions is not derecognised because the Group retains substantially all the risks and rewards on the basis of the predetermined repurchase price, and the criteria for derecognition are therefore not met.

2.9 Impairment of financial assets

2.9.1 Assets carried at amortised cost

The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be re-liably estimated.

The criteria the Group uses to determine the existence of objective evidence on an impairment loss pertaining to a financial asset or asset class include:

– debtor’s significant financial problems; – late payment of contractual interest or principal; – breach of contract; – start of bankruptcy proceedings, cumpulsory settlement

proceedings or a different form of financial restructuring;


– the disappearance of an active market for a financial asset due to financial problems experienced by the security’s issuer,

– the existence of a measurable decrease in expected cash flows of a group of financial assets from initial recogni-tion of these assets, even though a decrease cannot yet be identified with the individual financial assets in the portfolio, including:

– adverse changes in the payment status of borrowers in the portfolio and

– national or local economic conditions that correlate with defaults on the assets in the portfolio;

– the Group, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the Group would not otherwise consider.

The Group first assesses whether there is objective evidence of impairment in individually significant financial assets and collectively for financial assets, which are not indi-vidually significant. Should the Group determine that no objective evidence of impairment exists in an individually significant financial asset, it is included into a group of re-lated financial assets with similar credit risk characteristics, which is subsequently collectively assessed for impairment. The estimate period between a loss occurring and its iden-tification is determined by the Group’s risk management for each identified portfolio. Typically, the periods used are between one and three months.

Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment. The loss amount is measured as the difference between the asset’s carrying amount and the current value of the expected future cash flow, which also includes guarantees and collateral, discoun-ted at the financial assets original effective interest rate. Fu-ture credit losses, which have not yet occurred, are excluded. The carrying amount of the assets is reduced through an allowance account and the amount of the loss is recognised in the consolidated income statement. Should the interest rate in a loan or an investment held-to-maturity be variable, the discount rate for the measurement of impairment loss is the current effective interest rate as specified in respective agreement. The Group may also measure impairment for held-to-maturity financial assets on the basis of an asset’s fair value with the use of its market price.

The calculation of present value of the estimated future cash flows of collateralised financial assets reflects the cash flow, which may result from foreclosure or debt repayment, less costs for obtaining and selling the collateral.

For the purpose of collective evaluation of impairment, fi-nancial assets are grouped on the basis of similar credit risk characteristics (based on assessment procedures used for the group of related financial assets, the type of assets, bran-ch, geographic location, type of collateral, term to maturity and other factors). These characteristics are important for the assessment of the asset group’s future cash flows, as

these are an indicator of the debtor’s ability to repay due amount in compliance with contractual terms.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the histori-cal period that do not currently exist. Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related obser-vable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.

If the amount of the impairment subsequently decrease due to an event occurring after the write down, the reversal of loss is recognized as a reduction of an allowance for loan impairment. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the consolidated income statement.

The Group decides to write receivables off on the basis of the following criteria:

– the debtor no longer performs his regular activites (ter-mination of the legal entity),

– legal recovery proceedings have been concluded and – the Group has no adequate collateral, which it could liqui-

date, at its disposal.

2.9.2 Assets available-for-sale

At the reporting date the Group assesses whether there is objective evidence that available-for-sale financial assets are impaired. A significant or prolong decrease in the fair value of an equity instrument below its cost may provide objective evidence of impairment. Objective evidence that debt securities are impaired includes observable data of significant financial difficulty of the issuer or a breach of contract. If any such evidence exists for available-for-sale financial assets, the cumulative loss is removed from equity and recognized in the consolidated income statement as an impairment loss. A subsequent derecognition of loss due to impairment of an equity instrument, as recognised in the consolidated income statement is not reversed through the consolidated income statement. Later increases in its fair value are recognised through other comprehensive income.

If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the


impairment loss was recognized, the impairment loss is reversed through the consolidated income statement.

Impairment losses recognized in the consolidated income statement are measured as the difference between the car-rying amount of the financial asset and its current fair value.

2.9.3 Renegotiated loans

Loans that are either subject to collective impairment asses-sment or individually significant and whose terms have been renegotiated, due to a deterioration of the debtor’s solvency, are no longer considered to be past due, but are treated as new loans. In subsequent years, the asset is considered to be past due and disclosed only if renegotiated.

2.10 Derivative financial instruments and hedge accounting

Derivatives are initially recognized in the statement of financial position at fair value. They are valued at fair va-lue, determined on the basis of the listed market price, the model of discounted future cash flows and with the use of pricing models. Interest accruals on interest rate derivatives are in consolidated income statement recorded separately from fair value measurement.

The method of recognizing the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group uses derivatives to hedge the fair value of recognised assets and liabilities.

Hedge accounting is used provided certain criteria are met. When a hedge is introduced a formal document is prepared, describing the relationship between hedged items and hed-ging instruments, as well as its risk management purpose and strategy and the valuation methodology. The Group also documents the effectiveness assessment of hedging instruments at exposure to changes in the fair value of a hedged instrument, which are attributable to hedging. The Group assesses the effectiveness of a hedge at its inceptions and then on an ongoing basis during the duration of the hedge, where the hedge effectiveness must alwas fall within a range of 80 to 125 percent.

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in the con-solidated income statement, together with any changes in the fair value of the hedged asset or liability that are attri-butable to the hedged risk. Effective changes in fair value of hedging instruments and related hedged items are reflected in consolidated income statement.

If the hedge no longer meets the criteria for hedge acco-unting, the adjustment to the carrying amount of a hed-ged item for which the effective interest method is used is transferred to profit or loss over the period to maturity and recorded as retained profit.

Individual derivative financial instruments that provide effective economic hedges, which however do not qualify for hedge accounting under the specific accounting rules, are treated as derivatives held for trading. Changes in the fair value of those derivative instruments are recognised immediately in the consolidated income statement under »Net gains/(losses) from financial assets and liabilities held for trading«.

2.11 Offsetting

Financial assets and liabilities are offset and the net amo-unt reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

2.12 Sale and repurchase agreements

Securities sold subject to repo agreements are reclassified in the financial statements as pledged assets when the trans-feree has the right by a counterparty to sell or repledge the collateral. The difference between the sale and repurchase price is treated as interest accrued over the life of the agre-ements using the effective interest method.

2.13 Cash and cash equivalents

For the purpose of the consolidated statement of cash flows, cash and cash equivalents comprise balances with a matu-rity of less than 90 days from the date of acquisition: cash and balances with the Central Bank, debt securities held for trading and loans to banks.

2.14 Accounting for leases

a) the Group is the lessee

The leases entered into by the Group are operating leases. The total payments made under operating leases are inclu-ded to administrative expenses in the consolidated income statement on a straight line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor is recognised as an expense for the period in which termination takes place.

b) the Group is the lessor

In operational leasing the Group transfers the right to use an asset for a contractually agreed amount of time to the leasee in exchange for a payment or a string of payments.

Payments received under operating leasing are recognised as other operating income in the consolidated income sta-tement on a straight line basis over the period of the lease. Assets leased out under operating leases are presented in the consolidated statement of financial position as invest-ment property.


When assets are leased out under a finance lease, the present value of the lease payments is recognised as a receivable. Income from finance leasing transactions is apportioned systematically over the lease period, reflecting a constant periodic return on the lessor’s net investment outstanding.

2.15 Investment property

Investment property includes buildings held for rental yie-lds and not occupied by the Group. Investment property is initially recognized at cost. Transaction costs are included in the initial measurement. Subsequently it is measured at cost less accumulated depreciation and any accumulated impairment loss. When there is a change in use the Group made transfers to or from, investment property.

2.16 Property and equipment

All property and equipment is initially recognized at cost.

Subsequently it is measured at cost less accumulated depre-ciation and any accumulated impairment loss. Each year the Group assesses whether there are indications that assets may be impaired. If any such indication exists, the Group estimates the recoverableamount. The recoverable amount is the higher of net selling price and value in use. If the recoverable amount exceeds the carrying value, the assets are not impaired. If the recoverable amount is below the carrying value, the difference is recognized as a loss in the consolidated income statement.

Depreciation is provided on a straight-line basis over their estimated useful lives. The following are approximations of the annual rates used:

Buildings 1.9 – 3.0Furniture and equipment 7.0 – 20.0Computer equipment 10.0 – 33.0Leasehold improvements 10.0 – 20.0

Assets in the course of transfer or construction are not de-preciated until they are available for use.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, on each statement of financial position date.

Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit. Main-tenance and repairs are charged to the income statement during the financial period in which they are incurred.

Day-to-day servicing costs are recognized in profit or loss as incurred. Subsequent costs that increase future economic benefits are recognized in the carrying amount of an asset.

2.17 Intangible assets

Intangible assets comprise computer software and software licences. They are initially recognised at cost. The Group uses the cost model for the measurement after recognition. Intangible assets with a definite useful life are amortized using the straight-line method over their estimated useful economic life. At each reporting date intangible assets are reviewed for indications of impairment or changes in esti-mated future economic benefits. If such indications exist, the intangible assets are analysed to assess whether their carrying amount is fully recoverable. An impairment loss is recognized if the carrying amount exceeds the recoverable amount.

The amortisation of intangible fixed assets begins when they are brought into use.

The annual amortisation rates applied (in %):

Software licences 10.0 – 30.0 Computer software 10.0 – 30.0

2.18 Taxation

Corporate current income tax is recognized in accordance with the provisions of the Corporate Income Tax Law and is recorded together with the changes in deferred taxes as tax expense in the consolidated income statement.

Deferred income tax is provided in full, using the balance sheet liability method, for all temporary differences arising between the tax bases of assets and liabilities and their ca-rrying amounts for financial reporting purposes. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realized or the liability is settled.

The most significant temporary differences arise from the forming of provisions and impairments as well as from the revaluation of available-for-sale financial assets to fair value.

Deferred tax related to fair value remeasurement of avai-lable for sale investments is charged or credited directly to other comprehensive income and subsequently recognized in the income statement together with the deferred gain or loss.

2.19 Employee benefits

The Group provides employees with benefits as stipulated by the legislation, including: jubilee benefits and retirement indemnity bonuses. In line with the legislation, employees who retire are, under certain conditions, entitled to a lump sum severance pay out. Employees are also entitled to long service bonuses for every ten years of service at the Group. The abovementioned employee benefits are included in the income statement in the amount of the present value of future cash flows, together with the attributable gains and


losses.The valuation of the provisions for these obligations is carried out by independent qualified actuaries. The im-portant assumptions, used the actuarial calculation, are:

– salary growth in the Republic of Slovenia was forecast to reach 3.5 % annually and represents the estimated long-term salary growth level;

– a discount rate of 4.90 % annually, which is what the re-turn on 10-year corporate bonds with a high rating amo-unted to in the euro area end of December 2010;

– the number of employees, eligible to claim benefits.

There were no changes in assumptions regarding employee benefits in 2010 compared to 2009.

The Group contributes to the State Pension Scheme (8.85 % of gross salaries). The Group makes payments to a contribu-tion plan according to Slovenian legislation. Once contri-butions have been paid, the Bank has no further payment obligation. The regular contributions constitute net periodic costs for the year in which they are due and are included in employee costs as they are incurred.

2.20 Provisions

Provisions for liabilities and charges are recognised, if a present obligation (legal or constructive) exists as a result of a past event and it is probable that an outflow of resources enabling the inflow of economic benefits will be necessary to settle the obligation and the amount of the obligation can be measured reliably.

Where there is a number of similar obligations, the likeli-hood that an outflow will be required in settlement is deter-mined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

The Group uses these to directly cover costs or the expenses, for which they were formed. At the reporting date the justi-fication of their size or existence is assessed as compared to the current value of expenses, which according to forecasts, are required for the settlement of liabilities, on the basis of which the provisions had been formed.

2.21 Financial guarantee contracts

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

Financial guarantee contracts are initially recognized at fair value, which is equal to the amount of the fee received. Subsequently, the Groups liabilities under guarantees issued

are measured at the higher of the initial measurement, less amortization calculated to recognize fee income using the straight line method and the best estimate of the expendi-ture required to settle the obligation.

2.22 Share capital

a) Share issue costs

Expenses, directly connected with the issue of new shares are recognized in equity as a decrease.

b) Dividends on shares

Dividends on shares are recognised in equity in the period in which they are approved by the Bank’s owners.

c) Treasury shares

Should the Group purchase treasury shares, the proceeds are shown as a decrease in share capital. In the event of a subsequent sale of the acquired treasury shares the amount is shown as an increase in share capital. The Group formed share reserves for the acquired treasury shares.

2.23 Comparatives

There have been no adjustments and reclassifications made in the financial statements for 2010 in comparison to the financial statements for 2009.

2.24 Financial risk management

In its operations the Group assumes a number of different types of risk, the amount of which depends on the type of transaction and the preparedness to assume risk. The Group mainly focuses on the performance of traditional banking operations and it provides its clients with services pertain-ing to treasury and other financial transactions to a lesser extent. Most of its operations are conducted in the Republic of Slovenia, whereas it is present in interbank market of other EU member states as well as other low credit risk ex-hibiting countries throughout the world. It is also active, to a limited extent, in the countries of the South East Europe, lending to corporate and retail clients.

To achieve strategic goals in the area of operations associ-ated with risk and its management the Group is putting a lot of emphasis on credit, market, interest rate, liquidity, operational risk and capital and capital adequacy as well as profitability risk (P&L risk), strategic risk and reputation risk. The organisation of the Group ensures the separation of commerctial organisational units or the units that enter into transactions and assume risk (front office) from the back office, which books the transactions and keeps acco-unts. The risk monitoring and management function is also separated from the aforementioned two. The organisation of the Group is such as to provide for independent operations of individual organisational units up to the managerial level


and for an adequate flow of information up and down as well as between the organisational units.

The Group has prepared a strategy and a policy of assuming and managing risk per respective risk type. The strategy of assuming and managing risk reflects the Group’s core relationship toward risk within the framework of its ope-rations and includes the objectives and general principles or policies pertaining to assuming and managing risk, the approach to the management of individual risk types and the approach to the process of assessing adequate internal capital levels (organisational rules of process, procedures for the identification, measurement and assessment, ma-nagement and monitoring, system of internal controls), as well as the responsibilities of the Management Board and the Supervisory Board.

By developing internal reporting and the consideration and decision-making process at a number of different bodies within the Group, the Management Board and the entire senior management are actively involved in the risk mana-gement process. By managing risk, the Group intends to be more responsive and efficient when it comes to changes in the environment, to get closer to client needs and to ensure long-term financial stability. Assuming and managing risk has become an important element of the Bank’s comprehen-sive strategy due to the development and characteristics of the financial system.

Risk management is directly monitored:

– in the Risk Management Division: all risks; – at Credit Committees (once a week): credit risk; – at the Liquidity Committees (three times a week): liqui-

dity risk; – on a monthly basis at the Assets and Liabilities Commit-

tee (ALCO): credit, market, liquidity, interest rate, capital and profitability risk;

– at the Management Board level or the Managerial Body of the Bank: operational and strategic risk as well as re-putation risk;

– at the Risk Committee: all types of risk.

2.24.1 Credit risk

Credit risk is the risk of loss resulting from a debtor’s ina-bility to meet, for any reason, its financial or contractual obligations entirely. This type of risk includes subcategories, namely country risk, risk of concentration and residual risk. The Risk Management Division, being an organizationally independent unit in relation to commercial units and di-rectly answering to the Management Board, manages the implementation of the policy of assuming and managing credit risk and regularly reports to the ALCO on the expo-sure to credit risk and limit consideration.

The granting of loans includes commercial organizational units, the Risk Management Division and the Operational Support Division. Granting loans and other transactions are subject to authorizations and legal limitations. Authorisati-

ons depend on the rating of the debtor, the size of the total exposure, loan size, the total limit, collateral and deviation from other conditions. Loans are granted at different levels of banking operations.

The Group manages credit risk related to a single debtor or investment (stand alone risk), as well as the risk relating to the entire credit portfolio (portfolio risk).

2.24.1.1 Measuring and managing credit risk

The Group measures credit risk for active on-balance sheet items and for commitments and contingent liabilities. Cre-dit risk is assessed for financial assets measured at amorti-sed cost, for financial assets designated at fair value and for assumed liabilities from commitments and contigent liabi-lities. Credit risk is the result of business, commercial and housing loans, credit card operations, transaction account overdrafts, guarantees and granted but still undrawn loans, as well as a consequence of the investments in debt securi-ties and the exposure from transactions with derivatives.

Loans and advances to customers

The Group’s exposure to credit risk depends on three ele-ments: (1) the probability of default or exposure to the debtor’s rating class; (2) current exposure from statement of financial position and commitment and contingent liability items; (3) the amount of outstanding debt paid off, in case of default. The Group regularly monitors the exposure to credit risk and assesses loss due to defaults and unsettled debt.

(1) Internal rating systems have been developed for the classification of the Group’s debtors into rating classes and for the measurement of probability of default for different debtor groups (legal entities, individual entrepreneurs and banks). Debtor classification is based on the estimated qua-litative and quantitative elements. In the classification of banks and sovereigns (state) external ratings are usually considered (Moody’s Investor Service, Fitch Ratings, Stan-dard & Poor’s). Prior to every individual private loan or in-vestment approval each individual’s creditworthiness is assessed and the settlement of existing liabilities checked. Before approving a loan, as a rule, an inquiry is made with the use of the SISBON system (Slovenski informacijski sis-tem bonitet fizičnih oseb – the Slovene Information System on the Rating of Private Individuals), which includes data on indebtedness and settlement of liabilities by private in-dividuals in the Slovene banking environment since August 2008.

