BANKA CELJE GROUP CONSOLIDATED ANNUAL REPORT 20096eccfa35-4570-41ff-b63d... · 2017-10-16 · 2.1...

BANKA CELJE GROUP

CONSOLIDATEDANNUAL REPORT

2009

Banka Celje Group

Consolidated Annual Report 2009, prepared in accordance with International Financial Reporting Standards, as adopted by the European Union.

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CONTENTS

A wORD By ThE PRESIDENT OF ThE MANAGEMENT BOARD OF BANKA CELJE .........................................7REPORT OF ThE SUPERVISORy BOARD OF BANKA CELJE ................................................................................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 2009 ....... 13

3.1 General economic environment ................................................................................................. 133.2 Business policies of the Bank and its subsidiary company .......................................................143.3 The consolidated financial result ............................................................................................... 153.4 The consolidated financial position .............................................................................................173.5 An overview of the operations of the Bank and its subsidiary company ................................ 20

3.5.1 Credit operations ........................................................................................................... 203.5.2 Deposit operations......................................................................................................... 203.5.3 Securities operations ..................................................................................................... 223.5.4 Commitments and contingent liabilities ......................................................................243.5.5 Derivatives .................................................................................................................... 253.5.6 Payment operations ....................................................................................................... 25

3.6 Risk management and control operations ................................................................................. 263.7 Equity and shareholders.............................................................................................................. 303.8 Development of the Bank and its subsidiary company ............................................................ 313.9 Social responsibility of the Bank and its subsidiary company ................................................. 323.10 The internal audit department operations ................................................................................ 32

4 MANAGING BODIES OF ThE BANK .................................................................................................... 345 ORGANIZATION STRUCTURE OF ThE BANK

ON 1 JANUARy 2010 ............................................................................................................................. 356 ThE GROUP ON 31 DECEMBER 2009 .................................................................................................. 367 RETAIL DIVISION OF ThE BANK ON 31 DECEMBER 2009 .............................................................. 378 STATEMENT OF CORPORATE GOVERNANCE .................................................................................. 389 STATEMENT OF MANAGEMENT’S RESPONSIBILITIES ................................................................... 4310 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 CASh FLOw STATEMENT ..................................................................................... 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 ............................................................................................................................... 542.3 Segment reporting ....................................................................................................................... 542.4 Foreign currency translation ...................................................................................................... 542.5 Sale and repurchase agreements ............................................................................................... 552.6 Financial assets and liabilities .................................................................................................... 55

2.6.1 Financial assets .............................................................................................................. 552.6.2 Financial liabilities ........................................................................................................ 562.6.3 Derecognition of financial instruments ...................................................................... 57

2.7 Classes of financial instrument .................................................................................................. 572.8 Offsetting .................................................................................................................................... 582.9 Interest income and expense ...................................................................................................... 58

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2.10 Fee and commission income ....................................................................................................... 582.11 Dividend income .......................................................................................................................... 582.12 Impairment of financial assets ................................................................................................... 58

2.12.1 Assets carried at amortised cost ................................................................................... 582.12.2 Assets available-for-sale ................................................................................................ 592.12.3 Renegotiated loans ........................................................................................................ 59

2.13 Cash and cash equivalents .......................................................................................................... 592.14 Derivative financial instruments ............................................................................................... 592.15 Accounting for leases ................................................................................................................... 602.16 Investment property ................................................................................................................... 602.17 Property and equipment ............................................................................................................ 602.18 Intangible assets .......................................................................................................................... 602.19 Taxation ........................................................................................................................................ 612.20 Employee benefits ........................................................................................................................ 612.21 Provisions ..................................................................................................................................... 612.22 Financial guarantee contracts .................................................................................................... 612.23 Share capital ................................................................................................................................. 612.24 Comparatives ............................................................................................................................... 612.25 Financial risk management ........................................................................................................ 62

2.25.1 The Group’s approach to risk management .................................................................. 622.25.2 Credit risk ....................................................................................................................... 672.25.3 Market risk ..................................................................................................................... 782.25.4 Liquidity risk .................................................................................................................. 832.25.5 Capital and capital adequacy ......................................................................................... 842.25.6 Fair value of financial assets and liabilities ................................................................. 86

2.26 Major accounting policies and assessments .............................................................................. 872.27 Business segments ....................................................................................................................... 88