Prior to approving a transaction the Group classifies a deb-tor into a rating class, measuring the probability of default and loss. On an ongoing or at least on a quarterly basis, the Group verifies the adequacy of a classification in relation to the debtor’s financial standing, the settlement of due liabilities and the assessment of qualitative factors, on the basis of which the classification is retained or the debtor is classified into a higher or lower rating class. Transitional matrices are prepared regularly, showing the transitions


between rating classes and measuring the number of defaults in an individual period. On the basis of data on defaults, estimates on the probability of default for an individual rating class are adjusted.

The internal ratings system with the description of rating classes and the comparison with external ratings:

(2) The level of statement of financial position item exposure (loans) and the level of commitment and contingent liability exposures equal their nominal values.

(3) The loss amount in case of default depends on the amount of exposure and the collateral obtained. The Group strives toward securing its receivables to minimize loss. It is impor-tant for the Group to begin procedures for the settlement of overdue, unpaid receivables as soon as possible.

Debt securities

In managing credit risk from debt securities, the Group utilizes external ratings (Moody’s Investor Service, Fitch Ratings, Standard & Poor’s) of securities and issuers. In cases, where the fair value of an individual security is signi-ficantly lower than the original cost and the drop in value is attributable to reasons pointing to objective evidence of impairment, the Group recognizes the impairment charge for the investment.

Assumed commitments and contigent liabilities

Assumed commitments and contigent liabilities (off-balance sheet items) include the undrawn part of loans granted, guarantees and letters of credit. By issuing these instru-ments the Group commits to provide cash to the counter-party, when so instructed. The potential exposure to loss from these instruments pertains to credit risk. The same methodologies are applied in measuring credit risk from assumed commitments and contingent liabilities as are used in measuring credit risk pertaining to loans.

Derivatives

The exposure to credit risk from derivatives pertains to exposure to counterparty risk, namely the risk of a coun-terparty defaulting prior to final settlement of cash flow from the transaction. The exposure to credit risk equals the credit replacement value, calculated on the basis of the current exposure method. The Group enters into derivative instrument agreements with prime debtors mainly in fore-ign currency transactions, interest rate swaps. In the event

of increased credit risk, the Group tries to acquire additional collateral. The exposure to credit risk is managed within the framework of limits pertaining to lending agreements, which are confirmed by the Credit Committee.

Limit definition and monitoring

The Group calculates ceiling limits for loans (total limit) to individual debtors and to groups of related entities on the basis of data on the existing and future operations. In doing so it takes into consideration the legal requirements in connection with the largest exposure limits related to an individual entity or a group of related entities, which must not exceed 25 % of the Group’s equity. Limits are monitored on an ongoing basis and are adjusted in relation to the risk profile of the debtor or a group of related entities and the sector the debtor is active in. Total limits and their possible increases or decreases are confirmed by the Group’s Cre-dit Committee. The methodology of indebtedness ceilings calculation was upgraded in 2010 for corporate and bank clients as well.

In addition to limits set for individual debtors or groups of related entities, the Group also implements structural limits according to sector or category of debtor, according to geographic area and according to type of activity - thus limiting the risk of portfolio concentration. Structural li-mits are usually confirmed annually at ALCO meetings, with their consideration and trends monitored on the basis of monthly reports. If required, due to economic conditions and exposure to risk, these limits may also be adjusted.

Collateral

The Group’s exposure to credit risk is reduced with the imple-mentation of policies regarding collateral. To minimize loss in the event of default, the Group tends to acquire adequate collateral from the debtor, such as a mortgage on commer-cial or residential real estate, pledges of financial property (bank deposits, securities) or the acquisition of personal credit insurance by an adequate provider. The Group con-siders other forms of collateral such as physical collateral, inventories and cash claims to be of lesser quality. Usually

Internal rating class

Internal rating description Risk level

Comparison with the Bank of Slovenia ratings

Comparison with the Moody’s Investors Service* ratings

A1, A2, A3 Prime Investment grade A from Aaa to Aa3, from A1 to A3, from Baa1 to Baa3

B1, B2, B3 Standard Investment grade B from Ba1 to Ba3, from B1 to B3C1, C2 Substandard Sub-investment grade C from Caa1 and lowerD Default Default D DefaultE Default - recovery Default E Default

* comparison prepared for banks


long-term loans are collateralized, with a large portion of short-term loans collateralized as well and the only ones not requiring collateral being those granted to debtors of a higher credit rating. In cases where a debtor’s rating wor-sens, the Group would negotiate additional collateral or a reduction in exposure.

The significant types of appropriate collateral the Group utilises and the related valuation:

– financial assets used as collateral (bank deposits with the Group or cash assimilated instruments, debt securities, is-sued by sovereigns, the central bank or institution, equity and other securities, listed on stock exchanges), which is valued at market and is revaluated on a daily basis;

– pledged commercial or residential real estate, valued at fair value;

– personal assurances given by: sovereigns and central banks, regional or local authorities, public sector entities, institutions, insurance companies and companies with a high credit rating (100 % percent of the value).

Due to the macroeconomic conditions and the circumstan-ces prevailing in the real estate and capital markets in 2009 and 2010, a great deal of attention was directed at moni-toring the fair value of collateral and toward ensuring the contractually agreed ratios between exposure and collateral coverage.

To reduce credit risk the Group does not use utilise netting of the items from the statement of financial position and credit derivatives.

Estimating credit risk losses

A methodology for the estimation of credit risk losses has been prepared in accordance with IFRS, which is updated at least once a year and adapted to the economic conditions. Continuously or at least on a quarterly basis estimations are made, whether there is objective evidence of impairment relating to financial assets and liabilities assumed on the basis of commitments and contingent liabilities. The metho-dology of estimating impairment charges is set up according to type of debtor: legal entities and individual entrepreneurs, private individuals, banks and savings banks and prime deb-tors. The methodology of assessing impairment charges for exposure to private individuals was supplemented in 2010.

(1) Assessment of impairment charges for exposure to legal en-tities and private entrepreneurs

The impairment charge may be calculated individually on the basis of the estimated future cash flows or collectively on the basis of historical data on defaults and losses for groups of exposures with similar characteristics, adjusted to account for current conditions, thus reflecting the effects of recent operating conditions. Individual estimates pertain to assets individually exhibiting significant characteristi-cs (exposures above EUR 650,000) and showing signs of impairment (exposures classified lower than A3). If there

are no signs of impairment, the exposure is classified into a group of financial assets with similar characteristics and the impairment is assessed collectively. Individually im-pairment is also assessed for financial assets, which have already been recognized as impaired (exposures classified C2, D and E). Impairment is appraised on the basis of the estimated future cash flow, including expected repayment from realization of collateral.

For exposures not exhibiting signs of impairment or ex-hibiting individually insignificant impairment (exposures classified A1, A2, A3 and exposures under EUR 650,000), the charge is assessed collectively on the basis of historical default data and loss estimates. The Group estimation per-centage includes a general risk factor, reflecting the deteri-oration of economic conditions and a higher probability of defaults. The value of the general risk factor is assessed at least once a year on the basis of fluctuations in the gene-ral price levels, interest rates, the settlement of liabilities, fluctuations in the financial and capital markets as well as the real estate market conditions, the economic activity, conditions in the job market and the trends in the energy and raw material markets.

(2) Assessment of impairment charges for exposure to private individuals

To account for the exposure to private individuals the Gro-up modernized the methodology of impairment charge estimation in 2010. It classifies financial assets in rating groups A, B, C, D, E on the basis of the settlement of liabi-lities. Individually significant financial assets (exposures above EUR 400,000), where there is objective evidence to suggest for the need to establish an impairment, are im-paired individually. The same applies to financial assets already recognised as impaired (exposures classified C, D and E). For the purpose of collective impairment financial assets are divided into homogenous groups on the basis of the settlement of liabilities and in accordance with product groups (housing loans, consumer loans, quick loans, account overdrafts). Impairment charge percentages are based on past data and adjusted to current conditions, thus differing for every product group and every rating class. Impairment charge percentages are reestimated once a year.

(3) Assessment of impairment charges for exposure to banks and prime debtors

For banks the impairments are estimated solely on an individual basis. Exposures to prime debtors (sovereigns and central banks) are assessed using group or individual approach.

Managing credit risk during the crisis

The slow and unstable recovery of the domestic economy and uncertainty in the European financial markets require the Group to continue to implement the measures aimed at reducing the effect of the crisis on the financial positi-on and the profitability of the Group. It limited lending to


financially unstable debtors and to debtors from the riskier activities and regions. The Group was trying to obtain additi-onal collateral, keeping in contact with borrowers, monitoring their operations and cash flow for the repayment of debt, adjusting debtor classification and limit. It worked on the recovery of outstanding receivables and liquidated collateral in some cases. New investments were granted to debtors for the financing of regular busines operations with good quality collateral having been provided. In the area of retail lending stricter criteria for the assessment of creditworthiness was applied. The Group continued to follow it goal of diversifying the credit portfolio according to debtor or groups of related entities and activity.

It is the Group’s assessment that the number of defaults might increase in 2011, as it is expected that the economy will not pick up until the second half of the year. A positive impact on the domestic economy is expected to come from global economic activity in the European countries, with positive effects also coming from government measures to increase payment discipline and the competitiveness of the domestic economy. The Group will continue to closely monitor debtor rating and portfolio credit risk while adapting the lending policy and credit risk management to the current conditions.

2.24.1.2 Maximum credit risk exposure


31 December 2010 31 December 2009Maximum exposure

to credit riskFair value of

collateral3

Maximum exposure to credit risk

Fair value of collateral3

Statement of financial position assets 2,372,134 1,803,495 2,388,471 1,703,572Loans 1,793,275 1,680,720 1,789,240 1,621,440Loans and advances to state1 5,409 — 8,113 —Loans and advances to banks 85,908 — 88,501 —Loans and advances to private individuals 331,589 479,726 306,087 408,301 – overdraft accounts and cards 34,032 20,049 32,005 23,889 – housing loans 155,064 312,632 128,016 248,309 – consumer and other loans 142,009 146,792 145,668 136,103 – violation of overdraft limits 484 253 398 —Loans to companies2 1,370,369 1,200,994 1,386,539 1,213,139 – large companies 661,968 453,577 663,131 465,613 – small and medium sized enterprises (SME) 665,103 729,332 687,407 728,468 – other 43,298 18,086 36,001 19,058Financial assets held for trading 44,668 — 51,924 —Derivatives 12,645 — 16,129 —Debt securities 32,023 — 35,795 —Financial assets designated at fair value through P&L 29,445 1,845 18,437 —Debt securities 29,445 1,845 18,437 —Available-for-sale financial assets 194,954 48,372 178,163 29,169Debt securities 194,954 48,372 178,163 29,169Held-to-maturity investments 276,273 72,558 213,959 —Debt securities 276,273 72,558 213,959 —Assets pledged 32,390 — 135,672 52,963Debt securities 32,390 135,672 52,963Other financial assets 1,129 — 1,076 —

Off-balance sheet exposures 248,637 122,616 235,320 90,486Guarantees 79,289 49,966 78,788 41,989Other off-balance sheet exposures 169,348 72,651 156,532 48,497Total 2,620,772 1,926,112 2,623,791 1,794,0581 State (sovereigns) includes direct beneficiaries of the Republic of Slovenia budget and foreign central state level units (sovereigns).2 Size of companies defined in accordance with the Companies Act; the micro, small and medium size enterprises (SME) comprise those, which fulfil two of the following

criteria:– average number of employees is less than 250, – net sales income does not exceed EUR 35,000 thousand,– the value of assets does not exceed EUR 17,500 thousand.Large companies are all those companies, which do not fit the SME criteria.“Other” shows regional and local state levels, public sector entities, new companies,companies in receivership, societies and other debtors, which do not provide information on their size

3 Fair value of collateral equals:– the market value of financial assets held as collateral, – 100% of the value of insurance company guarantees, bank guarantees, state and municipal guarantees and prime rated companies,– values of residential and commercial real estate equal market values of comparable real estate.


The table shows the Group’s maximum credit risk exposure from loans, investments in securities and commitments and contingent liabilities as at 31 December 2010 and 2009. In 2010 the exposure to credit risk remained at a level similar to the previous year. Loans sligtly grew, mainly due to an increase in retail lending, while commitments and contingent liabilities increase by 5,6 % and the exposure from debt financial instruments decrease by 3 %, with exposure from deri-vatives decreasing by 21,6 %.

The continuation of the economic and financial crisis also had an impact on the credit portfolio. By carefully managing investment policy during the crisis and responsibly managing credit risk, the Group achieved the following results in 2010:

– as at 31 December 2010 loans that were classified into the highest of investment grade rating classes, namely A and B, represented 85.26 % of all loans (2009: 93.39 %), impairment charge coverage increased to 5.13 % (2009: 3.96 %);

– the coverage of exposure with adequate collateral improved moderately in 2010 due to additional collateral applied to existing loans as well as collateral obtained for new loans, thus 94 % of all loans was collateralised as at 31 December 2010;

– the Group holds 87 % of debt security investments rated at least A; – the consolidated income statement shows impairment charges amounting to EUR 31,014 thousand (2009: EUR 28,145

thousand), wherein impairment charges for loans measured at amortized cost represented EUR 23,496 thousand (2009: EUR 20,373 thousand) and securities impairment charges amounted to EUR 7,518 thousand (2009: EUR 7,772 thousand). Provisions for commitments and contingent liabilities and other provisions decreased by EUR 67 thousand. Increased impairment charges reflect the economic and financial crisis, which resulted in increased defaults and in the drop in the fair value of securities.

2.24.1.3 Credit risk exposure according to rating classes

Exposure from loans


31 December 2010 31 December 2009

Rating classLoan

amountImpairment

amountLoan

structureImpairment

structureLoan

amountImpairment

amountLoan

structureImpairment

structure

Prime (A) 1,042,696 3,585 55.16 % 3.70 % 1,106,653 7,146 59.40 % 9.68 %Standard (B) 569,023 21,453 30.10 % 22.12 % 633,279 25,462 33.99 % 34.49 %Substandard (C) 158,340 22,224 8.38 % 22.91 % 65,546 10,944 3.52 % 14.82 %Default (D) 51,328 10,192 2.72 % 10.51 % 48,254 21,135 2.59 % 28.63 %Default (E) - recovery 68,884 39,542 3.64 % 40.77 % 9,336 9,139 0.50 % 12.38 %Total 1,890,271 96,996 100.00 % 100.00 % 1,863,067 73,827 100.00 % 100.00 %

Gross exposure from loans as at 31 December 2010 amounted to EUR 1,890,271 thousand, representing a 1.5 % increase as compared with the balance the previous year (2009: EUR 1,863,067 thousand). After accounting for impairment char-ges the loan carrying amount is EUR 1,793,275 thousand similar to last year (2009: EUR 1,789,240 thousand). Portfolio quality deteriorated due to the continued unfavourable conditions, as shown by the fact that as at 31 December 2010 the percentage of highest rated loans (classes A and B) decreased to 85.26 % (2009: 93.39 %). Exposure to loans, classified as substandard and default increased to 14.74 % (2009: 6.61 %), with the Group established additional impairment charges on these loans.



31 December 2010 Loans to private individuals Loans to companies

Rating class

Overdraft accounts

and cardsHousing

loans

Con-sumer loans

Violation of over-

draft limits

Large compa-

nies SME Other

Loans and

advances to state

Loans and

advances to banks Total

Prime (A) 34,264 152,097 132,938 310 442,539 152,578 36,898 5,409 85,663 1,042,696Standard (B) — 1,834 1,801 118 156,205 403,129 5,651 — 285 569,023Substandard (C) — 1,960 10,502 112 60,556 85,192 18 — — 158,340Default (D) — 222 311 32 11,894 38,789 80 — — 51,328Default (E) - recovery — 1,086 2,043 403 11,112 48,756 5,484 — — 68,884Impairments 232 2,135 5,586 491 20,339 63,341 4,832 — 40 96,996Total 34,032 155,064 142,009 484 661,967 665,103 43,299 5,409 85,908 1,793,275

According to loan classes



Rating class

Overdraft accounts

and cardsHousing

loans

Con-sumer loans

Viola-tion of

overdraft limits

Large compa-

nies SME Other

Loans and

advances to state

Loans and

advances to banks Total

Prime (A) 32,328 126,500 142,434 210 441,423 235,417 32,011 8,113 88,217 1,106,652Standard (B) — 2,569 3,650 124 215,561 408,532 2,493 — 351 633,280Substandard (C) — 521 1,055 89 16,127 47,729 25 — — 65,546Default (D) — 154 1,136 22 4,178 40,370 2,395 — — 48,254Default (E) - recovery — 1,260 1,267 499 142 2,555 3,612 — — 9,335Impairments 323 2,988 3,874 546 14,299 47,195 4,535 — 67 73,827Total 32,005 128,016 145,668 398 663,131 687,407 36,001 8,113 88,501 1,789,240

Loans to private individuals increased by 8 % as compared to the previous year. Housing loans increased most, namely by 21 %, overdraft accounts increased by 6 %, whereas consumer spending loans went down. Loan quality decreased somewhat due to consumer loans, but remained high (2010: 94 % of loans was classified prime; 2009: 96 %)

Lending to corporate slight decreased to the previous year, which is a result of the Group applying its lending policy during the crisis and creating additional impairments.