NOTES TO INDIVIDUAL ITEMS INCLUDED IN CONSOLIDATED FINANCIAL STATEMENTS ..................... 913 Net interest and similar income ............................................................................................................. 914 Dividend income...................................................................................................................................... 925 Net fee and commission income ............................................................................................................ 926 Net gains from financial assets and liabilities not classified as fair value through profit or loss .... 937 Net gains / losses from financial assets and liabilities held for trading ............................................. 938 Net losses from financial assets and liabilities designated at fair value through profit or loss ........ 949 Foreign exchange translation net gains ............................................................................................... 9410 Net gains from derecognition of assets other than non-current assets held for sale ....................... 9411 Net other operating income ................................................................................................................... 9512 Administrative expenses ........................................................................................................................ 9513 Amortisation and depreciation .............................................................................................................. 9614 Provisions ................................................................................................................................................ 9615 Impairment charges ................................................................................................................................ 9616 Income tax expense ................................................................................................................................. 9717 Basic and diluted earnings per share ..................................................................................................... 9718 Cash and balances with the Central Bank ............................................................................................. 9719 Financial assets held for trading ............................................................................................................ 9820 Financial assets designated at fair value through profit or loss .......................................................... 9921 Available-for-sale financial assets ......................................................................................................... 9922 Loans and advances to banks ............................................................................................................... 10123 Loans and advances to customers ....................................................................................................... 10224 held-to-maturity investments ............................................................................................................. 10425 Property and equipment ....................................................................................................................... 10526 Investment property ............................................................................................................................. 106

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27 Intangible assets.................................................................................................................................... 10628 Current income tax assets and liabilities ............................................................................................ 107

28.1 Income tax - assets .................................................................................................................... 10728.2 Income tax - liabilities ............................................................................................................... 10728.3 Deferred taxes ............................................................................................................................ 107

29 Other assets .......................................................................................................................................... 10830 Deposits from Central Bank ................................................................................................................. 10931 Financial liabilities held for trading .................................................................................................... 10932 Financial liabilities designated at fair value through profit and loss ................................................ 11033 Financial liabilities at amortised cost – deposits from banks ........................................................... 11034 Financial liabilities at amortised cost – due to customers ................................................................. 11135 Financial liabilities at amortised cost – borrowings from banks ...................................................... 11236 Debt securities in issue ......................................................................................................................... 11237 Subordinated liabilities ......................................................................................................................... 11338 Financial liabilities associated to transfer assets ............................................................................... 11439 Provisions .............................................................................................................................................. 11440 Other liabilities ..................................................................................................................................... 11541 Share capital .......................................................................................................................................... 115

41.1 Subscribed capital ...................................................................................................................... 11541.2 Treasury shares bought ............................................................................................................. 11641.3 Share premium ........................................................................................................................... 11641.4 Profit reserves ........................................................................................................................... 11641.5 Revaluation reserve ....................................................................................................................117

42 Dividend per share .................................................................................................................................11743 Contingent liabilities and commitments .............................................................................................11744 Cash and cash equivalents ................................................................................................................... 11845 Related party transactions ................................................................................................................... 119

45.1 Claims and commitments and contingent liabilities .............................................................. 11945.2 Gross amounts paid out ............................................................................................................ 12045.3 Gross amounts paid out to Management Board and Supervisory Board members .............. 120

46 Expenditure from subordinated liabilities ......................................................................................... 12047 Average complement of employees in 2009 and at 31 December 2009 ............................................ 12148 Information on the results of organizational units abroad .............................................................. 12149 Post reporting date events ................................................................................................................... 121

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From the business point of view 2009 will still be charac-terised as a crisis ridden year. The crisis began in the second half of 2007 in the international interbank market and later on expanded to the financial markets in general. After that it spread to the real economy and now we are discussing the crisis of the public sector or public finance.

In spite of the crisis continuing, at the end of 2009 the short-term indicators showed a gradually improving economy as presented by data from the Institute of Macroeconomic Analysis and Development.

At the Bank we tried to mitigate the consequences of the crisis by gradually increasing the share of deposits from the non-banking sector in the overall structure of funding from 53% to 57% of all liabilities; with this measure we were successful in compensating for the decrease in fund-ing from abroad.

we also raised loans totalling EUR 109 million from the SID Bank, which proved an adequate alternative allowing for replacement of foreign funding which matured. The sec-ond half of the year saw the conditions in the interbank markets improve temporarily, which is why we were able to raise a three year Schuldschein facility from Deutsche Bank in the amount of EUR 51.5 million. Also in 2009 we were actively involved in negotiations to obtain a credit line from the European Investment Bank amounting to EUR 50 million maturing in 12 years. The agreement was signed in March 2010.

At the regular annual General Meeting of Shareholders the Bank obtained approval from its owners to abolish the provision on cumulative dividend payments to preferred stock holders, which resulted in an increase of the Bank’s core capital without additional capital having been paid-in.

we were also successful in offering subordinated bonds in an amount of EUR 12.1 million, which also had a positive impact on the amount of capital and the Bank’s capital ad-equacy ratio.

with an active approach to the implementation of measures aimed at the rationalisation of costs we were able to decrease administrative costs by 5.0% in 2009 as compared to 2008. The business network was also reorganised with increased intensity, leading to the closure of three smaller business units with a new business unit having been opened in Mari-bor on September 1, 2009. we are planning to open a new business unit in Koper in 2010.

Banka Celje, a bank with 145 years of tradition, again ob-tained a confirmation of its good international rating based on its operations in 2009 from the Fitch Ratings agency, being one of the three leading global rating institutions. Preserving its international rating in the harsh economic climate is seen as a big success. It indicates business excel-lence, trust and the good name that the Bank enjoys at home and abroad. According to the analytics the rating also attests to the imporatnce of the Bank’s position in Slovenia, its good capital adequacy and cost efficiency.

Among the Bank’s strategic goals, representing key elements of its continued development, we put safety of operations first, followed by the development of new services, a solid capital base and profitability.

During the coming three-year period, based on the cur-rent forecasts of a gradual revival in international economic activity, we are planning to achieve a 5% annual nominal growth of the volume of operations. In connection with funding the Bank’s activities will be aimed at obtaining deposits with adequate maturities in the domestic market, while actively approaching the attainment of other long-term funding sources. we are planning to achieve growth in loans from foreign banks and we will be issuing long-term bonds.

Dear shareholders, business partners and employees, let me, on behalf of the entire Management Board, thank you all for the good cooperation and the trust you have shown us.

Dušan Drofenik, M.Sc.PresidentoftheManagementBoard

A wORD By ThE PRESIDENT OF ThE MANAGEMENT BOARD OF BANKA CELJE

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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 Associa-tion 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 comprises 7 members with Alojz Jamnik as President, Tadej Tufek, M.Sc. as Vice President and the other members being: Borut Stanič, Ivan Ferme, Matej Narat, M.Sc., Štefan Špilak, Ph.D. and Bojan Šrot. All were elected at the General Meeting of Sharehold-ers on May 16, 2007 for a term of 4 years. The members of the Supervisory Board 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 2009 the Supervisory Board met at six regular meet-ings, dealing with 51 items on the agenda and at two cor-respondent meetings, where it addressed six agenda items. It received all the data and information it needed to regu-larly 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.

The Bank’s business policies and plan for 2009 as well as the development plan for the 2009 to 2011 period were already

reviewed by the Supervisory Board in October of 2008 and adopted in December of the same year. The first assignment in the current business year pertained to the proposal on the use of the Bank’s net profit for 2008.

At its 14th regular meeting the Supervisory Board also re-viewed the Bank’s annual report for 2008, the report on the operations of the Internal Audit Service for the period from July to December 2008 as well as its report on 2008. It was also made aware of the letter of the auditors to the Management and Supervisory Boards after the conclusion of the 2008 audit and it approved the audited Annual Report 2008 as well as the Bank’s Statement on Compliance with the Corporate Governance Code. Additionally, it reviewed the entire documentation relating to the 24th Annual Regu-lar Meeting of Shareholders. It also adopted the report to the Meeting of Shareholders on it own operations during 2008.

During the year the Supervisory Board monitored the Bank’s operations by reviewing reports for the period from the start of the year to April, to September and to October. The Management Board reported to it on the Bank’s liquidity situations and on the denationalisation claim. The Internal Audit Service reported to it on its own operations 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 7 times. It also gave consent to the membership of the Bank’s Management Board in various supervisory boards and other committees. At its 15th Regu-lar meeting on June 24, 2009 the Supervisory Board was made aware of the termination of the term of office related to Viktorija Svet, Member of the Management Board and it nominated Aleksander Vozel, M.Sc., as the new Member of the Management Board at its 16th Regular meeting on September 23, 2009. Mr. Vozel also obtained consent by the Bank of Slovenia and started his term on January 1, 2010.

In the area of development policies the Supervisory Board put the Bank’s business policies and plan for 2010 on the agenda as well as the Bank’s development plan for the 2010 to 2012 period, the strategic plan of the Internal Audit for the 2010 to 2012 period and its 2010 annual operations program, the strategy and policies on assuming and man-

REPORT OF ThE SUPERVISORy BOARD OF BANKA CELJE

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aging risk and the risk profile as well as the Bank’s trading strategy.

Based on the scope of activities conducted during 2009 and due to the fact that the Supervisory Board operated in full composition, the President and the members of the Super-visory Board assess the work of the Supervisory Board in 2009 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 six times in 2009, being the first year of its operation. It adopted the plan of operations in 2009 and reviewed the Bank’s plans as well as the most significant strategies and policies pertaining to risk management. 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 cred-it 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.

Annual Report 2009

In line with the legislative requirements the Bank prepared the unconsolidated and the consolidated annual reports for 2009. The consolidated report includes the fully consoli-dated subsidiary company Posest, d.o.o., Celje, where 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 engineer-ing, property leasing, real estate and equipment appraisals

and the supervision 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 2009 the regular 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 and confirmed the content as being in line with the Bank’s business report. It also issued a special 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 unconsolidated and consolidated annual reports for 2009 at its 20th Regular meeting on April 21, 2010, 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 operated well during the concluded business year, which they see as the 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 JamnikPresidentoftheSupervisoryBoard

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– amounts in thousands of EUR2009 2008 2007 Index