Credit exposure to banks and sovereigns decreased in 2010. The Group mainly deals with sovereign entities and banks exhibiting low risk.

2.24.1.4 Credit risk exposure according to maturity

Loans according to maturity




Loans to private

individualsLoans to

companiesLoans

to stateLoans to

banks

Loans to private

individualsLoans to

companiesLoans

to stateLoans to

banks

Loans neither past due nor impaired 335,208 1,352,204 5,409 85,947 308,183 1,369,986 8,113 88,566Loans past due - individually impaired 3,773 105,305 — 1 4,346 76,597 — 2Loans past due - not impaired 1,052 1,372 — — 1,289 5,984 — —Impairments 8,444 88,512 — 40 7,731 66,029 — 67Total 331,589 1,370,369 5,409 85,908 306,087 1,386,539 8,113 88,501


As at 31 December 2010 the exposure to impaired loans to corporates past due amounted to EUR 105,305 thousand (2009: EUR 76,597 thousand) with only EUR 1,372 thousand (2009: EUR 5,984 thousand) represented by non-impaired loans.

Loans pastdue and individually impaired

Loans pastdue and not-impaired

Restructured loans




Loans to private

individualsLoans to

companiesLoans

to stateLoans to

banks

Loans to private

individualsLoans to

companiesLoans

to stateLoans to

banks

Receivables up to 30 overdue 60 2,782 — 2,842 287 9,950 1 10,238Receivables over 30 to 90 days overdue 213 13,098 — 13,311 1,070 4,819 — 5,889Receivables over 90 days overdue 3,500 89,425 1 92,926 2,989 61,828 1 64,818Total 3,773 105,305 1 109,079 4,346 76,597 2 80,945Fair value of collateral 3,021 88,264 — 4,032 49,565 —


31 December 2010 31 December 2009Loans

to private individuals

Loans to companies

Loans to banks Total

Loans to private

individualsLoans to

companiesLoans

to banks Total

Receivables up to 30 overdue 697 1,041 — 1,738 272 1,534 — 1,806Receivables over 30 to 90 days overdue 355 221 — 576 1,017 705 — 1,722Receivables over 90 days overdue — 110 — 110 — 3,745 — 3,745Total 1,052 1,372 — 2,424 1,289 5,984 — 7,273Fair value of collateral 1,093 1,421 — 369 7,668 —


Carrying amountRestructured loans 31 December 2010 31 December 2009

Prime (A) — 45Standard (B) 42,739 26,639Substandard (C) 46,630 2,549Default (D) 957 4,531Default ( E) - recovery 2,077 —Total 92,403 33,764Fair value of collateral 93,987 31,767

The carrying amount of restructured loans in 2010 increased due to the economic crisis continuing. The Group decided to restructure receivables from debtors, which exhibited a deteriorated economic and financial position and where it assu-mes that the loans will not be settled in accordance with the initially agreed maturities, however the anticipated future activities of the debtor suggest a better probability for the repayment of debt. In these cases it decided to restructure its receivables mainly by extending the maturities on the repayment of principal. Almost all restructured loans are indivi-dually impaired. Collateral coverage is high, as at 31 December 2010 the value of collateral received amounted to EUR 93,987 thousand (2009: EUR 31,767) and exceeded the amount of restructured loans.


2.24.1.5 Credit risk exposure according to impairment approach

Exposure from loans

The Group recognises impairment charges in accordance with the internal methodology on the formation of impairment charges and provisions in line with IFRS. Individually significant exposures and exposures where there is objective evi-dence of impaired are impaired individually on the basis of the estimated future cash flows, while other exposures are impaired collectively. As at 31 December 2010 30 % of the loan portfolio was assessed individually representing 77 % of impairment provisions (2009: 35 % of the loan portfolio or 67 % of impairment charges).

According to loan type


31 December 2010 31 December 2009Group approach Individual approach Group approach Individual approach

Rating class Loans Impairments Loans Impairments Loans Impairments Loans Impairments

Prime (A) 957,032 3,585 85,664 — 981,885 7,146 124,766 —Standard (B) 339,992 8,553 229,031 12,900 219,145 8,273 414,134 17,189Substandard (C) 9,681 1,687 148,659 20,537 9,160 1,913 56,386 9,030Default (D) 3,138 1,788 48,190 8,404 2,756 1,494 45,498 19,641Default (E) - recovery 6,829 6,725 62,055 32,817 5,463 5,428 3,873 3,711Total 1,316,672 22,338 573,599 74,658 1,218,409 24,255 644,657 49,572Fair value of collateral 1,254,627 426,093 1,121,272 500,168



Overdraft accounts

and cardsHousing

loansConsum-er loans

Viola-tion of

overdraft limits

Large compa-

nies SME Other

Loans and ad-vances

to state

Loans and ad-vances

to banks Total

Group approach 34,264 157,199 138,188 975 531,858 404,647 44,132 5,409 — 1,316,672 – Impairments 232 2,135 3,257 491 3,324 11,173 1,726 — — 22,338Individual approach — — 9,407 — 150,449 323,797 3,998 — 85,948 573,599 – Impairments — — 2,329 — 17,016 52,167 3,106 — 40 74,658Impairment com-pared to loan value 0.68 % 1.36 % 3.78 % 50.36 % 2.98 % 8.70 % 10.04 % 0.00 % 0.05 % 5.13 %Total 34,032 155,064 142,010 484 661,967 665,104 43,298 5,409 85,908 1,793,275



Overdraft accounts

and cardsHousing

loansConsum-er loans

Viola-tion of

overdraft limits

Large compa-

nies SME Other

Loans and ad-vances

to state

Loans and ad-vances

to banks Total

Group approach 32,328 131,004 149,542 944 462,406 399,776 34,296 8,113 — 1,218,409 – Impairments 323 2,988 3,874 546 3,718 11,154 1,652 — — 24,255Individual approach — — — — 215,024 334,826 6,240 — 88,568 644,657 – Impairments — — — — 10,581 36,041 2,883 — 67 49,572Impairment com-pared to loan value 1.00 % 2.28 % 2.59 % 57.84 % 2.11 % 6.42 % 11.19 % — 0.08 % 3.96 %Total 32,005 128,016 145,668 398 663,131 687,407 36,001 8,113 88,501 1,789,240


Loans to banks are assessed individually, while loans to other borrowers are assessed individually and collectively, depending on the amount of exposure and on the classification or assessment, whether there is objective evidence for impairment.

2.24.1.6 Exposure to credit risk from debt securities

The table below features the carrying value of debt financial instruments classified according to issuer and rating by Moody’s Investor Service.


31 December 2010

IssuerRating by Moody's

Financial assets held for trading

Financial assets designated at fair

value through P&L

Available-for-sale financial

assets

Held-to-maturity

investmentsAssets

pledged

Total financial

assets

Governments Aaa do Aa3 1 12,255 45,659 190,447 32,390 280,753A1 do A3 — — — — — —Baa1 do Baa3 — — — — —Ba1 do Ba3 — — 2,901 — — 2,901

Banks Aaa do Aa3 — 9,337 81,333 75,623 — 166,293A1 do A3 3,193 1,984 39,615 — — 44,792Baa1 do Baa3 18,446 3,831 7,460 — — 29,737Ba1 do Ba3 2,885 2,038 1,874 — — 6,797

Other Neocenjeni * 7,498 — 16,111 10,203 — 33,812Total 32,023 29,445 194,954 276,273 32,390 565,085

* All unrated securities has been classified into the highest rating class A in accordance with internal methodology.


31 December 2009

IssuerRating by Moody's

Financial assets held for trading

Financial assets designated at fair

value through P&L

Available-for-sale financial

assets

Held-to-maturity

investmentsAssets

pledged

Total financial

assets

Governments Aaa do Aa3 — 1,091 32,241 210,895 79,843 324,070A1 do A3 — — 4,359 — — 4,359

Banks Aaa do Aa3 — 11,505 69,974 3,065 41,819 126,362A1 do A3 18,555 3,246 54,289 — 5,669 81,759Baa1 do Baa3 — 1,834 7,729 — — 9,562Neocenjeni * 9,742 761 2,197 — — 12,700

Other Neocenjeni * 7,498 — 7,374 — 8,342 23,214Total 35,795 18,437 178,163 213,959 135,672 582,026

* 97% of unrated securities has been classified into the highest rating class A in accordance with internal methodology.

92 % of the Group’s investments are represented by sovereign and bank debt securities, same as the year before. As at 31 December 2010 investments in EU countries represent 99 % of all investments.

In 2010 the Group did not establish additional impairment charges pertaining to debt financial instruments. The fair value of impaired instruments as at 31 December 2010 amounted to EUR 2,466 thousand (2009: EUR 2,643 thousand).

2.24.1.7 Concentration of exposures according to regions and activities

Credit risk exposure according to region

The table below shows financial assets exposure according to geographical regions. The exposure according to region is determined in accordance with address of the debtor or the issuer of the financial instrument.


An increase in exposure to the European union is a result of increased investments in prime debt financial instruments. Exposure to the South East Europe increased mainly due to loans given to companies owned by Slovene parents or to companies which Slovene companies cooperate with and due to retail lending activities. The Group enters foreign markets with due care and only on the basis of good collateral.


31 December 2010 Slovenia EU SE Europe Other regions Total

Loans and advances to state 5,409 — — — 5,409Loans and advances to banks 44,100 39,291 815 1,742 85,948Loans and advances to private individuals 332,549 413 7,071 — 340,033Loans to companies: 1,328,489 1,154 121,992 7,246 1,458,881 – large companies 658,378 — 20,735 3,194 682,307 – small and medium sized enterprises (SME) 621,981 1,154 101,257 4,052 728,444 – other 48,130 — — — 48,130Financial assets held for trading 30,877 1,145 — — 32,023Financial assets designated at fair value through P&L 14,293 13,185 — 1,967 29,445Available-for-sale financial assets 98,882 91,611 — 4,553 195,046Held-to-maturity investments 183,418 92,855 — — 276,273Assets pledged — 32,390 — — 32,390Impairments 86,410 20 10,381 276 97,087Total 1,951,607 272,024 119,497 15,232 2,358,361


31 December 2009 Slovenia EU SE Europe Other regions Total

Loans and advances to state 8,113 — — — 8,113Loans and advances to banks 52,711 33,821 334 1,702 88,568Loans and advances to private individuals 309,148 138 4,531 1 313,818Loans to companies: 1,337,513 2,740 104,195 8,120 1,452,568 – large companies 652,959 — 17,968 6,504 677,430 – small and medium sized enterprises (SME) 644,019 2,740 86,228 1,616 734,602 – other 40,536 — — — 40,536Financial assets held for trading 35,795 — — — 35,795Financial assets designated at fair value through P&L 2,450 13,259 — 2,728 18,437Available-for-sale financial assets 82,464 88,104 — 11,954 182,523Held-to-maturity investments 130,573 83,386 — — 213,959Assets pledged 130,004 5,669 — — 135,672Impairments 65,125 93 8,308 4,660 78,187Total 2,023,645 227,024 100,753 19,845 2,371,267


Credit risk exposure according to activity


31 December 2010

Manufac-turing

Commerce and motor

vehicle repairs

Con-struction

Financial mediation

Real estate, leases,

services

Utilities, defence, so-cial security Other

Private individuals Total

Loans and advances to state — — — — — 5,409 — — 5,409Loans and advances to banks — — — 85,948 — — — — 85,948Loans and advances to private individuals — — — — — — — 340,033 340,033Loans to companies: 315,623 246,004 155,737 211,254 235,526 28,012 266,725 — 1,458,881 – large companies 208,898 132,866 44,874 90,222 35,815 — 169,632 — 682,307 – small and medium sized

enterprises (SME) 103,962 110,589 110,549 119,495 194,562 — 89,287 — 728,444 – other 2,763 2,549 314 1,537 5,149 28,012 7,806 — 48,130Financial assets held for trading — — — 32,023 — — — — 32,023Financial assets designated at fair value through P&L — — — 17,190 — 12,255 — — 29,445Available-for-sale financial assets — 2,548 — 143,509 — 48,561 429 — 195,046Held-to-maturity investments — — — 75,623 — 200,650 — — 276,273Assets pledged — — — — — 32,390 — — 32,390Impairments 13,897 9,044 19,071 15,079 23,287 56 8,209 8,444 97,087Total 301,726 239,508 136,666 550,467 212,239 327,221 258,944 331,589 2,358,361


31 December 2009

Manufac-turing

Commerce and motor

vehicle repairs

Con-struction

Financial mediation

Real estate, leases,

services

Utilities, defence, so-cial security Other

Private individuals Total

Loans and advances to state — — — — — 8,113 — — 8,113Loans and advances to banks — — — 88,568 — — — — 88,568Loans and advances to private individuals — — — — — — — 313,818 313,818Loans to companies: 334,303 249,631 143,884 220,601 220,220 20,897 263,032 — 1,452,568 – large companies 226,832 104,542 45,376 101,001 36,726 — 162,954 — 677,430 – small and medium sized

enterprises (SME) 104,561 141,767 98,309 115,342 181,532 — 93,090 — 734,601 – other 2,910 3,322 200 4,258 1,962 20,897 6,987 — 40,536Financial assets held for trading — — — 35,795 — — — — 35,795Financial assets designated at fair value through P&L — — — 17,346 — 1,091 — — 18,437Available-for-sale financial assets — 2,488 — 143,006 — 36,600 429 — 182,523Held-to-maturity investments — — — 3,065 — 210,895 — — 213,959Assets pledged — — — 55,830 — 79,843 — — 135,672Impairments 14,540 13,248 12,179 11,940 11,748 63 6,737 7,731 78,187Total 319,764 238,870 131,705 552,270 208,472 357,375 256,723 306,087 2,371,267

From the aspect of exposure according to activity, the exposure remains highest in connection with financial brokerage and public administration, defence and social security, being the result of investments in prime financial instruments, which the Group uses for liquidity management purposes. Exposure from loans is highest toward manufacturing, which constitutes quite a heterogenous group. In 2011 the Group will continue to pursue the diversification of investments according to activity and limit or decrease investments in the more risky activities.


2.24.1.8 Credit risk exposure from derivatives

Credit exposure in derivatives is based on the possibility of counterparty failure to deliver. The Group enters into interest rate swap transactions with prime foreign banks. Currency swaps are also done with prime foreign banks and, to a lesser extent, with corporates also.

The Group enters into securities forwards with corporate. In the event of increased credit risk the Group collateralizes its receivables additionally with appropriate types of collateral. The fair value decreased in 2010 due to a drop in the volume of transactions with derivatives.

2.24.1.9 Credit risk exposure from Credit Linked Notes (CLN)

On 31 December 2010 the Group held 4 bonds in an amount of EUR 8,465 thousand (2009: EUR 7,168 thousand) with Credit Linked Note characteristics.

One is structured in accordance with the “First to Default” principle, two pertain to subordinated debt and another is a “Credit Inverse Note Floater”, meaning that the assumed credit risk of the state is reflected in the price of the issued security.

In addition to the assumed credit risk all of the aforementioned structured debt securities also mean taking on the credit risk of the issuer.

The structured securities mentioned are recognised at fair value through profit or loss. The Group monitors them carefully and limits the volume of trading with them.

The Group values the positions in these securities in accordance with the principle of ensuring an available market price. All of the securities that are quoted on the Reuters and Bloomberg terminals are valued at quoted price.

In addition to the captioned methods of acquiring prices, the Group also monitors the movement of zero-coupon interest rates (the “Zero Curve”). To control fair value determination, the Group uses prices and price fluctuations of comparable securities.

An overview of structured debt securities as at 31 December 2010:


Fair valueDerivative financial instruments 31 December 2010 31 December 2009

Futures and forwards 6,965 10,503Interest rate swaps 5,203 4,801Currency swaps 443 755Option 34 70Total 12,645 16,129

CLN Assumed credit risk CLN type Moody's rating 2010 Moody's rating 2009

UNICREDIT BANK AUSTRIA AG First to Default A1 A1Country I. Baa3 Baa3Country II. A1 A1Country III. Baa3 Baa3Country IV. Baa3 Baa1Country V. A2 A2Country VI. Baa3 Baa3

ING AMSTERDAM CLN on Subordinated Loan Baa3 A3Bank I. Baa1 A2

AFINANCE B. V. CLN on Subordinated Loan — —Bank II. Ba3 Ba3

UBS ZURICH Credit Inverse Note Floater Aa3 Aa3Country I. Baa3 Baa3


2.24.2 Market risk

Market risk is risk of change in the fair value of financial instruments due to changes in risk factors, being interest rates, currency rates and financial instrument prices. The most significant risk type within market risk is positional risk pertaining to equity and debt financial instruments and derivatives. Exposure to currency risk is low.

The Group assesses market risk as the risk it is exposed to when performing trading activities and the risks it is exposed to in non-trading activities pertaining to market risk factors.