Balance Balance Balance 09/08 08/07

1. Statement of financial position (on 31 December)Total assets 2,560,233 2,415,041 2,307,197 106 105Total deposits from the non-banking sector 1,453,436 1,288,456 1,129,695 113 114– legal and other entities 750,181 623,569 516,740 120 121– private individuals 703,255 664,887 612,955 106 108Total amount of loans to the non-banking sector 1,700,739 1,596,314 1,422,196 107 112– legal and other entities 1,394,652 1,305,421 1,134,763 107 115– private individuals 306,087 290,893 287,433 105 101Total equity 199,391 189,421 189,079 105 100Impairment of financial assets at cost and provisions 88,892 70,011 63,721 127 110Commitments and contingent liabilities 455,688 614,908 606,868 74 101

2. Income statement (from 1 January to 31 December)Net interest and similar income 53,505 49,764 47,572 108 105Net non-interest income 23,462 27,506 32,698 85 84Staff costs, general and administrative costs 36,818 38,753 39,710 95 98Depreciation and amortisation 3,914 4,391 4,928 89 89Impairment and provisions 27,910 19,566 8,561 143 229Profit before income tax 8,325 14,560 27,071 57 54Income tax expense 1,773 2,988 5,896 59 51

3. Number of employees (on 31 December) 576 602 611 96 99

4. SharesNumber of shareholders 703 697 646 101 108Number of shares 508,629 508,629 422,123 100 120Nominal share value (in EUR) 33 33 33 100 100Book value per share (in EUR) 391 371 447 105 83

5. Ratios in % *CapitalCapital 299,729 283,591 246,373 106 115Capital adequacy 15.36 15.31 14.20Asset qualityImpairment charges on financial assets, measured at amortised cost, and provisions for guarantees and commitments / classified balance and off-balance sheet asset items 3.80 2.30 2.30ProfitabilityInterest margin 2.15 2.08 2.23Financial mediation margin 3.09 3.24 3.65Return on assets - before tax 0.33 0.61 1.27Return on equity - before tax 4.23 8.10 15.15Return on equity - after tax 3.33 6.44 11.85Operational costsOperational expenses / average assets 1.64 1.79 2.08LiquidityAverage liquid assets / average short-term deposits from non-banking sector 40.65 44.75 48.35Average liquid assets / average assets 19.25 20.59 23.09

* The indicators are prescribed by Article 20 of the Decision on books of account and financial reports of banks and savings banks, Official Gazette of the Republic of Slovenia No 28/07 from 29 March 2007, supplementation of Official Gazette of the Republic of Slovenia No 119/07, 102/08 and 21/09 from 20 March 2009 and the Methodology for calculating indicators, Official Gazette of the Republic of Slovenia No 28/09 from 29 March 2007 with amendments in Official Gazette of the Republic of Slovenia No 21/09 from 20 March 2009.

I CONSOLIDATED BUSINESS REPORT1 hIGhLIGhTS

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2 PRESENTATION OF ThE BANK AND ITS SUBSIDIARy COMPANy

Banka Celje, d.d., (the Bank) is an independent bank, estab-lished 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 officeThe Bank's head office is located in Celje, at Vodnikova 2.

The subsidiary company’s head officeThe 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 of “e-money” issue services; – issuing and managing of other payment instruments (such as travellers cheques and bank notes);

– issuing of guarantees and other commitments; – trading for own account or for the account of customers in: foreign exchange, including currency exchange transac-tions, 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 and offers advisory services in the re-covery of bad debt.

Subsidiary company scope of operationsThe company is registered to perform a number of different types of activities, with its 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 inves-tors.

Bodies of the Bank: – General Meeting of Shareholders, – Supervisory Board, – Management Board.

The General Meeting of Shareholders is the senior body, enabling shareholders to exercise their rights in the affairs of the Bank. The Supervisory Board is comprised of seven members that are nominated and recalled by the General Meeting of Shareholders. The Management Board consists of three members. The President and the two other mem-bers are nominated and relieved of duty by the Supervisory Board.

Bodies of the subsidiary companyThe Posest, d.o.o., Celje subsidiary company is managed by the founder through the competent body, being the Bank's Management Board.

Bank's historyThe 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 independ-ently 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 transformed it into a branch, now called Podružnica hmezad (hmezad branch). In 1999 the Bank entered into a ''Strategic Partnership and Business Co-operation Agree-ment'' with Nova Ljubljanska banka, d.d., thus becoming an associate member of the NLB Banking Group.

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

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3 REPORT ON ThE OPERATIONS OF ThE BANK AND ITS SUBSIDIARy COMPANy IN 2009

3.1 GENERAL ECONOMIC ENVIRONMENT

The international economic and financial crises continued in 2009. They had a strong impact on the deterioration of the state of public finances in most of the countries in the Eu-ropean Union, with the gross domestic product of the euro zone falling by 4.0% in the third quarter of 2009. End 2009 certain signs of recovery were visible in the global economy, however these differ a good deal according to country or region. The global recovery was started by Asian develop-ing countries, while developed countries are still exhibiting few signs of domestic demand, which would be able to fuel economic growth without the need for the implementation of additional fiscal and monetary measures.

In Slovenia the international crisis significantly decreased the level of economic activity. In 2009 GDP decreased by 7.8% in real terms as compared with 2008, being almost double the euro zone average and a reflection of the eco-nomic crisis. The final quarter of 2009 saw a 0.1% growth in GDP, with the relatively weak improvement in economic activity in the final quarter indicating that Slovene eco-nomic recovery is still unstable and gradual. All of the major expenditure categories of the domestic product decreased in real terms. Gross investments in property and equipment decreased the most. Import and export went down also, export due to a drop in foreign demand and import due to a contraction in domestic demand. The balance of payments positively impacted economic growth. Final consumption was 0.3% less than in 2008, whereby government final consumption expenditure remained the only expenditure category retaining positive growth with a 3.1% increase. In relation to the structure of production within the gross domestic product 2009 saw the largest decrease in added value in processing activities and construction, while added value grew in financial mediation, public administration, education and healthcare.

The labour market also saw unfavourable conditions con-tinue in 2009. The registered unemployment rate increased from 7.0% to 10.3% according to data from December 2009. It increased in all regions in Slovenia, except in the Savinjska and Zasavska regions as well as in southeast Slovenia. It was highest in the Pomurje region. The number of unemployed persons is persistently increasing since September 2008 increasing by 30,433 people in 2009 or by 45.9% to 96,672 people. The shares of persons who lost their jobs due to busi-ness reasons or bankruptcy are on the increase.

The public finance deficit amounted to about 5.7% of the gross domestic product during the final 12 months leading up to November 2009. Income decreased by 5.1% due to the contraction of economic activity and the subsequently lower

tax payments. Expenses increased by 8.3% during the first half of the year mainly due to the ebalancing of public sector salaries, with expenses strengthening due to subsidies and unemployment help during the second half. In line with the policies of the European Union in connection with decreas-ing the excess deficit, the government adopted a stability program in January 2010, which anticipates a reduction in the government deficit under 3% by the end of 2013.

The conditions in the financial markets in 2009 deterio-rated further as well. Due to further contraction of funding from abroad, banks adjusted their funding methods in 2009, ensuring mainly short-term funding with the restructur-ing. They decreased their indebtedness with foreign com-mercial banks, while increasing liabilities to the domestic non-banking sector. They also borrowed heavily from the European Central Bank, which offered banks 12-month funding through three separate auctions. Subsequently, banks started granting mainly short-term loans. The low corporate lending volume was predominantly the result of decreased creditworthiness on the demand side due to the relatively high level of debt that companies are carrying. Banks reacted to the high level of credit risk by stricter lending condition, usually accompanied with the demand for a higher quality of collateral.

Start of 2009 saw the sharp drop in the value of the Slovene stock market index, the SBI20 seize, with volatility increas-ing at the same time. At the annual level the index increased by 10.4%. The value of mutual fund assets started increas-ing in April 2009 after ten straight months of going down. Net inflows were positive again in 2009. Even though the latter months saw a restructuring on investments by the more conservative investors moving from mixed to bond funds, the structure still showed more assets invested in riskier funds.

2009 also saw the Slovene annual inflation rate among the highest in the euro zone even though the level was relatively low. On average the consumer price index increased by 0.9% in the euro zone, while the increase in Slovenia reached 2.1%, measured using the harmonized consumer price index used in the calculation of inflation rates in other members of the European Monetary Union. A higher growth of prices was recorded in Greece and in Luxembourg, while prices decreased the most in Ireland, by 2.6%. The entire euro zone, including Slovenia, saw year-on-year inflation rates decrease during the first half of the year and was even negative during the summer months due to weak demand. Inflation in 2009 was significantly impacted by tax changes. The largest fiscal contribution to inflation was actually recorded in Slovenia, where increased excise duties drove inflation 1.3 percentage points higher according to the most recently available data.

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3.2 BUSINESS POLICIES OF ThE BANK AND ITS SUBSIDIARy COMPANy

The Bank’s Supervisory Board confirmed the development plan for the 2010–2012 period as well as the business poli-cies and the Bank’s financial plan for 2010, whereby it con-sented to the business policy and the financial plan for 2010 to be re-evaluated, should a change in the conditions in the domestic or international financial environment occur.

The Bank prepares the development plan for the coming three-year period supplementing it annually and prolonging it by an additional year. In the event of significant macro-economic 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 special emphasis on safety of operations, the next important thing is business cooperation with Nova Ljubljanska banka d.d., the development of new services and profitability.

Strategic policies have been taken into account in the prepa-ration of strategic objectives. In the Bank’s view these objec-tives, due to their long-term nature, include the setting up of an efficient integrated IT support system, improvements in operational organization pertaining to the orientation toward customers and responsiveness to their needs, in-creasing the volume of operations and an improvement in service quality, the optimal management of all banking risks, income effectiveness and the rationalization of opera-tions as well as professional competence.