Monitoring and reporting on the amount of exposure to market risk is done using limit systems and using a number od different methods to measure market risk.

Due to the financial crisis, having impacted the global finan-cial market, the Group adopted certain measures pertaining to market risk to protect itself from large loss from financial instruments. Thus it re-examined and adjusted limits accor-ding to region, issuer and product as well as all the limits for the largest loss allowed. The Group also calculates Value-at-Risk on a daily basis for all the equity financial instruments held in the trading book, measures currency volatility on a daily basis and calculates their largest allowed loss. It also monitors the trends in interest rates and performs interest rate sensitivity analyses.

2.24.2.1 Measuring and managing market risk

Positional risk (the risk of change in value) in equity and debt securities is present at the entire portfolio level as well as at the level of individual transactions. The Group calcu-lates the exposure to positional risk at the portfolio level using the VaR method. As the usefulness of this method is limited, the exposure to positional risk, is also monitored using sensitivity analyses, whereby the effect of change in different risk factors (e.g. interest rates) on the value of a financial instrument or a portfolio of financial instruments is measured. The Group also applies extraordinary condi-tions stress scenarios, which reflect the effect that such conditions in the financial markets have on the value of financial instruments.

The Group manages exposure to positional risk by utilising a system of limits, which it upgraded in 2010. These are ba-sically separated into trading and banking book limits and further from the aspect of financial instrument type, region and issuer. The Group measures exposure to positional risk at the level of individual transactions, which is why it has

put in place stop limits in its limit system, which have been set on the basis of price volatility of financial instruments.

The Group measures currency risk on a daily basis by mo-nitoring the net positions according to individual foreign currencies, while also calculating daily exposure to currency risk with the use of the VaR method. The exposure to cur-rency risk is monitored with the use of foreign currency position limits, which define the maximum level of an open net position according to an individual currency as well as the total open position.

The Group also enters into transactions with currency and interest rate derivatives. The Group’s basic policy in the area of derivative trading pertains to entering into transactions to hedge own positions and the positions of clients, whereby the latter transactions are hedged with counter positions. Transactions are entered into with prime foreign banks.

In measuring market risk the Group calculates the capital requirements pertaining to market risk for all items held for trading in line with the Decision on the calculation of market risk capital requirements for banks and savings banks. The Group also calculates the capital requirement for currency risk.

As at 31 December 2010 the capital requirements for market risk amounted to EUR 6,548 thousand or 4 % of all capital requirements, while the number stood at EUR 9,037 thou-sand on 31 December 2009 or 6 % of all capital requirements. The decrease of positional risk capital requirements is the result of a sale of financial instruments.

Pertaining to market risk, the Group assesses the required internal capital in line with the most advanced risk mana-gement methods. The assessment of the required internal capital for currency risk, the positions pertaining to finan-cial instruments and derivatives is prepared by the Group using calculations or estimates of the VaR. The calculation of VaR is performed using the historic simulation method, with all the other parameters compliant with the Basel ru-les pertaining to the determination of market risk capital requirements in accordance with the internal model. Should the capital requirement using the internal model exceed the capital requirement using the standardised mnodel, the dif-ference is considered to be an additional capital requirement.

On 31 December 2010 the Group prepared a potential stress scenario, where it simulated the effect on the consolidated income statement and the impact on equity should book values of all the equity securities held in the trading book decrease by 20 % and the book values of all the debt securiti-


es held in the trading book decrease by 10 %. The simulation does not take into account forward securities sales. The result of the stress scenario is shown in the table below:

2.24.2.2 Value-at-Risk analysis

The Value-at-Risk (VaR) technique is used by the Group for trading items in normal market conditions. In doing so it tries to estimate potential loss, at a certain degree of probability and for a certain period of time. The technique is complemented by other methods, used for assessment of a change in the value of financial instruments in the event of changes in risk factors.

For foreign currency and positional risk related to equity securities the Group utilises historical simulation. Both models feature market data for 1 year, a 99 % level of confidence and a 10 day holding period. Testing in extreme situations, the so-called “stress testing” is undertaken periodically.

Trading VaR for the Group – (10 day holding period, 99 % level of confidence)


31 December 2010 31 December 2009Debt securities Equity securities Total Debt securities Equity securities Total

Effect on income statement (1,838) (131) (1,968) (2,181) (190) (2,371)Effect on equity (400) (5,967) (6,366) (1,276) (9,566) (10,841)Total (2,237) (6,097) (8,335) (3,457) (9,756) (13,213)


31 December 2009Average

value in 2010Maximum

value in 2010Minimum

value in 2010 31 December 2010

Total VaR 4,270 2,460 5,147 1,356 1,781EQ VaR 4,263 2,457 5,116 1,355 1,779FX VaR 7 3 31 1 2

Notes:EQ VaR Tradable equity securities VaR FX VaR Foreign currency VaR

The VaR of equity securities from the trading book fluctua-ted between EUR 1,355 thousand and EUR 5,116 thousand in 2010. During the year the Group worked on decreasing the size of the securities portfolio, with volatility on the stock markets also continuing to subside. Both factors re-sulted in the decrease of VaR.

The Group’s policy is that of a closed currency position, whi-ch is why currency risk VaR remained low throughout the year fluctuating between EUR 1 thousand and EUR 31 thou-sand. Currency market volatility was lower in 2010 as com-pared with the previous year, however it still remained high

2.24.2.3 Sensitivity analysis for financial instruments included in banking book

The interest rate sensitive financial instruments in the ban-king book are analysed using the method of interest rate gaps, where the amount of the gap in an individual time interval is also limited. Exposure to interest rate risk is also measured using sensitivity analyses and stress tests, prepared on the basis of the estimated duration gap. Based on these two methods different analyses of interest rate sensitivity are performed, including stress scenarios.

The sensitivity analysis of all interest rate sensitive financial instruments in the banking book as at 31 December 2010 shows that with a parallel increase of the interest curve by 50 basis points the net present value of financial instru-ments would increase by EUR 3.320 thousand. The effect on the net present value of financial instruments is calculated using the method of duration gaps between financials assets and liabilities in the banking book.

The simulation of the effect of a change in the interest rate on the income statement shows than an increase of the inte-rest rate by a 50 basis points increases the asset side interest income by EUR 7,427 thousand per year, while the liabilities side interest expenses increase by EUR 5,440 thousand per year. The net interest income thus increases by EUR 1,987 thousand should the interest rate increase by fifty basis points. The analysis included all interest sensitive transacti-ons maturing or subject to interest fixing within a one year interval. The liabilities side excludes at sight deposits as the Group estimates these pertain to liabilities not sensitive to interest rates. A change in the interest rate is anticipated, not however in the credit premium.



31 December 2010 USD CHF Other EUR Total

Cash and balances with Central Bank 139 114 528 127,543 128,324Financial assets held for trading — — 1,196 64,169 65,365Financial assets designated at fair value through P&L — — — 29,445 29,445Available-for-sale financial assets — — — 236,029 236,029Loans and advances 21,145 53,705 3,649 1,714,776 1,793,275 – loans and advances to banks 1,277 374 2,792 81,465 85,908 – loans and advances to customers 19,868 53,331 857 1,633,311 1,707,367Held-to-maturity investments — — — 276,273 276,273Assets pledged — — — 32,390 32,390Other financial assets 1 — 3 2,204 2,208TOTAL ASSETS 21,285 53,819 5,376 2,482,829 2,563,309

Deposits from Central Bank — — — 70,013 70,013Financial liabilities held for trading — — — 6,014 6,014Financial liabilities designated at fair value through P&L — — — 40,050 40,050Financial liabilities at amortised cost 8,611 13,140 2,730 2,202,888 2,227,369 – deposits from banks 235 89 192 53,919 54,435 – due to customers 8,376 4,983 2,538 1,483,061 1,498,958 – borrowings from banks — 8,068 — 411,267 419,335 – borrowings from other customers — — — 8,847 8,847 – debt securities in issue — — — 160,436 160,436 – subordinated liabilities — — — 85,358 85,358Financial liabilities associated to transferred assets — — — 30,993 30,993Derivative financial instruments designated for hedging — — — 348 348Other financial liabilities — — — 7,584 7,584TOTAL LIABILITIES 8,611 13,140 2,730 2,357,890 2,382,371

Net balance sheet position on 31 December 2010 12,674 40,679 2,646 124,939 180,938

31 December 2009TOTAL ASSETS 23,520 56,322 5,096 2,436,584 2,521,522TOTAL LIABILITIES 8,995 10,365 2,716 2,321,906 2,343,982

Net balance sheet position on 31 December 2009 14,525 45,957 2,380 114,678 177,540

The banking book interest rate sensitive financial instruments are analysed in more detail within the framework of market risk, where modified duration and value at risk are calculated.

2.24.2.4 Foreign currency risk

Foreign currency risk is financial risk and represents the danger of financial loss due to changes in currency rates. It is based on the positions open in foreign currency. A change in rates thus directly effects asset value as well as foreign currency denominated liabilities, expressed in the reporting currency. The Group encounters foreign currency risk in international operations and it is based on the following:

– the assets and the liabilities of the Group are denominated in different currencies; – the Group trades foreign currencies for its own account.

The risk of foreign currency exposure depends on the net foreign currency positions, on portfolio structure, the volatility of foreign currencies and on the correlation between these variables.

Foreign currency risk exposure


The table shows a high level of open currency positions, with long positions prevailing. The Group managed these using FX derivatives (e.g. FX swaps). As at 31 December 2010 the position in CHF derivatives amounted to EUR 40,699 thousand and EUR 13,027 thousand in USD. Taking into account the aforesaid the USD and CHF positions were matched.

Taking into account the FX derivative transactions currency positions are nearly closed, which is why the effects of changes in foreign exchange rates are negligible.

2.24.2.5 Interest rate risk

Interest rate risk represents the exposure of the Group’s financial position to unfavourable interest rate fluctuations, thus impacting its earnings as well as the economic value of its receivables, liabilities and commitments and contingent liabi-lities or the economic value of its equity. For the most part it is derived from interest rate sensitive assets with different maturities and dynamics of interest rate changes as compared to interest sensitive liabilities.

The measurement of interest rate risk is based on the division of interest rate sensitive products to the banking book and the trading book.

The interest rate risk the Group in 2010 was based on the unmatched maturities and renewed interest rate fixing between interest rate sensitive assets and liabilities. This was the result of acquiring long-term fixed interest rate funding and its use for variable interest rate investments as well as fixed ones with a different maturity. The Group plans to continue closing interest rate gaps in 2011 with the use of balance sheet instruments and interest rate derivatives, whereby it will decrease the effect on the consolidated income statement due to a change in the fair value of the interest rate derivative by using of hedge accounting.


Interest rate risk exposure


31 December 2010Up to 1 month

1 - 3 months

3 -12 months

1- 5 years

Over 5 years

Non-interest bearing Total

Cash and balances with Central Bank 117,633 — — — — 10,691 128,324Financial assets held for trading 1,946 800 8,260 18,965 2,051 33,342 65,365Financial assets designated at fair value through P&L 14,574 10,189 — 2,071 2,611 — 29,445Available-for-sale financial assets 19,772 66,415 21,543 82,625 4,600 41,075 236,029Loans and advances 523,122 378,173 756,255 128,524 7,201 — 1,793,275 – loans and advances to banks 83,722 — 2,186 — — — 85,908 – loans and advances to customers 439,400 378,173 754,069 128,524 7,201 — 1,707,367Held-to-maturity investments 20,723 5,070 98,627 97,019 54,834 — 276,273Assets pledged 866 31,524 — — — — 32,390Other financial assets — — — — — 2,208 2,208TOTAL ASSETS 698,636 492,172 884,685 329,204 71,296 87,316 2,563,308

Deposits from Central Bank 30,013 40,000 — — — — 70,013Financial liabilities held for trading — — — — — 6,014 6,014Financial liabilities designated at fair value through P&L — 40,050 — — — — 40,050Financial liabilities at amortised cost 818,448 322,184 669,186 397,810 19,742 — 2,227,370 – deposits from banks 34,635 14,800 5,000 — — — 54,435 – due to customers 660,382 208,890 373,128 255,107 1,451 — 1,498,958 – borrowings from banks 115,415 57,375 195,546 45,000 6,000 — 419,335 – borrowings from other customers — 3,016 5,831 — — — 8,847 – debt securities in issue 7,278 25,603 29,853 97,703 — — 160,436 – subordinated liabilities 738 12,500 59,829 — 12,291 — 85,358Financial liabilities associated to transferred assets 30,993 — — — — — 30,993Derivative financial instruments designated for hedging 348 — — — — — 348Other financial liabilities — — — — — 7,584 7,584TOTAL LIABILITIES 879,801 402,234 669,186 397,810 19,742 13,598 2,382,371

Share capital — — — — — 16,980 16,980Share premium — — — — — 51,542 51,542Revaluation reserve — — — — — 3,971 3,971Profit reserves (including retained earnings) — — — — — 125,731 125,731Treasury shares — — — — — (31) (31)Profit for the year — — — — — 2,509 2,509TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT — — — — — 200,702 200,702

TOTAL LIABILITIES AND EQUITY 879,801 402,234 669,186 397,810 19,742 214,300 2,583,073

GAP on 31 December 2010 (181,165) 89,937 215,498 (68,605) 51,554 (126,984) (19,766)

31 December 2009TOTAL ASSETS 568,899 557,075 843,589 346,606 82,762 122,592 2,521,522TOTAL LIABILITIES AND EQUITY 744,590 413,931 902,601 247,408 21,707 213,137 2,543,373

GAP on 31 December 2009 (175,691) 143,144 (59,012) 99,198 61,055 (90,545) (21,851)


2.24.3 Liquidity risk

Liquidity risk is the risk stemming from the risk of ensu-ring liquidity, when the Group is not able to settle all due liabilities or it is forced to acquire funding at significantly higher cost and the market liquidity risk, which arises when it is not possible to sell a position in a financial instrument or replace it in a short period of time without significantly influencing market prices. From the time point of view it is possible to distinguish between the management of opera-tional liquidity and the management of structural liquidity.

Liquidity management is performed by the Financial Mar-kets Division, conducting all the basic liquidity management processes. The process of managing liquidity risk is headed by the Risk Management Division, which measures liquidity risk, sets and monitors limits or target values in relation to liquidity and concentration of deposits. The Operational Support Division prepares reports on liquidity ratios. Senior management and the Management Board are also included in the liquidity management process through different bo-dies of the Bank.

For banks the durations gaps in assets and liabilities are common, as transforming short-term funding into long-term loans is their core assignment, however the Bank is exposed to liquidity risk in doing so. Due to this fact the Group has set up an efficient liquidity management system, which includes:

– analysis and planning of future cash flows, – maintaining very liquid assets within liquidity reserves,

– monitoring target values and limits pertaining to ope-rational and structural liquidity through the system of internal and external reporting,

– ensuring an adequate diversification of liquidity sources and

– preparing scenarios simulating extraordinary liquidity conditions.

The Group prepares three different scenarios of extraor-dinary liquidity conditions, which are based on a dynamic analysis of liquidity gaps:

– a scenario adapted to its own liquidity position (an idi-osyncratic scenario), which assumes the impossibility of renewing liquidity sources,

– a scenario based on the market situation (market scena-rio), which provides for a drop in the liquidity of assets, and

– a scenario based on combination of the above two sce-narios.

Based on scenario results the Bank determined the mini-mum amount of liquidity reserves and its structure. The Group has set up procedures of early liquidity shortage de-tection, whereby it also regularly monitors the trends rela-ted to individual products within the Bank and the market situation. At the onset of possible warning signs the Group has set up a crisis plan, which defines the most efficient ways of managing the positions in the event of extraordinary liquidity conditions. In such an event the Group would be active in two ways, namely in the acquisition of addtional, alternative funding and in the appropriate communication with the public.


Liquidity risk exposure

The above table discloses undiscounted cash flow, which in addition to the carrying amounts of financial instruments include the anticipated cash flows from interest according to remaining contractual maturities at the end of the year. The amounts disclosed are based on spot rates and interest rates at the reporting date. Innovative subordinated bonds do not mature at any certain date, are however callable in 2017, which is why the Group included them in the “over 5 years” class. The interest cash flow has been calculated for 7 years.

The liquidity gap within up to one month time interval is negative, however the fact must be taken into account that it includes all at sight deposits within financial liabilities, even though the Central Bank, in line with the regulation, only considers at sight deposits 50 % weighted for stabili-ty. Financial assets though feature securities included in liquidity reserves recorded at remaining maturity, not up to one month interval.