In connection with the development of an efficient infor-mation technology (IT) support system, the next three year period will see the Bank ensuring a greater level of IT support integration in all areas of banking operations. The data warehouse development project will be completed and continuously upgraded. within the framework of the development of the data warehouse, the Bank’s priority will be the preparation of models for extended reporting to the European Central Bank in line with the requirements set forth by the regulator and the completion of the process of feeding data from the income statement into the warehouse.

The Bank will continue to improve the level of internal ef-ficiency with an adequate organization of operations. It will ensure the consideration of all the provisions set forth by the minimum standards related to trading operations and it will conclude the process of transferring and storage of its electronic archive with an external provider. In retail, the Bank will consider closing some of the less profitable business units and look for alternative, more frequented locations. In 2010 it will perform all of the necessary activi-ties associated with the opening of a business unit in Koper.

A 5% nominal annual growth rate in the volume of opera-tions has been planned for the coming three-year period, taking into consideration the current forecasts of a slow recovery in the world’s markets. In relation to funding ac-

tivities will turn toward acquiring deposits in the domestic market with suitable maturities. The bank will work on ac-quiring other long-term funding sources intensively. It plans growth in the volume of loans from foreign banks as well as issuing long-term bonds. Borrowing from the European Central Bank will gradually be reduced in accordance with the successfulness of acquiring other long-term funding. In investments the largest growth is expected in the area of lending to the non-banking sector. Lending to corporates will see the Bank put special emphasis on finding new clients and maintaining the level of quality in investments from borrower rating point of view, the attainment of planned pricing levels and adequate collateral. In retail lending a moderate growth is planned. The Bank estimates that the consequences of the financial and economic crisis will re-main visible in 2010, mainly in the decreasing of purchasing power, increased unemployment and lower salaries. Securi-ties investments will remain at the level from 2009, whereby investment activity in the banking book will be directed at reinvesting matured debt security investments in govern-ment and bank debt securities with a state guarantee and a high credit rating.

In the coming three-year period the Bank’s development activity in relation to risk will continue, especially in con-nection with the improvement of methodologies relating to the calculation of its internal capital, which is required by the second pillar of the new European Capital Accord and which will enable the Bank to maintain an adequate level of the required internal capital in line with the adopted strate-gies on assuming and managing risk. This entire time, the Bank will also be implementing the required measures to preserve the capital adequacy ratio at a minimum of 10% and the Tier 1 capital ratio above 7.5%. Maintaining strong capital remains one of the Banks key objectives.

In addition to ensuring stable and safe operations, the com-ing three years the Bank will work on maintaining profit-ability, while taking into consideration the conditions in the financial markets. The achieved pre-tax result will en-sure its shareholders receive an adequate return on average capital. The interest margin will remain at the level from 2009, however the net interest income will be higher than in 2009 due to an increased volume of operations. In spite of continued uncertainty in connection with financial mar-kets the Bank will need to complete some of its important projects in 2010, which is why it will carefully monitor costs and preserve their total volume at the level from 2009. 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 continuously decrease 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 consideration

15

shall be given to the identification and development of key personnel, which it deems important from the perspective of knowledge management.

The Posest, d.o.o., Celje subsidiary company prepared its development plan for the 2008 to 2012 period in the second half of 2007, thus establishing the expansion in the volume of operations, especially in the area of leasing and real estate engineering.

3.3 ThE CONSOLIDATED FINANCIAL RESULT

The Group concluded 2009, a year still plagued by extremely unstable operating conditions, with a gross profit prior to the recognition of impairment charges and provisions amounting to EUR 36,235 thousand. The attained result was 6% higher than in 2008. The pre-tax profit amounted to EUR 8,325 thousand and was 43% lower than the gross profit in 2008. Data shows that the decrease in gross profit was mainly the result of the need for additional impairment charges and provisioning.

The return on average equity prior to tax amounted to 4.23%, with the share of costs in net income representing 52.92%.

The net profit amounted to EUR 6,552 thousand, with half of the Bank’s net profit already having been allocated to other profit reserves on the basis of a decision by the Supervisory Board at the end of 2009.

Analysis of the Group’s net income and expenses in 2009:

The Group made EUR 53,505 thousand in net interest and similar income in 2009, being 8% or EUR 3,741 thousand more than in 2008. Interest income fell by 14%, interest expenses by 26%. The interest margin increased from 2.08% to 2.15% in 2009.

Dividend income reached EUR 722 thousand. It trailed the 2008 figure by 44%. In 2009 the Bank made 64% of all divi-dend income from investments in held for trading invest-

– amounts in thousands of EURNet INcome aND expeNSeS Realization 2009 Realization 2008 change Index

1 2 3=1-2 4=1:2Net interest and similar income 53,505 49,764 3,741 108Dividend income 722 1,290 (568) 56Net fee and commission income 16,743 16,857 (114) 99Net gains from financial assets and liabilities not classified as fair value through profit or loss 1,345 8,640 (7,295) 16Net gains / losses from financial assets and liabilities held for trading 4,230 (2,628) 6,858 (161)Net losses from financial assets and liabilities designated at fair value through profit or loss (705) (3,562) 2,857 20Foreign exchange translation net gains 314 4,910 (4,596) 6Net gains from derecognition of assets other than non-current assets held for sale 29 58 (29) 50Net other operating income 784 1,941 (1,157) 40Administrative expenses (36,818) (38,753) 1,935 95Depreciation and amortisation (3,914) (4,391) 477 89Provisions 235 (4,003) 4,238 (6)Impairment charges (28,145) (15,563) (12,582) 181profit before income tax 8,325 14,560 (6,235) 57Income tax expense (1,773) (2,988) 1,215 59profit for the year 6,552 11,572 (5,020) 57

ments, with the other 36% based on dividend income from available-for-sale securities.

Net fee and commission income from services rendered decreased by 1% reaching EUR 16,743 thousand in 2009. Fee and commission income was 6% lower, while fee and commission expenses fell by 34%. The services accounting for the majority of the Group’s non-interest income from fees and commissions in 2009 include payments and card

16

operations. Most of the expenses from banking services also came from card operations for the year. Lower fee and commission income resulted mainly from a decreased vo-lume of international operations by domestic corporates and subsequently a lower income from international payments as well as the loss of income from card operations.

Net gains from financial assets and liabilities not classified as fair value through profit or loss amounted to EUR 1,345 thousand, being significantly lower than in 2008. In trad-ing equity and debt securities the Bank made a profit in the amount of EUR 1,204 thousand. Net profit from write-offs reached EUR 141 thousand.

Financial assets and liabilities held for trading resulted in a profit of EUR 4,230 thousand, while the item produced a loss in 2008 due to the fall in fair values.

Trading in equity and debt securities produced a minor loss of EUR 53 thousand, while profit from trading in derivatives and forwards amounted to EUR 3,910 thousand. The foreign currency trading activities also resulted in profit reaching EUR 373 thousand.

with regard to financial assets and liabilities designated at fair value through profit or loss, the Bank made a loss amounting to EUR 705 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 1,391 thousand due to positive valuation of bonds purchased, while the valuation of own securities issued resulted in a loss of EUR 2,096 thousand.

Foreign exchange translation net gains amounted to EUR 314 thousand. The profit made is the result of a long foreign currency position, predominantly the Swiss franc and the US dollar and the fluctuations in the rates of these curren-cies as compared to the euro.

Net gains from derecognition of assets other than non-current assets held for sale reached EUR 29 thousand in 2009, with the profit attained in 2008 amounting to EUR 58 thousand. The profit the Group made in 2009 is mainly the result of sales of investment property held by the subsidiary.

Net other operating income reached EUR 784 thousand in 2009. Income came in at EUR 1,323 thousand and expenses amounted to EUR 539 thousand. The Group made most of the income from the sale of goods and services through its subsidiary and from office space and POS terminal leases. The major part of the expenses for the year came from con-tributions to humanitarian organizations and member-ships.

Administrative expenses include the cost of labour as well as general and administrative costs. In 2009 these accounted for EUR 36,818 thousand. Labour costs amounted to EUR 21,407 thousand, while general and administrative costs came in at EUR 15,411 thousand, both categories being 5% lower than in 2008.

Depreciation and amortization amounted to EUR 3,914 thousand, an 11% decrease as compared to 2008.

The Group’s cost efficiency, measured through the share of operating costs in the Bank’s assets improved from 1.79% to 1.64% in 2009. The cost / income ratio – CIR amounted to 52.92%, whereas in 2008 it stood at 55.84%.

In 2009 provisions were reversed in an amount reaching EUR 235 thousand, having been formed in a total of EUR 4,003 thousand in 2008, mainly due to legally unresolved matters based on transactions from the denationalization proceedings. Additionally, in 2009 the Group provisioned EUR 162 thousand for denationalization proceedings, EUR 252 thousand for liabilities toward employees and EUR 28 thousand for the National housing Saving Scheme.

Provisions for commitments and contingent liabilities were derecognized in the amount of EUR 677 thousand.

Impairment charges due to lending and receivables amount-ed to EUR 28,145 thousand and were 81% in comparison to 2008. The Group recognized impairment charges for securi-ties in an amount of EUR 7,772 thousand. The impairment charge due to credit risk amounted in total to EUR 20,373 thousand.

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3.4 ThE CONSOLIDATED FINANCIAL POSITION

End 2009 the consolidated total assets amounted to EUR 2,560,233 thousand. As compared to 2008 the figure increased by EUR 145,192 thousand or 6%, surpassing the annual plan by 1%.