Liquidity gaps changed as compared with 31 December 2009, especially in the 1 to 3 month and the 3 to 12 motnh inter-


31 December 2010Carrying

amountTotal cash flow (undiscounted)

Up to 1 month

1 - 3 months

3 - 12 months

1 - 5 years

Over 5 years

Cash and balances with Central Bank 128,324 128,331 128,331 — — — —Financial assets held for trading 65,366 76,783 33,837 6 9,469 22,797 10,673Financial assets designated at fair value through profit or loss 29,445 35,388 12,691 9,540 160 3,001 9,995Available-for-sale financial assets 236,029 253,474 43,326 26,147 41,894 133,585 8,521Loans and advances 1,793,275 1,963,325 338,316 173,128 525,639 688,471 237,771 – loans and advances to banks 85,908 85,980 83,749 — 2,196 36 — – loans and advances to customers 1,707,367 1,877,345 254,567 173,128 523,443 688,435 237,771Held-to-maturity investments 276,273 330,418 18,501 10,632 106,976 120,423 73,885Assets pledged 32,390 33,615 1,138 32,478 — — —Other financial assets 2,208 2,208 2,208 — — — —TOTAL ASSETS 2,563,309 2,823,541 578,348 251,932 684,139 968,277 340,845

Deposits from Central Bank 70,013 70,127 30,008 40,119 — — —Financial liabilities held for trading 6,014 6,014 6,014 — — — —Financial liabilities designated at fair value through profit or loss 40,050 52,395 — 2,518 901 8,989 39,987Financial liabilities at amortised cost 2,227,369 2,349,440 712,818 263,948 606,720 655,992 109,962 – deposits from banks 54,435 54,721 34,675 14,839 5,207 — — – due to customers 1,498,958 1,535,556 646,208 215,721 394,352 275,557 3,717 – borrowings from banks 419,335 448,562 24,130 10,684 162,284 213,770 37,694 – borrowings from other customers 8,847 9,167 — 45 5,524 3,598 — – debt securities in issue 160,436 186,124 7,420 8,325 35,412 134,967 — – subordinated liabilities 85,358 115,311 385 14,334 3,941 28,101 68,550Financial liabilities associated to transferred assets 30,993 30,998 30,998 — — — —Derivative financial instruments designated for hedging 348 348 348Other financial liabilities 7,584 7,584 7,584 — — — —TOTAL LIABILITIES 2,382,371 2,516,906 787,770 306,585 607,621 664,982 149,948

GAP on 31 December 2010 180,938 306,635 (209,423) (54,653) 76,518 303,296 190,896OFF-BALANCE SHEETGuarantees and stand-by LCs 80,261 80,261 80,261 — — — —Commitments to extend credits 171,004 171,004 171,004 — — — —TOTAL 251,265 251,265 251,265 — — — —

31 December 2009TOTAL ASSETS 2,521,522 2,739,076 450,473 317,025 725,387 928,718 317,473TOTAL LIABILITIES 2,343,982 2,469,107 704,766 265,323 831,373 519,034 148,610

GAP on 31 December 2009 177,540 269,969 (254,293) 51,701 (105,986) 409,684 168,862


vals. The 1 to 3 month interval shows a decrease in asset side transactions, while the 3 to 12 month interval shows a decrease in the liabilities side. The liquidity gaps in the over 1 year interval are positive. Considering the above, the bank actually recorded a liquidity surplus.

2.24.4 Capital and capital adequacy

In its operations the Group must always exhibit an appro-priate level of capital to be able to secure the assets of its clients and investors. An adequate capital base is security for the different types of risks the Group is exposed to in its ordinary course of business. It must have capital at its disposal, which suits the risk of its operations and its bu-siness strategy.

In accordance with the provisions of Basel II and the Deci-sion on the calculation of own funds, capital requirements and capital adequacy of banks and savings banks capital is divided into three categories:

– Tier 1 capital, – Tier 2 capital, – Tier 3 capital.

Tier 1 capital represents the highest quality of capital and may be used, together with Tier 2 capital, for the fulfilment of capital requirements relating to credit, market and opera-tional risk. Tier 3 capital may only be used for the fulfilment of capital requirements relating to market risk, except the capital requirements for settlement risk and counterparty credit risk.

The Group must fulfil certain ratios and adhere to certain limits in connection with individual capital components at all times. The more significant ratios and limits comprise:

– Tier 2 capital may not exceed the level of Tier 1 capital, – the sum of preferential cumulative shares with a fixed re-

turn and subordinated debt included in the Tier 2 capital may not exceed 50 % of the Tier 1 capital.

Despite the abovementioned ratios and limits between indi-vidual categories or capital components, hybrid instruments, which may be included in Tier 1 capital, carry additional limitations.

Potential surpluses of individual categories or capital com-ponents above the limits set may not be considered in the calculation of capital.

Tier 1 capital

The components of Tier 1 capital:

– paid up share capital and capital reserves from regular shares, except share capital, paid in on the basis preferred cumulative shares of related capital reserves,

– reserves and retained profit, free from potential future liabilities and approved at the General Meeting of Share-holders in the amount, which is assumed to remain part of capital and will not be distributed,

– hybrid instruments based on Tier 1 capital within limits, namely: – transitional period hybrid instruments without incen-

tive for pay-out (preferred non-cumulative shares) and – transitional period hybrid instruments with incentive

for pay-out (subordinated registered bond).

Deductibles from the Group’s Tier 1 capital:

– own shares, with the characteristics of Tier 1 capital, – intangible long-term assets, – other items: other negative effects from (net) revaluation

surpluses, not related to deductibles from Tier 1 capital and not forming part of Tier 2 capital and not considered in the calculation fo capital, namely the negative effects from revaluation surpluses in connection with equities and shares, available-for-sale and designated at fair value (included in the banking and trading book) and available-for-sale debt securities as well as those recognised at fair value (included in the trading book).

Tier 2 capital

The Group’s Tier 2 capital comprises:

– 80 % of the amount of positive effects from surplus from the revaluation of available-for-sale equities and interests as well as those designated at fair value (included in the banking and trading book) and available-for-sale debt se-curities as well as those recognised at fair value (included in the trading book),

– surplus from hybrid instruments in the part exceeding the limit for inclusion in Tier 1 capital (subordinated re-gistered bond),

– subordinated debt for inclusion in Tier 2 capital (which is gradually discounted from Tier 2 capital at a 20 % cumula-tive discount during the last five years prior to maturity).

Deductions from Tier 1 and Tier 2 capital

As at 31 December 2010 and 31 December 2009 the Group did not exhibit any deduction from Tier 1 and Tier 2 capi-tal, as stipulated under Article 30 of the Decision on the calculation of own funds, capital requirements and capital adequacy of banks and savings banks.

Tier 3 capital

As at 31 December 2010 and 31 December 2009 the Group did not have any debt instruments in issue, which would merit inclusion into Tier 3 capital.


The capital for capital adequacy purposes decreased somew-hat in 2010 due to a decrease of Tier 2 capital, while Tier 1 capital increased due to the transfer of net profit to reserves and the decrease in deductibles. The capital adequacy ratio decreased due to an increase in credit risk capital require-ments, while the Tier 1 capital ratio increased based on the aforementioned reasons.

The Group is complied with all externally imposed capital requirements in 2009 and in 2010.


Capital and capital requirements 2010 2009

I. TOTAL CAPITAL for capital adequacy requirements (1+2) 298,141 299,7291. TIER 1 capital 220,461 215,758Paid-up share capital 13,584 13,584Share premium 36,820 36,820Profit reserves and retained profit 125,731 123,074Non-innovative instruments — 17,971Innovative instruments — 50,000*Hybrid instruments 68,067 —*Transitory period hybrid instruments, without pay-out incentives 18,067 —*Transitory period hybrid instruments, with pay-out incentives 50,000 —Deductible items from TIER 1 capital: (23,741) (25,691)(–) Own shares (401) (455)(–) Intangible long-term assets (5,256) (5,342)(–) Revaluation reserves (RR) - available for sale - prudential filters (1,153) (2,258)*(–) Innovative instrument surplus — (17,636)*(–) Hybrid instrument surplus (16,931) —

2. TIER 2 capital 77,680 83,971Surplus of individual capital compnents, distributable to Tier 2 capital (Hybrid instruments surplus) 16,931 17,636Tier 1 capital adjustments, transferable to Tier 2 capital - prudential filter 5,452 6,498Subordinated debt 55,297 59,837

II. CAPITAL REQUIREMENTS 156,778 156,113Capital requirements for credit and counterparty risks 138,715 135,546Capital requirements for position and foreign exchange risks 6,548 9,037Capital requirement for operational risk 11,515 11,530

III. CAPITAL ADEQUACY RATIO (I / II x 8) (in %) 15.21% 15.36%

IV. TIER 1 CAPITAL ADEQUACY RATIO (I.1. / II x 8) (in %) 11.25% 11.06%

* The modified Decision on the calculation of capital in banks and savings banks came into effect on 31 December 2010.

In 2010 the CRD II directive was adopted (valid from 31 December 2010), pertaining to changes in the calculation of regulatory capital. Most of the changes deal with the de-finition and treatment of hybrid instruments, where stricter criteria will apply to their classification in the calculation of Tier 1 capital as compared with the characteristics of existing hybrid instruments. The Basel III proposal was also adopted, which, in addition to requirements for improved quality and transparency of the capital base, also introduces contingency reserves.


2.24.5 Fair value of financial assets and liabilities

a) Financial instruments not measured at fair value

To calculate the fair values of held-to-maturity financial assets the Group used the quoted market prices and the methodology based on discounting future cash flows for all other items.

Discount factors for financial assets are calculated on the basis of the reference zero coupon curve according to indi-vidual currency. The discount factors for financial liabilities are calculated on the basis of the interest rate curve for institutions with international ratings such as those assi-gned to the Group.

The statement of financial position shows loans and other receivables in net amounts, meaning that these have been decreased by the impairment charges. This means that the estimated fair value of financial assets also takes credit risk into account.

b) Fair value hierarchy

The Group defines a hierarchy of valuation techniques based on whether the inputs for those valuations are published or not. Published inputs reflect market data obtained from in-dependent sources; non-published inputs reflect the Group’s


Carrying amount Fair value2010 2009 2010 2009

Financial assetsLoans 1,793,275 1,789,240 1,824,376 1,825,903 – loans and advances to banks 85,908 88,501 85,917 88,517 – loans and advances to customers 1,707,367 1,700,739 1,738,458 1,737,386Held-to-maturity investments 276,273 213,959 286,636 227,782Held-to-maturity assets pledged 32,390 101,236 33,574 101,065Total financial assets 2,101,938 2,104,435 2,144,586 2,154,750

Financial liabilitiesDeposits from the Central bank 70,013 130,486 69,964 130,363Financial liabilities at amortised cost 2,227,369 2,159,899 2,241,466 2,182,830 – deposits from banks 54,435 56,610 54,433 56,772 – due to customers 1,498,958 1,453,436 1,505,398 1,465,292 – borrowings from banks 419,335 419,445 421,940 424,111 – borrowings from costumers 8,847 — 8,858 — – debt securities in issue 160,436 134,774 163,861 138,230 – subordinated liabilities 85,358 95,634 86,976 98,425Financial liabilities associated to transferred assets 30,993 — 30,995 —Total financial liabilities 2,328,373 2,290,385 2,342,425 2,313,192

market assumptions. These two types of inputs have created the following fair value hierarchy.

Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Ljubljana Stock Exchange).

Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). This level includes the majority of the OTC deriva-tive contracts, issued structured debt, cetificates of deposit and financial liabilities issued by the Group (subordinated bonds BCE 10 and certificates of deposit). The sources of input parameters like EURIBOR yield curve or counterparty credit risk are Bloomberg and Reuters.

Level 3 - inputs for an asset or liability that are not based on published market data. This level includes equity invest-ments with significant unobservable components.

This hierarchy requires the use of published market data when available. The Group considers relevant and published market prices in its valuations where possible.


Assets and liabilities measured at fair value


31 December 2010 Level 1 Level 2 Level 3 Total

Financial assets measured at fair value:Financial assets held for trading 26,075 31,091 8,199 65,365 Debt securities 13,576 18,446 — 32,023 Equity securities 12,498 — 8,199 20,698 Derivatives — 12,645 — 12,645Financial assets designated at fair value through profit or loss 27,460 1,985 — 29,445 Debt securities 27,460 1,985 — 29,445Total assets 53,534 33,077 8,199 94,810

Financial liabilities measured at fair value:Financial liabilities designated at fair value through profit or loss — 40,050 — 40,050Derivatives — 6,014 — 6,014Total liabilities — 46,064 — 46,064


31 December 2009 Level 1 Level 2 Level 3 Total

Financial assets at fair value through profit and lossFinancial assets held for trading 33,940 35,966 17,841 87,747Debt securities 15,958 19,837 — 35,795Equity securities 17,982 — 17,841 35,823Derivatives — 16,129 — 16,129Financial assets designated at fair value 15,093 3,344 — 18,437Debt securities 15,093 3,344 — 18,437Plegde assets 11,342 — — 11,342Total Assets 60,375 39,310 17,841 117,526

Financial liabilities at fair value through profit and lossFinancial liabilities designated at fair value — 39,851 — 39,851Derivatives — 6,051 — 6,051Total liabilities — 45,902 — 45,902

Reconciliation of Level 3 Items ment. Should the fair value of these financial instruments decrease by 20 %, this would have a negative effect on the income statement in the amount of EUR 1,640 thousand (2009: EUR 3,568 thousand).

2.25 Critical accounting estimates and judgements

a) Impairment of loans and receivables

With the goal of determining impairment charges the Group is constantly (or at least on a quarterly basis) reviewing its loan portfolio. Prior to making the decision on recognising loss through the consolidated income statement, the Group makes judgement if any information exists, which could signify a drop in the estimated cash flows from loans. Such evidence includes the information on deterioration of deb-tor creditworthiness or on deterioration of economic condi-tions and circumstances. Future cash flows from financial assets are estimated on the basis of past experience and loss from credit risk bearing assets, like assets within the group. In estimating future cash flow data is also considered, which


Financial assets measured at fair value:Financial assets held for trading Equity securities

As at 1 January 2009 8,334Profit / (Loss) —Purchase 9,642Settlements (135)As at 1 January 2010 17,841Profit / (Loss) —Sale (9,642)Settlements —As at 31 December 2010 8,199

The Group performed a sensitivity analysis, wherein it simu-lated the effect a 3rd level decrease in the carrying amount of equity financial instruments has on the income state-


reflects the effects of current circumstances. Individual estimations are prepared on the basis of projected future cash flows including all relevant information in relation to the financial position and debtor creditworthiness as well as collateral. The methodology and presumptions, used in esti-mating future cash flow are based on regular reviews aimed at decreasing the differences between the estimated and actual losses. Should the current value of future cash flows decrease by 1 percentage point, it would result in additional impairment charges in the amount of EUR 4,989 thousand.

b) Fair value of financial instruments

Fair values of financial instruments not traded on organi-sed markets are determined using valuation models. These include comparisons with the most recent transactions, the use of discounted future cash flows and other frequently used valuation methods. Fair value valuation models have been reviewed by independent parties. All models in use have been verified to ensure that the results offer an adequa-te representation of actual market conditions. A change in the basis of the determination of market risk, volatility and correlation could impact the reported fair value of held for trading financial assets as well as available-for-sale finan-cial assets.

c) Available-for-sale equity instruments

Available-for-sale equity instruments are impaired when a substantial or long-term drop in their fair value below their original cost has been recorded or there is objective evidence that shows impairment is required. The estimates used for the determination of a substantial and long-term decrease in fair value are presented under item 2.9.2. In the event of a change in the assessment of a significant drop in fair value, which would cause all drops in fair value below original costs or carrying amounts to be deemed significant, impairment charges on the instruments in question would increase by EUR 1,442 thousand.

2.26 Segment reporting

The Group’s operations comprise three segments:

– retail, incorporating private customer current accounts, savings, deposits, insurance brokerage products, credit and debit cards, loans;

– corporates and public sector, incorporating current acco-unts, deposits, loans and other credit facilities, payment operations, foreign currency and derivative products;

– banking, incorporating current accounts, deposits, loans, financial instruments trading, payment operations.

In its operations the Group primarily performs credit and deposit operations. Segments are disclosed according to the methodology used in the preparation of internal report and are discussed at the ALCO, which also comprises Managa-ment Board members. During the year there have been no significant changes in reportable segments.

Liabilities and assets are shown according to segment based on the segment they were acquired from or the segment they were invested in.

Transactions between segments for the purpose of internal accounting are based on harmonised transfer bases (in-ternal transfers of income effects between segments, keys for the transfer of service and administrative unit costs to profit centres). Net interest is included in the report in ac-cordance with the market transfer prices, whereby transfer income is applied to some transactions and transfer expen-ses to others as well as transfer interest margins, pointing to the contribution of an individual transaction to the net interest of the Group.

The transfer pricing system for the allocation of net interest revenue has been methodologically designed and confirmed by the Assets and Liabilities Management Committee, whi-ch receives reports on the transfer prices of interest bearing assets and liabilities on a monthly basis.


Reconciliation of segment results of operations to consolidated financial statements:


31 December 2010Banking

Companies and public sector

Households (Retail) Total

Total income 3,780 104,009 28,261 136,050Net interest and similar income 2,347 38,415 14,305 55,067Net fee and commission income (1,442) 10,565 7,138 16,261Net gains from financial transactions (6,381) 8,128 3,288 5,035Net other operating income 5 (188) (276) (459)Administrative expenses with depreciation and amortisation (1,781) (12,100) (25,868) (39,749)Provisions (214) 404 89 279Impairment charges (2,584) (27,807) (618) (31,009)Profit before income tax (10,050) 17,417 (1,942) 5,425Income tax expense — — — (925)Profit for the year 4,500

Segment assets 490,362 1,695,103 387,482 2,572,947Subsidiary — 14,697 — 14,697Not allocated — — — 10,436Total assets 2,598,080

Segment liabilities 638,721 968,094 791,326 2,398,141Subsidiary — 13 — 13Equity — — — 199,926Total liabilities and equity 2,598,080

Other segment itemsInvestments in property and equipment and in intangible assets 75 2,112 574 2,761Depreciation and amortisation 102 2,874 781 3,757

The report on operations according to segments in 2010:


31 December 2010Bank results

Consolidation and adjustments Total consolidated

Net interest and similar income 55,067 (59) 55,008Net fee and commission income 16,261 (1) 16,260Net gains from financial transactions 5,035 6 5,041Net other operating income (459) 753 294Administrative expenses with depreciation and amortisation (39,749) (406) (40,155)Provisions 279 (28) 251Impairment charges (31,009) (5) (31,014)Profit before income tax 5,425 260 5,685Income tax expense (925) (1) (926)Profit for the year 4,500 259 4,759

Total assets 2,598,080 1,137 2,599,217

Segment liabilities 2,398,154 361 2,398,515Equity 199,926 776 200,702Total liabilities and equity 2,598,080 1,137 2,599,217


The report on operations according to segments in 2009:


31 December 2009Banking

Companies and public sector

Households (Retail) Total

Total income 7,776 113,837 24,168 145,781Net interest and similar income 16,966 27,427 9,495 53,888Net fee and commission income (898) 10,944 6,698 16,744Net gains from financial transactions 1,797 5,529 (1,442) 5,884Net other operating income 24 68 14 106Administrative expenses with depreciation and amortisation (1,433) (16,755) (22,037) (40,225)Provisions (163) 620 (198) 259Impairment charges (5,283) (20,972) (1,884) (28,139)Profit before income tax 11,010 6,861 (9,354) 8,517Income tax expense — — — (1,746)Profit for the year 6,771

Segment assets 363,977 1,774,239 366,156 2,504,372Subsidiary — 17,327 — 17,327Not allocated — — — 37,384Total assets 2,559,083

Segment liabilities 663,432 920,473 776,294 2,360,199Subsidiary — 11 — 11Equity — — — 198,873Total liabilities and equity 2,559,083

Other segment itemsInvestments in property and equipment and in intangible assets 177 2,588 549 3,314Depreciation and amortisation 207 3,026 643 3,876

Reconciliation of segment results of operations to consolidated financial statements:


31 December 2009Bank results

Consolidation and adjustments Total consolidated

Net interest and similar income 53,888 (383) 53,505Net fee and commission income 16,744 (1) 16,743Net gains from financial transactions 5,884 51 5,935Net other operating income 107 677 784Administrative expenses with depreciation and amortisation (40,226) (506) (40,732)Provisions 259 (24) 235Impairment charges (28,139) (6) (28,145)Profit before income tax 8,517 (192) 8,325Income tax expense (1,746) (27) (1,773)Profit for the year 6,771 (219) 6,552

Total assets 2,559,083 1,150 2,560,233

Segment liabilities 2,360,210 632 2,360,842Equity 198,873 518 199,391Total liabilities and equity 2,559,083 1,150 2,560,233


Reconciliation of results by geographic areas:

Structurally, the Group makes the largest part of the revenue in the domestic market.

During the reported period in 2010 the Group did not make 10 % or more from operations with any single client. The same applies to the previous reporting period.


31 December 2010 Revenues Non current assets

Slovenija 123,827 1,445,199European Union 6,576 260,433Former Yugoslav countries 6,940 28,946Other (1,293) 50,748Total 136,050 1,785,326


31 December 2009 Revenues Non current assets

Slovenija 123,467 1,340,545European Union 12,210 187,363Former Yugoslav countries 9,210 65,161Other 894 15,679Total 145,781 1,608,748


NOTES TO INDIVIDUAL ITEMS INCLUDED IN CONSOLIDATED FINANCIAL STATEMENTS

3 NET INTEREST AND SIMILAR INCOME


2010 2009

Interest and similar income 112,628 120,432Loans and advances to customers 89,604 95,263Loans and advances to banks 404 798Securities 19,837 21,475 – held for trading 1,374 2,115 – financial assets designated at fair value through profit or loss 971 1,108 – available-for-sale financial assets 5,680 6,047 – held-to-maturity investments 11,812 12,205Deposits with Central Bank 374 409Derivatives - interest rate swap 2,409 2,487

Interest and similar expense (57,620) (66,927)Loans and advances from customers (30,868) (37,486)Loans and advances from banks (12,188) (14,656)Securities in issue and CDs (11,792) (11,376)Derivatives - interest rate swap (1,798) (2,166)Deposits from Central Bank (974) (1,243)

Net interest and similar income 55,008 53,505

In 2010 the Group realized EUR 28,709 thousand of the income due from individually impaired loans (2009: EUR 29,540 thousand).

4 DIVIDEND INCOME


2010 2009

Dividends from financial assets held for trading 441 459Dividends from available-for-sale financial assets 287 263Total 728 722


5 NET FEE AND COMMISSION INCOME


2010 2009

Fee and commission income 18,811 19,003Cards 6,660 7,073Payments 6,419 6,744Guarantees given 1,472 1,466Other services 4,260 3,720

Fee and commission expense (2,551) (2,260)Cards (1,639) (1,363)Payments (299) (320)Brokerage and other securities transactions (172) (138)Other services (441) (439)

Net fee and commission income 16,260 16,743

6 NET GAINS FROM FINANCIAL ASSETS AND LIABILITIES NOT CLASSIFIED AT FAIR VALUE THROUGH PROFIT OR LOSS


2010 2009

Available-for-sale financial assets 1,637 1,204Debt securities 706 43Equity securities 931 1,161

Financial assets recognised at amortised cost (240) 141

Total 1,397 1,345

The Group achieved a comparable profit from financial assets, not measured at fair value through profit and loss. This profit was mainly achieved as a result of the sale of shares acquired for repayment of loans and bonds.

7 NET (LOSSES) / GAINS FROM FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING


2010 2009

Equity securities (296) 350Debt securities (10) (403)Forwards and futures with associated securities 740 1,927Currency derivative financial instruments (8,884) 826IRS and options (Interest rate cap) 1,303 1,157Foreign currency trading 329 373Total (6,818) 4,230

The Group uses currency derivatives to economically hedge currency open position, which is why their effects need to be assessed together with effects of currency differences (Note 10).


8 NET (LOSSES) FROM FINANCIAL ASSETS AND LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS


2010 2009

Gains from bond valuation 108 1,391Losses from own securities issued (161) (2,096)Total (53) (705)

Income from the valuation of bonds is the result of the fair value valuation of bonds purchased. The Group provides fair value on the basis of quotes available from the information platform (Reuters or Bloomberg).

In 2010 the Group recognised a loss of EUR 161 thousand from securities issued based on a valuation in accordance with its internal model.

9 CHANGES IN FAIR VALUE FROM HEDGE ACCOUNTING


2010 2009

Net loss from hedging derivatives (390) —Net profit from hedging positions 488 —Total 98 —

Using hedge accounting the Group hedged the fair value of the part of a bond it issued, which pertains to a change in interest rates.

10 FOREIGN EXCHANGE TRANSLATION NET GAINS


2010 2009

Positive exchange rate differences 24,460 13,261Negative exchange rate differences (14,797) (12,947)Total 9,663 314

Compared with the previous year the Group achieved a substantially higher profit from exchange rate differences in 2010, mainly as a result of the growth of the Swiss franc and US dollar rates and the open foreign currency position.

11 NET GAINS FROM DERECOGNITION OF ASSETS


2010 2009

From sale of office space and housing 24 49From sale of computer and other equipment 2 (20)Total 26 29

Gains from derecognition of property and equipment pertain to the carrying value at the sale of office space in the amount of EUR 18 thousand and the sale of investment property in the amount of EUR 6 thousand.


12 NET OTHER OPERATING INCOME


2010 2009

Income 1,058 1,123Income from sale of real estate 757 605Income from leases 186 207Other operating income 115 311

Expense (764) (339)Fees and commissions reimbursed (298) -Membership fees (120) (110)Contributions to humanitarian organizations (112) (117)Taxes and other duties (111) (106)Other expenses (123) (6)

Total 294 784

13 ADMINISTRATIVE EXPENSES


2010 2009

Personnel expenses (20,819) (21,407)Gross salaries (15,779) (16,592)Pension security costs (2,071) (2,201)Social security costs (1,111) (1,172)Other staff costs (1,858) (1,442)

General and administrative expenses (15,565) (15,411)IT costs (4,125) (3,852)Business card costs (2,365) (2,540)Maintenance cost (1,901) (2,067)Advertising cost (893) (1,003)Materials and energy costs (696) (661)Office stationery costs (407) (576)Rent (740) (518)Audit and consultancy costs (358) (263)Other services (4,080) (3,931)

Total (36,384) (36,818)

Within auditing and consultancy costs for 2010 EUR 53 thousand comes from the auditing of the annual report, with the rest of the costs represented by the payment for supervision and other consultancy services.

14 AMORTISATION AND DEPRECIATION


Oznaka tabele 2010 2009

Depreciation of property and equipment 26 (2,531) (2,902)Amortisation of intangible assets 28 (1,231) (979)Depreciation of investment property 27 (9) (33)Total (3,771) (3,914)


15 PROVISIONS


Note 2010 2009

Provisions for off-balance sheet liabilities 42 67 677Provisions for liabilities to employees 42 452 (252)Provisions for legal action pending 42 (268) (162)Other provisions 42 — (28)Total 251 235

16 IMPAIRMENT CHARGES


2010 2009

Impairment of loans measured at amortised cost (23,496) (20,373)

Impairment of available-for-sale financial assets (7,518) (7,772)Impairment of equity securities (7,518) (6,618)Impairment of debt securities — (895)Impairment of mutual funds — (259)

Total (31,014) (28,145)

In 2010 the Group established more impairment for loans than the year before, mainly due to worse economic conditions and an increased lack of payment discipline.

17 INCOME TAX EXPENSE


Note 2010 2009

Current tax (1,409) (3,133)Deferred tax 29.2 483 1,360Income tax expense (926) (1,773)

Profit before tax 5,455 8,517Tax calculated at a tax rate of 20% (2009: 21%) (1,091) (1,788)Expenses not deductible for tax purposes (250) (421)Tax relief 224 218Income not assesable for tax purposes 191 218

Total tax expense as reported in consolidated income statement (926) (1,773)

A lower income tax amount is the result of a lower profit and lower taxation rate, which amounted to 20 % in 2010.

The tax administration may conduct a tax audit for the current reporting period at any time during the next five years and impose additional liability or penalty on the basis of its findings. The Management Board is not aware of any circumstances, which could potentially cause liability.


18 BASIC AND DILUTED EARNINGS PER SHARE


2010 2009

Net profit for the year 4,759 6,552Net profit - preferential shareholders (952) (1,310)Net profit - ordinary shareholders 3,807 5,242

Number of ordinary shares 406,653 406,653Basic and diluted earnings per share (EUR per share) 9 13

Basic earnings per share have been calculated with the division of net profit by the weighted average number of ordinary shares issued, decreased by the treasury shares.

Issued subordinated debt securities are not convertible to equity, which is why they do not represent potential shares.

19 CASH AND BALANCES WITH THE CENTRAL BANK


2010 2009

Cash in hand 10,691 11,814Balances with Central Bank 117,633 28,426Total 128,324 40,240

The Group increased deposits with the Central Bank in 2010 on the basis of a balance of overnight deposits.The average minimum reserve requirement amounted to EUR 26,535 thousand in 2010 (2009: EUR 27,417 thousand).

The Group must fulfil the minimum reserve requirement with the Central Bank. The minimum reserve requirement amount depends on the volume and structure of deposits received. Currently the Bank of Slovenia requires a minimum reserve in the amount of 2 % for all deposits and debt securities with maturities up to 2 years. The Group was able to fulfil the reserve requirement in 2010 without difficulty.

The minimum reserve requirements are normally fully disposable for the Group’s daily operations, that is why they are included in cash and cash equivalents in full (Note 47).

20 FINANCIAL ASSETS HELD FOR TRADING


Note 2010 2009

Derivatives 20a 12,645 16,129

Debt securities 32,023 35,795Bonds 14,722 15,958 – listed on stock exchange 13,576 15,958 – not listed on stock exchange 1,146 —Certificates of deposit 17,301 19,837

Equity securities 20,697 35,823Shares 20,697 35,823 – listed on stock exchange 12,498 17,982 – not listed on stock exchange 8,199 17,841

Total 65,365 87,747


The decrease in financial assets held for trading recorded in 2010 resulted from the sale of shares.

Financial assets held for trading did not form part of assets pledged in 2009 nor in 2010, and no debt securities with original maturities up to three months are held.

20a Derivatives


Contractual amount Fair valueDerivative financial instruments 2010 2009 2010 2009

Futures and forwards 46,140 63,849 6,965 10,503IRS 75,303 84,758 5,203 4,801Currency swaps 75,306 87,653 443 755Option (Interest rate cap) 10,000 10,000 34 70Total 206,749 246,260 12,645 16,129

In 2010 the Group decreased the volume of forward agreements, the fair value of which amounted to EUR 6,965 thousand at the end of the year (2009: EUR 10,503 thousand).

Interest rate swaps for the hedging of a bond issued have the largest effect on the fair value recorded pertaining to inte-rest rate swaps. Here the Group paid lower variable interest to receive higher fixed interest thus achieving a net positive result. The positive valuation of interest rate swaps on 31 December 2010 increased due to the lower interest rate curve as compared with 31 December 2009.

21 FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS


Debt securities 2010 2009

Bonds 29,445 18,437Pledged government bonds — 11,342Total 29,445 29,779

This item includes structured, innovative and plain-vanilla bonds. EUR 13,686 thousand worth of bonds are economically hedged with interest rate swaps (2009: EUR 13,852 thousand). The decrease in investments in financial assets at fair value through profit or loss in 2010 is the result of securities maturing, with a positive impact in a total amount of EUR 108 thousand coming from the revaluation of bonds to a higher fair value (Note 8).

Accounting for financial assets designated at fair value through profit or loss is based on the elimination of a mismatch in the valuation of financial assets at different bases, that would arise if the financial assets are carried at amortized cost and interest rate swaps are carried at fair value.

The Group reports investments in Credit Linked Notes, which could significantly impact the expected cash flow, in the financial instruments, recognized at fair value through profit or loss. The Group has prepared a policy for these invest-ments, which also defines the required return and the investment period.

In 2010 the Group did not pledge any of its financial assets designated at fair value through profit and loss (2009: EUR 11,342 thousand).


22 AVAILABLE-FOR-SALE FINANCIAL ASSETS


22a Analysis by type of available-for-sale financial assets31 December 2010 31 December 2009

Balances Impairment Balances Impairment

Debt securities 195,046 92 182,523 4,360Bonds 191,098 92 172,573 4,360Bills and treasury bonds 3,948 — 9,950 —

Equity securities 50,699 16,881 58,824 9,459Shares 47,742 16,881 58,318 9,459Shares in equity in limited liability companies 2,957 — 506 —

Mutual funds 10,403 3,146 9,685 3,146

Total gross 22a 256,148 20,119 251,032 16,965Total net 22a 236,029 234,067

22b Securities pledged 2010 2009Government bonds — 17,426Bank bonds — 5,668Total 22b — 23,094

Total 22a and 22b 236,029 257,161

Investments in equity securities comprise investments in shares and interests shown at fair value and at cost. The invest-ments at cost include investments in the amount of EUR 3,189 thousand, comprising the investments in Bankart, d.o.o., Ljubljana, Skupna pokojninska družba, d.d., Ljubljana, KDD, d.d., Ljubljana, Regionalna razvojna agencija, d.o.o., Celje and in Swift La Hulpe, Belgium. With the exception of the Regionalna razvojna agencija, d.o.o., Celje, where the Bank holds an interest of 15.7 %, the other equity interests the Bank holds are lower and do not exceed 6.0 %.

The decrease in equity securities in 2010 is mainly a result of the sale of shares.

Changes in available-for-sale financial assets:


Equity securities Debt securities

Shares Interests Mutual funds BondsBills and

treasury notesTotal financial assets

available-for-sale

Balance as at 1 January 2010 48,859 506 6,539 191,307 9,950 257,161Purchase 6,606 2,451 — 44,469 3,944 57,470Sale (16,478) — — (13,113) — (29,591)Realization at maturity — — — (31,504) (9,997) (41,501)Change in fair value (608) — 718 (987) (13) (890)Transfer to impairment (7,518) — — — — (7,518)Interest and foreign exchange rate differences — — — 834 64 898Balance as at 31 December 2010 30,861 2,957 7,257 191,006 3,948 236,029



Equity securities Debt securities

Shares Interests Mutual funds BondsBills and

treasury notesTotal financial assets

available-for-sale

Balance as at 1 January 2009 26,124 506 5,213 183,375 19,918 235,136Purchase 29,859 — 320 46,935 9,936 87,050Sale (1,416) — — — — (1,416)Realization at maturity — — — (42,168) (19,987) (62,155)Change in fair value 910 — 1,265 4,425 (48) 6,552Transfer to impairment (6,618) — (259) (794) — (7,671)Interest and foreign exchange rate differences — — — (466) 131 (335)Balance as at 31 December 2009 48,859 506 6,539 191,307 9,950 257,161

2010 saw impairments of shares established in the amount of EUR 7,518 thousand. Details on impairment charges are shown in Note 16.

23 LOANS AND ADVANCES TO BANKS


2010 2009Balances Impairments Balances Impairments

At sight 22,027 — 13,788 —Short-term loans 61,687 — 72,423 —Long-term loans 2,234 40 2,357 67Total gross 85,948 40 88,568 67Total net 85,908 88,501

Cash and cash equivalents (Note 47) include loans to banks with maturity up to 90 days, in the amount of EUR 83,714 thousand (2009: EUR 86,209 thousand).

In 2009 and 2010 impairments were reported for loans to one foreign commercial bank.


24 LOANS AND ADVANCES TO CUSTOMERS

Analysis by types of borrowers, by transactions, maturity and currency:– amounts in thousands of EUR

31 December 2010Short-term

Impairment of short-term Long-term

Impairment of long-term

Local currency 667,081 57,171 1,060,640 37,240Loans and advances to public sector — — 5,409 —Loans to private individuals 50,578 3,318 265,348 4,338 – overdraft accounts and cards 34,264 232 — — – housing loans 4 — 139,217 2,003 – consumer loans 15,335 2,595 126,131 2,335 – violation of overdraft limits 975 491 — —Loans to companies 616,503 53,853 789,883 32,902 – large companies 264,820 13,726 406,597 6,523 – SME 347,214 37,386 340,582 24,296 – other 4,469 2,741 42,704 2,083

Foreign currency 16,677 400 59,925 2,145Loans to private individuals — — 24,107 788 – housing loans — — 17,978 132 – consumer loans and other — — 6,129 656Loans to companies 16,677 400 35,818 1,357 – large companies 5,753 58 5,137 32 – SME 10,924 342 29,724 1,317 – other — — 957 8

Total 683,758 57,571 1,120,565 39,385Net total according to maturity 626,187 1,081,180Net total according to total maturity 1,707,367


31 December 2009Short-term

Impairment of short-term Long-term

Impairment of long-term

Local currency 758,257 37,067 938,117 35,372Loans and advances to public sector — — 8,113 —Loans to private individuals 53,193 1,756 236,917 5,610 – overdraft accounts and cards 32,328 323 — — – housing loans — — 113,262 2,745 – consumer loans 19,921 887 123,655 2,865 – violation of overdraft limits 944 546 — —Loans to companies 705,064 35,311 693,087 29,762 – large companies 308,512 6,514 358,449 7,662 – SME 385,697 25,979 305,867 20,394 – other 10,855 2,818 28,771 1,706

Foreign currency 32,290 401 45,835 920Loans to private individuals 8 — 23,700 365 – housing loans — — 17,742 243 – consumer loans 8 — 1,051 73 – other loans — — 4,907 49Loans to companies 32,282 401 22,135 555 – large companies 5,473 65 4,996 58 – SME 26,809 336 16,229 486 – other — — 910 11

Total 790,547 37,468 983,952 36,292Net total according to maturity 753,079 947,660Net total according to total maturity 1,700,739


Impairments and write-offs for customers, by types of credit facilities:


Balance as at 1 January 2010

Changes in impairments Write-offs

Balance as at 31 December 2010

Loans to individuals 7,731 923 (210) 8,444Current account and credit card overdrafts 323 (91) — 232Real estate loans 2,988 (825) (28) 2,135Personal loans 3,825 1,812 (51) 5,586Current account overdrafts 546 76 (131) 491Other loans 49 (49) — —

Credits to companies 66,029 23,933 (1,450) 88,512Large companies 14,298 7,198 (1,157) 20,339SME 47,196 16,438 (293) 63,341Others 4,535 297 — 4,832

Total 73,760 24,856 (1,660) 96,956


Balance as at 1 January 2009

Changes in impairments Write-offs

Balance as at 31 December 2009

Loans to individuals 6,071 2,099 (439) 7,731Current account and credit card overdrafts 299 24 — 323Real estate loans 2,173 965 (150) 2,988Personal loans 2,859 1,095 (129) 3,825Current account overdrafts 687 8 (149) 546Other loans 53 7 (11) 49

Credits to companies 47,252 20,143 (1,366) 66,029Large companies 9,285 5,099 (86) 14,298SME 34,122 14,354 (1,280) 47,196Others 3,845 690 — 4,535

Total 53,323 22,242 (1,805) 73,760

25 HELD-TO-MATURITY INVESTMENTS


25a Analysis by type of held-to-maturity investments 2010 2009

Bonds 276,273 130,613Treasury bills — 83,346Total 25a 276,273 213,959

25b Securities pledged 2010 2009Government bonds 32,390 59,418Bank bonds — 41,818Total 25b 32,390 101,236

Total 25a and 25b 308,663 315,195


The Group pledged government bonds held to maturity as at 31 December 2010 amounting in total to EUR 32,390 thou-sand (2009: EUR 101,236 thousand).

Changes in held-to-maturity investments:


Debt securitiesTotalBonds Treasury bills

Balance as at 1 January 2010 231,849 83,346 315,195Purchase 112,218 — 112,218Realization at maturity (36,498) (83,346) (119,844)Accrued interest 11,710 102 11,812Payed interest (10,996) (102) (11,098)Capital adjustment transferred due to transfer from AFS 380 — 380Balance as at 31 December 2010 308,663 — 308,663


Debt securitiesTotalBonds Treasury bills

Balance as at 1 January 2009 283,577 9,979 293,556Purchase 26,838 82,274 109,112Realization at maturity (77,068) (10,000) (87,068)Accrued interest 10,019 1,093 11,112Payed interest (12,205) — (12,205)Capital adjustment transferred due to transfer from AFS 688 — 688Balance as at 31 December 2009 231,849 83,346 315,195

Held-to-maturity financial assets mostly include prime government securities, as the Group estimates it has the capacity to hold them to maturity.

In 2010 the Group bought the Republic of Slovenia bonds as well as bonds issued by prime banks.


26 PROPERTY AND EQUIPMENT


NoteLand and buildings Computers

Other equipment

Assets in course of construction Total

Cost as at 1 January 2009 33,315 13,935 8,609 1,426 57,285Additions — — 2 1,692 1,694Transfer from assets in the course of construction 345 611 158 (1,114) —Disposals (76) (1,644) (391) — (2,111)Transfer to investment property — — — (2,003) (2,003)Cost as at 31 December 2009 33,584 12,902 8,378 1 54,865

Accumulated depreciation as at 1 January 2009 19,190 9,335 4,864 — 33,389Depreciation charge 14 650 1,545 707 — 2,902Disposals (74) (1,632) (349) — (2,055)Accumulated depreciation as at 31 December 2009 19,766 9,248 5,222 — 34,236

Net book amount 31 December 2009 13,818 3,654 3,156 1 20,629

Cost as at 1 January 2010 33,584 12,902 8,378 1 54,865Additions — — — 1,619 1,619Transfer from assets in the course of construction 11 1,344 220 (1,575) —Disposals (144) (998) (477) — (1,619)Cost as at 31 December 2010 33,451 13,248 8,121 45 54,865

Accumulated depreciation as at 1 January 2010 19,766 9,248 5,222 — 34,236Depreciation charge 14 645 1,236 650 — 2,531Disposals (125) (974) (461) — (1,560)Accumulated depreciation as at 31 December 2010 20,286 9,510 5,411 — 35,207

Net book amount 31 December 2010 13,165 3,738 2,710 45 19,658

Larger purchases in 2010 are represented by the purchases of computer equipment required for modernisation, expansi-on and for improved security (disc field, servers, routers) totalling EUR 971 thousand, the purchases of other computer equipment (POS terminals, ATMs) and the purchases of other equipment. Decreases pertain to the sale and elimination of outdated computer and other equipment, which is no longer usable.

Property and equipment have not been pledged nor in 2010 or 2009.


27 INVESTMENT PROPERTY


Note 2010 2009

Balance as at 1 January 306 8,591Additions — 121Transfer from assets in the course of construction — 2,003Transfer from inventory 1,539 —Sale (29) (25)Transfer to long-term leasing — (10,351)Depreciation 14 (9) (33)Balance as at 31 December 1,807 306

The investment property increased by the amount of the transferred housing inventories, which have been leased out under operating leasing.

28 INTANGIBLE ASSETS


Note Software licenses Assets in course of installation Total

Cost as at 1 January 2009 10,872 808 11,680Additions — 2,205 2,205Transfer from fixed assets in instalation 2,645 (2,645) —Disposals (1,698) — (1,698)Cost as at 31 December 2009 11,819 368 12,187

Accumulation depreciation as at 1 January 2009 7,564 — 7,564Amortisation charge 14 979 — 979Disposals (1,698) — (1,698)Accumulation depreciation as at 31 December 2009 6,845 — 6,845

Net book amount at 31 December 2009 4,974 368 5,342

Cost as at 1 January 2010 11,819 368 12,187Additions — 1,145 1,145Transfer from fixed assets in preparation 1,248 (1,248) —Cost as at 31 December 2010 13,067 265 13,332

Accumulation depreciation as at 1 January 2010 6,845 — 6,845Amortisation charge 14 1,231 — 1,231Accumulation depreciation as at 31 December 2010 8,076 — 8,076

Net book amount at 31 December 2010 4,991 265 5,256

Larger purchases in 2010 are represented by investments in the completion of the data warehouse (transfer to application amounting to EUR 498 thousand) and to software, mainly for retail, in the amount of EUR 428 thousand, and payments in an amount of EUR 282 thousand.

The fair value of intangible assets at the end of the business year does not deviate from their carrying value.


29 INCOME TAX ASSETS

29.1 Current tax assets


2010 2009

Current tax 1,582 1,862Deferred tax 3,415 2,760Balance of assets as at 31 December 4,997 4,622

Current tax receivables represent the difference between the obligation to pay tax in the amount of EUR 1,409 thousand and the prepayments made amounting to EUR 2,991 thousand.

29.2 Deferred tax assets


2010 2009

Available-for-sale securities 3,030 2,248Provisions for liabilities to employees 375 502Marketable securities 10 10Deferred tax assets 3,415 2,760

Deferred tax asset movements:


2010 2009

Balance as at 1 January 2,760 3,566

Income statement changes in deferred taxes:Trading securities – elimination of assets — (26)Available-for-sale securities - impairment – establishment of assets for impairment 1,504 1,621 – derecognition on disposal (893) (159)Provisions for liabilities to employees – establishment of assets 4 24 – elimination of assets (132) (85)Investment property valuation — (15)Income statement effect of changes in deferred taxes as at 31 December 483 1,360

Changes in deferred taxes other comprehensive income:Available-for-sale securities – valuation by fair value (1,453) (3,081) – derecognition on disposal 1,625 915Changes in deferred taxes recorded in other comprehensive income as at 31 December 172 (2,166)

Balance as at 31 December 3,415 2,760


30 OTHER ASSETS


2010 2009

Financial assets 2,208 2,160Receivables for credit / debit cards 734 725Other retail claims 2,045 2,059Fee and commission due 281 250Debtors 145 71Receivables for advance payments 37 60Other claims 45 79Impairment (1,079) (1,084)

Non-financial assets 4,190 7,812Inventories 4,027 7,662Deferred operating expenses 146 101Receivables for input VAT 17 49

Total 6,398 9,972

The decrease of other assets is the result of the decrease in inventories at the subsidiary company due to the sale of flats in the amount of EUR 2,518 thousand and the transfer to investment property in the amount of EUR 1,539 thousand.

Changes in impairments for other assets:


Balance 1 January 2009 1,127Impairments 57Impairments release (100)Balance 31 December 2009 1,084Impairments 47Impairments release (52)Balance 31 December 2010 1,079

31 DEPOSITS FROM CENTRAL BANK


2010 2009

Short-term loans from ECB in local currency 70,013 20,051Long-term loans from ECB in local currency — 110,435Total 70,013 130,486


32 FINANCIAL LIABILITIES HELD FOR TRADING


Contractual amount Fair value2010 2009 2010 2009

Futures and forwards 46,140 63,849 1,679 1,652IRS 75,303 84,758 1,691 2,602Foreign currency swaps 75,306 87,653 2,610 1,727Options (Interest rate cap) 10,000 10,000 34 70Total 206,749 246,260 6,014 6,051

In securities forward transactions the fair value represents negative valuations due to forward sale price differences.

In 2010 the Group decreased the currency swap balances. The negative valuation from these transactions increased compa-red with the year before mainly due to the financing of the Swiss franc position and the trend of the currency’s exchange rate.

33 FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT AND LOSS


Interest rate as at 31 December 2010 2010 2009

Certificates of deposit with maturity 2012 5.00 % 1,547 1,519Subordinated bonds BCE10, with maturity 2017 5.00 % 38,503 38,332Total 40,050 39,851

Financial liabilities designated at fair value include those securities that are economically hedged, consistently with the risk management policy, by a derivative – interest rate swap. Within the interest rate swap, the Group swapped the nominal interest rate with a variable one, thus hedging the risk of a - decrease in long-term interest rates.

The nominal value of the BCE10 subordinated bond amounts to EUR 37,000 thousand, while the fair value amounted to EUR 38,503 thousand on 31 December 2010 (2009: EUR 38,332 thousand).

Based on the Decision on the calculation of capital in banks and savings banks the BCE10 bonds represent the Group’s subordinated debt, thus being included in Tier 2 capital up to an amount representing 50 % of the Group’s Tier 1 capital and exhibiting the following characteristics:

– the bonds are not especially insured or guaranteed, the Group’s property being the only collateral, – liabilities from bonds are subordinated to plain debt instruments in the event of bankruptcy or winding up procedures and are only redeemed, once all non-subordinated liabilities to creditors and subordinated liabilities included in Tier 3 capital have been redeemed, therefore these represent a high risk security,

– subordinated bonds paid in are only disposable to cover the Group’s loss in the event of bankruptcy or winding up pro-cedures and are not used to cover loss during the time of the Group’s regular operations.

Accounting for financial liabilities, designated at fair value through profit and loss is based on the elimination of measu-rement inconsistencies that would otherwise result from the recognized gains and losses on different bases. In this way a Group acquire more appropriate information about liabilities and the related derivatives on financial liabilities carried at amortized cost and interest rate swaps carried at fair value.

Subordinated bonds BCE10 are listed on stock exchange and certificates of deposit are not.


34 FINANCIAL LIABILITIES AT AMORTISED COST – DEPOSITS FROM BANKS

34a Analysis by currency and maturity


2010 2009

At sight 955 1,406In local currency 439 244In foreign currency 516 1,162

Short-term 53,480 55,204In local currency 53,480 55,204

Total 54,435 56,610

34b Analysis by territory


2010 2009

Slovenia 34,986 46,308Former Yugoslav countries 14,395 3,226European Union 5,054 7,076Total 54,435 56,610

35 FINANCIAL LIABILITIES AT AMORTISED COST – DUE TO CUSTOMERS

35a Analysis by currency and maturity and by type of customers


2010 2009At sight Short-term Long-term At sight Short-term Long-term

Companies 120,797 320,668 330,857 88,479 429,262 232,440In local currency 118,878 320,539 330,857 86,256 429,202 232,439In foreign currency 1,919 129 — 2,223 60 1 Private individuals 321,012 245,655 159,969 293,321 297,347 112,587In local currency 313,165 241,377 158,245 287,433 292,401 111,527In foreign currency 7,847 4,278 1,724 5,888 4,946 1,060

Total 441,809 566,323 490,826 381,800 726,609 345,027Total at sight, short-term and long-term 1,498,958 1,453,436




2010 2009

Slovenia 1,485,660 1,440,879Former Yugoslav countries 7,086 5,870European Union 4,550 5,228Other 1,662 1,459Total 1,498,958 1,453,436

36 FINANCIAL LIABILITIES AT AMORTISED COST – BORROWINGS FROM BANKS

36a Analysis by currency and maturity of the liability


2010 2009

In local currency 411,267 412,709Short-term loans 32,110 9,015Long-term loans 379,157 403,694

In foreign currency 8,068 6,736Long-term loans 8,068 6,736

Total 419,335 419,445



2010 2009

Slovenia 198,256 178,981European Union 221,079 240,464Total 419,335 419,445

37 FINANCIAL LIABILITIES AT AMORTISED COST – BORROWINGS FROM CUSTOMERS


2010 2009Companies and individuals Short-term Long-term Short-term Long-term

In local currency — 8,847 — —Total 8,847 —


38 DEBT SECURITIES IN ISSUE



Certificates of deposit in local currency 99,405 113,360Up to 1 year 2.72 % 6,555 7,029Above 1 year up to 2 years 3.63 % 28,988 54,384Above 2 year up to 3 years 4.16 % 18,739 9,477Above 3 year up to 4 years 5.01 % 41,454 39,927Above 4 year up to 5 years 4.97 % 3,669 2,543

Bonds in local currency 61,031 21,414Bonds, maturity 2010 — — 21,414Bonds, maturity 2015 4.69 % 61,031 —

Total 160,436 134,774

Bonds BCE13 and BCE14, due in 2015 are listed on stock exchange and certificates of deposit are not.

39 SUBORDINATED LIABILITIES



Subordinate bonds due in 2010 (EUR) — — 10,381Subordinate bonds due in 2011 (EUR) 4.90 % 13,032 13,027Subordinate certificates of deposit due in 2014 (EUR) 2.27 % 10,278 10,275Subordinate bonds due in 2016 (EUR) 6.50 % 12,497 12,484Subordinate bonds due in 2017 (EUR) 3.24 % 49,551 49,467Total 85,358 95,634

In 2004 the Group issued subordinated bonds totalling EUR 12.5 million with an interest rate of 4.90 % and maturing in 2011. Interest is paid on an annual basis. The first interest coupon was matured on 15 February 2005, with the last one matured on 15 February 2011.

In October and November of 2007 the Group issued subordinated Certificates of Deposit in a total amount of EUR 10.25 million, carrying an interest rate of 6M EURIBOR increased by 1 percentage point, maturing in 7 years. Interest is paid on a semi-annual basis.

To improve capital adequacy and ensure further growth of operations the Group again issued subordinated liabilities in 2007. In line with the stipulations in the Decision on the calculation of capital in banks and savings banks these are dee-med innovative financial instruments and are included in the calculation of Tier 1 capital in accordance with the decision of the Bank of Slovenia dated December 4, 2007, with any eventual surplus included in Tier 2 capital. The following are the main characteristics of the issued innovative subordinated bonds:

– the instrument does not have a set maturity, it can however be called, but no earlier than 10 years after the date when the entire emission is closed, in full, not in part with the approval of the Bank of Slovenia,

– payment of all liabilities from bonds is guaranteed by the Group’s property without limitation, – the bonds are not especially insured nor covered by a guarantee issued by the Group, related entities or through any other form of an agreement, which from the legal or economic perspective would improve the level of redemption as compared to other creditors,

– liabilities from these bonds are subordinated in full to liabilities toward regular creditors and the liabilities based on subordinated debt instruments, meaning that in an event of bankruptcy or winding up procedures they are redeemed only after the non-cumulative preferential shares and regular shares, thus proving a high risk security,


– the Group cannot pay out the Group’s operating profit, should it not settle liabilities from innovative instruments during the current year,

– the Group has power of disposal over the funding from the bonds without condition and it may utilize it to cover loss during regular operations,

– the Group has the option of withholding interest payments from bonds, should it not have recognized distributable profit in the previous year, payment from the bonds are not cumulative, which is why any holder of the bond no longer has any claim to the interest withheld.

The Group issued innovative perpetual subordinated bonds in a nominal amount of EUR 50 million at an interest rate of 6M EURIBOR plus 2 percentage points. The stated interest rate is valid for a period of 10 years, when the bond is callable, should it not be called the interest margin increases by 1 percentage point. The first interest payment was effected on June 28, 2008, with the following coupons falling due on a semi-annual basis.

To ensure additional capital for the management of risk and to secure the funding for the Group’s long-term investments, the Management Board of the Bank, on May 13, 2009, adopted the decision to issue subordinated registered bonds – 12th issue (designated BCE12). As at December 31, 2010 EUR 12,497 thousand was subscribed at a fixed nominal interest rate of 6.5 %, maturing on June 15, 2016. Interest is paid out annually, with the first interest coupon matured on June 15, 2010 and the final coupon maturing on June 15, 2016.

The subordinated BCE12 bonds have the characteristics of subordinated debt and the Group includes them in the calcu-lation of Tier 2 capital. The subscribed subordinated bonds will only be available to cover the Group’s loss in the event of bankruptcy or winding up procedures and are not available to cover for loss coming from the Group’s regular operations. The bonds are not secured separately nor are they covered with a guarantee made by the Group, a related party or with any other form of contract, which would legally or economically improve the level of priority in relation to payouts as compared with other creditors. The Group guarantees the payout of liabilities from bonds with all its assets, without limit. Liabilities from the bonds are subordinated to plain-vanilla debt instruments in the event of bankruptcy or winding up and are only paid out once all unsubordinated liabilities to regular creditors have been paid out as well as the liabilities based on subordinated debt included in Tier 3 capital.

All of the subordinated bonds are listed on the stock exchange.

40 FINANCIAL LIABILITIES ASSOCIATED TO TRANSFERRED ASSETS


2010 2009

Short-term financial liabilities to foreign banks in domestic currency 30,993 —Total 30,993 —

In 2010 the Group borrowed short-term loans from foreign banks, where securities were put up as collateral – repos.

41 HEDGING DERIVATIVES


Contractual amount Fair value2010 2009 2010 2009

Fair value hedging - hedge accounting 20,000 — 348 —Total 20,000 — 348 —

In 2010 the Group hedged a bond it issued from interest rate risk by entering into an interest rate swap transaction (IRS). The mentioned instruments are accounted for by the Group in accordance with Hedge Accounting as a fair value hedge.


42 PROVISIONS


Note 2010 2009

Unresolved legal proceedings 46a 8,169 7,901Provisions for commitments and contingent liabilities 46d 2,628 2,695Employee related provision 2,159 2,783Other provisions 312 602Total 13,268 13,981

As at 31 December 2010 there were provision formed amounting to EUR 8,169 thousand for pending legal actions from the denationalization proceedings of office building. Additionally, the Group formed EUR 268 thousand worth of provi-sions to this effect.

Other provisions relate to the national housing savings scheme (NSVS). Should a saver in the scheme not use the option to take a housing loan according to the conditions of the NSVS, the Group must return all of the premiums that the saver received in the duration of the saving to the Republic of Slovenia Housing Fund.

Changes in provisions:


Provisions or unsettled disputes

Provisions for off-balance sheet liabilities

Retirement benefit provisions

Other provisions Total

Balance 1 January 2009 7,957 3,372 2,893 855 15,077Provisions made / (released) 162 (677) 252 28 (235)Provisions (utilized) (218) — (362) (281) (861)Balance 31 December 2009 7,901 2,695 2,783 602 13,981Provisions made / (released) 268 (67) (471) — (270)Provisions (utilized) — — (153) (290) (443)Balance 31 December 2010 8,169 2,628 2,159 312 13,268

43 OTHER LIABILITIES


Note 2010 2009

Liabilities from card operations 3,584 3,159Liabilities from salaries 2,412 2,482Liabilities toward suppliers 2,020 1,778Accrued expenses 794 1,167Taxes payable 464 397Fees and commissions due 60 49Liabilities toward denationalization claimants 42, 46a — 218Other liabilities 1,126 1,324Total 10,460 10,574

All other liabilities, except for taxes payable and liabilities from salaries are financial liabilities, carried at amortized cost.


44 SHARE CAPITAL

44.1 Subscribed capital

The Bank’s share capital comprises 508,629 dematerialized no par value registered shares. 80 % are regular voting right shares, with 20 % represented by preferred shares. The latter had a “conditional” right which arises only once regular dividend is not paid. At the 24th Regular Annual Shareholder’s Meeting on June 11, 2009 the Bank’s owners adopted a decision on the conversion of the cumulative preferred shares to non-cumulative preferred shares thus eliminating the right to cumulative dividend payments.

At the 23rd Regular Annual Shareholder’s Meeting on May 22, 2008 the Bank’s owners authorized the Management Board to increase share capital during the next 5 years by issuing new shares. The amount of authorized capital may not exceed 50 % of the ordinary shares the time when the authorization was given, meaning 211,061 shares. The Bank may only issue new shares upon consent of the Supervisory Board.

In October 2008 the Bank successfully increased capital from authorised capital by selling 86,506 shares, the value of the issue thus reaching EUR 35 million. The Bank did not issue any new shares neither in 2009 nor in 2010.

Bank shareholders with shareholdings exceeding 3 % are listed in the following table:

Shareholding rights Voting rights

Nova Ljubljanska banka d.d. Ljubljana 40.99 % 49.42 %Slovenska odškodninska družba d.d. Ljubljana 9.36 % 6.70 %NFD 1. Investicijski sklad d.d. Ljubljana 9.21 % 9.65 %Abanka Vipa d.d. Ljubljana 4.00 % 3.36 %Unior d.d. Zreče 3.88 % 4.84 %Zavarovalnica Triglav d.d. in Kritni sklad Ljubljana 3.75 % 2.68 %

Number of shares and amount of share capital:

Share capital in thousands of EURNumber of shares Ordinary shares Preference shares Total

Balance 31 December 2008 508,629 13,584 3,396 16,980



44.2 Treasury shares bought

As at 31 December 2010 and as at 31 December 2009 the Group portfolio included 251 ordinary treasury shares in total amount of EUR 31 thousand; these shares are recorded as a deduction of the share capital.

44.3 Share premium

Share premium increased from EUR 19,492 thousand to EUR 51,542 thousand in 2008 as a result of the sale of regular and preferred shares in the process of raising additional capital at a price exceeding the nominal value of paid-in shares. During 2009 and 2010 the share premium stood unchanged at EUR 51,542.


44.4 Profit reserves

Changes in reserve balance:


Statutory reserves Other reserves from profit Retained earnings Total

At 1 January 2009 2,904 113,013 633 116,550Increase from part of net profit for the year — 6,746 164 6,910Increase from past dividends not paid — 34 — 34Decrease for dividends paid — — (420) (420)At 31 December 2009 2,904 119,793 377 123,074Increase from part of net profit for the year — 2,839 (220) 2,619Increase from past dividends not paid — 38 — 38At 31 December 2010 2,904 122,670 157 125,731

Based on the stipulations in Article 64 of the Companies Act, the Group must form statutary reserves in an amount, which allows for the sum of statutory reserves and capital reserves to reach 10 % of the share capital. As at 31 December 2010 the Group’s statutary reserves amounted to 17 % of the share capital.

Other profit reserves, formed by the Group for unidentified risk and potential future loss, may not be distributed for payments to shareholders or other persons on the basis of the stipulations in the Articles of Association. These may however be included in the calculation of Tier 1 capital in accordance with the Decision on the calculation of capital in banks and savings banks.

In line with the Articles of Association only retained profit may be paid out.

As at 31 December 2010 the Group distributed part of the net profit for the year in the amount of EUR 2,250 thousand to other profit reserves. EUR 220 thousand from retained earnings was also distributed to other profit reserves.

44.5 Revaluation reserve

Changes in the revaluation reserve:


At 1 January 2009 (3,767)Profits from changes in fair value of available-for-sale 1,702Transfer to income statement due to impairment 7,772Sale / disposal of available-for-sale securities (1,047)At 31 December 2009 4,660Losses from changes in fair value of available-for-sale (8,041)Recycled to income statement due to impairment 7,518Sale / recycled to income statement of available-for-sale securities (166)At 31 December 2010 3,971

45 DIVIDEND PER SHARE

Dividends payable are not accounted for until they have been ratified at the Bank’s annual General Shareholders Assembly. Dividend per share for the 2009 business year in the amount of EUR 5.50 per ordinary and preference share was confirmed at the Bank’s 25th Shareholders’ Assembly on 8 June 2010 and paid out in September 2010.


46 CONTINGENT LIABILITIES AND COMMITMENTS

a) Legal proceedings

As at 31 December 2010 the Group’s provisions for pending legal actions amounted to EUR 8,169 thousand from the de-nationalization process, according to which the denationalization beneficiaries may claim the real estate be returned to them in kind or remuneration paid for the time from the day of the denationalization legislation coming into effect and up to the actual delivery of the real estate (31 December 2009: EUR 7,901 thousand). On 30 December 2010 the Group obtained a resolution by the Supreme Court of the Republic of Slovenia stating that a review process in connection with the return of business premises in denationalization proceedings is rejected, which means that the proceedings will be completed at a regular court in the Republic of Slovenia. The Group filed a constitutional complaint in objection to the decision by the Supreme Court.

b) Capital commitments

As at 31 December 2010 the Group had no capital commitments.

c) Potential and assumed liabilities

The basic aim of these instruments is to ensure, that assets are made available when so requested by the clients. Guarantees and stand-by letters of credit represent irrevocable guarantees, that the Group will effect payment, should the client not be able to fulfil its obligation to a third party. Cash requirements for guarantees and stand-by letters of credit are lower than the amount of the liabilities in question, as, based on the data from the past years, the Group does not expect to see a third party claim fulfilment of obligation in cash, which is why these are low risk instruments.

Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guaran-tees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in the amount equal to the total unused commitments.

d) Breakdown of contractual amounts relating to bank guarantees, documentary letters of credit and assumed liabilities


Note 2010 2009

Guarantees and stand-by LCs 80,261 84,578Documentary LCs — 1,260Commitments to extend credits 171,004 152,177 – maturity up to 1 year 140,188 141,387 – maturity over 1 year 30,816 10,790Total 251,265 238,015Provisions for off-balance sheet risk 42 (2,628) (2,695)Total net 248,637 235,320

In 2010 the guarantees total includes service guarantees in the amount EUR 52,338 thousand (2009: EUR 47,476 thousand).

e) Guarantees


As at 1 January 2009 53,745Approved guarantees 48,125Guarantees due (54,394)As at 31 December 2009 47,476Approved guarantees 50,230Guarantees due (45,368)As at 31 December 2010 52,338

Commission and fee income from service guarantees amounted to EUR 883 thousand in 2010 (2009: EUR 811 thousand).


47 CASH AND CASH EQUIVALENTS

Cash and cash equivalents in the consolidated statement of cash flows represent instruments with original maturity of less than 90 days.


Note 2010 2009

Cash and balances with the Central Bank 19 128,324 40,240Loans to banks 23 83,714 86,209Total 212,038 126,449

48 RELATED PARTY TRANSACTIONS

48.1 Claims and commitments and contingent liabilities


2010

Management and Supervisory Board members

with related partiesTop management

with related parties

Shareholders with more than

20% of shares Total

RECEIVABLESLoans 195 318 3,097 3,610Securities — — 43,924 43,924Liabilities assumed 19 29 — 48Guarantees issued — — 2,573 2,573Total 214 347 49,594 50,155

Loan repayments during the year 31 185 76,123 76,339

LIABILITIESDeposits 779 1,141 10,052 11,972Subordinated debt and certificates of deposit — — 5,769 5,769Total 779 1,141 15,821 17,741

Interest income 5 16 1,147 1,168Interest expense 48 53 581 682



2009

Management and Supervisory Board members

with related partiesTop management

with related parties

Shareholders with more than

20% of shares Total

RECEIVABLESLoans 202 429 2,784 3,415Securities — — 46,668 46,668Liabilities assumed 17 54 — 71Guarantees issued — — 1,314 1,314Liabilities from derivatives — — 10,173 10,173Total 219 483 60,939 61,641

Loan repayments during the year 20 344 130,042 130,406

LIABILITIESDeposits 651 990 42,232 43,873Subordinated debt and certificates of deposit — 50 4,712 4,762Total 651 1,040 46,944 48,635

Interest income 6 27 1,446 1,479Interest expense 41 50 443 534

The Group conducts transactions with related parties in accordance with Terms and Conditions of Banka Celje d.d. and the Banka Celje Decision on Interest Rates, which is also used for other clients.

48.2 Gross amounts paid out to key management personnel


Management Board members Supervisory Board members Management personnel Total

Fixed revenue 385 — 1,385 1,770Variable revenue 94 — 199 293Other revenue 85 — 204 289Director's fee — 36 — 36Total 564 36 1,788 2,388

In January a new member joined the Bank’s Management Board, thus taking the member count back to three members in 2010 and 15 members of Top management.

48.3 Gross amounts paid out to Management Board and Supervisory Board members


RevenueManagemant Board members Fixed Variable Other Total

President & CEO 151 48 37 236Member of the Management Board & Deputy CEO 129 41 27 197Member of the Management Board 105 5 21 131Total 385 94 85 564

Fixed remuneration includes gross salaries, while variable remuneration pertains to the part of the salary based on perfor-mance. Other income includes holiday pay, additional pension insurance premiums and annuity savings as well as benefits.



Supervisory Board members Fixed reimbursements

President of the Supervisory Board —Member of the Supervisory Board & Deputy CEO 10Member of the Supervisory Board —Member of the Supervisory Board —Member of the Supervisory Board 9Member of the Supervisory Board 8Member of the Supervisory Board 9Total 36

49 EXPENDITURE FROM SUBORDINATED LIABILITIES

In 2010, the Group paid EUR 4,908 thousand of interest from subordinated bonds issued and EUR 208 thousand of interest from issued subordinated certificates of deposit which are included in interest expense.

50 AVERAGE NUMBER OF EMPLOYEES IN 2010 AND AT 31 DECEMBER 2010

On 31 December 2010 the Bank had 538 employees, of which 36.25 % were educated at least at the higher education level, 19.70 % possessed vocational education diplomas, 40.33 % held high school diplomas and 3.72 % of the employees were educated at lower levels. In 2010, the average complement of employees at the Bank was 566. Information on the employees is represented in more detail under item 6.6 in the business report.

At the end of 2010 the subsidiary employed four employees and in 2009 five employees.

51 INFORMATION ON THE RESULTS OF ORGANIZATIONAL UNITS ABROAD

The Group has no subsidiaries or associated companies abroad.

52 EVENTS AFTER REPORTING DATE

In February 2011 the owners of the Bank signed an agreement to sell 363,946 shares of the Bank and publicly announced a call for non-binding written tenders for the purchase of shares.

BANKA CELJE GROUP ANNUAL 2010 - Osebne financee8602f98-da4a-4599... · 8 Banka Celje Group Annual...

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