Group’s assets according to individual items:

The Group’s most liquid assets decreased by 18% or EUR 8,804 thousand in 2009. Cash fell by 12% to EUR 11,814 thousand, with balances with the Central Bank dropping by EUR 35,648 thousand to EUR 28,426 thousand.

held for trading financial assets decreased by 20% to EUR 87,747 thousand, representing 4% of the Bank’s as-sets. Equity investments increased by 38% to EUR 35,823 thousand, while investments in bonds and certificates of deposit decreased; bonds by 12% to EUR 15,958 thousand and certificates of deposit by 54% to EUR 19,837 thousand. Receivables from the valuation of derivatives fell by 25% due to reduced volume of operations and reached EUR 16,129 thousand at the end of 2009. Most of these receivables per-tain to forward agreements based on securities.

Investments in financial assets designated at fair value through profit or loss, amounted to EUR 18,437 thousand, having decreased by 37% in 2009. Decreased investments in addition to the larger volume of pledges resulted from se-curities maturing, while the revaluation of bonds to higher fair value positively impacted the amount of investments.

Investments in available-for-sale financial assets increased by 11% to EUR 234,067 thousand in 2009. Investments in equity securities and mutual funds grew by 76% or by EUR 24,061 thousand to EUR 55,904 thousand, with the increase predominantly pertaining to the repayment of a loan by selling pledged securities. Investments in debt se-

– amounts in thousands of EURGRoup'S aSSetS 2009 Str. 2008 Str. change Index

1 2 3 4 5=1-3 6=1:3Cash and balances with Central Bank 40,240 2 49,044 2 (8,804) 82Financial assets held for trading 87,747 4 109,052 5 (21,305) 80Financial assets designated at fair value through profit or loss 18,437 1 29,472 2 (11,035) 63Avaliable-for-sale financial assets 234,067 9 210,468 9 23,599 111Loans and advances 1,789,240 70 1,642,225 68 147,015 109– loans and advances to banks 88,501 4 45,911 2 42,590 193– loans and advances to customers 1,700,739 66 1,596,314 66 104,425 107held-to-maturity investments 213,959 8 193,761 8 20,198 110Assets pledged 135,672 5 128,884 5 6,788 105Property and equipment 20,629 1 23,896 1 (3,267) 86Investment property 306 – 8,591 – (8,285) 4Intangible assets 5,342 – 4,116 – 1,226 130Income tax assets 4,622 – 3,566 – 1,056 130Other assets 9,972 – 11,966 – (1,994) 83total 2,560,233 100 2,415,041 100 145,192 106

curities remained at the level from 2008, amounting to EUR 178,163 thousand.

Loans and advances to banks increased by 93% to EUR 88,501 thousand. At sight deposits increased by 24% due to over-night deposits, while short-term loans increased by 163%, conversely long-term loans decreased by 68%.

Loans and advances to customers increased by 7% in 2009, reaching EUR 1,700,739 thousand by the end of the year. with a 66% share these represent the strongest category in the Group’s investment operations. Loans to corporates, comprising loans to companies and loans to private entre-preneurs, increased by 7% reaching EUR 1,394,320 thou-sand, while retail loans grew by 5% to reach EUR 306,087 thousand.

held-to-maturity investments increased from EUR 196,761 thousand to EUR 213,959 thousand. The Group includes securities, which it anticipates it will be able to hold until final maturity, into this category. In addition to long-term bonds issued by prime issuers this item also includes the Republic of Slovenia treasury bills.

Assets pledged increased by 5% to EUR 135,672 thousand in 2009 and were pledged for the acquisition of funding from the European Central Bank. The pledge includes gov-ernment bonds, recognised at fair value through profit or loss amounting to EUR 11,342 thousand, available-for-sale

18

government and bank bonds totalling EUR 23,094 thousand and held-to-maturity government and bank bonds in an amount of EUR 101,236 thousand.

Investments in property and equipment decreased by 14% to EUR 20,629 thousand, with investments in property de-creasing by 2% on account of sales and depreciation and investments in equipment decreasing by 18%. Qualifying assets amounted to EUR 1,426 thousand in 2008 and pertained to the construction of a production facility by the subsidiary, which was given over to a financial lease in its entirety in 2009. Subsequently, the amount was transferred to loans and advances to customers.

Investment property decreased from EUR 8,591 thousand to EUR 306 thousand in 2009 and pertains to the current value of property and buildings, purchased to be leased by the Bank’s subsidiary. The decrease in value is the result of a financial lease agreement pertaining to the production facility completed in 2009 and the transfer of investments to loans and advances to customers.

Investments in intangible assets increased by 30% to EUR 5,342 thousand. Long-term property rights amounted to EUR 4,974 thousand, while intangible long-term qualifying assets amounted to EUR 368 thousand. The increase resulted from investments in the construction of a data warehouse and the purchase of computer software.

Receivables from corporate income tax amounted to EUR 4,622 thousand end 2009, pertaining to corporate income tax overpaid in the amount of EUR 1,862 thousand while EUR 2,760 thousand was applicable to long-term deferred tax receivables. End 2008 tax receivables amounting to EUR 3,566 thousand pertained to long-term differed tax receivables exclusively.

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

– amounts in thousands of EURGRoup’S lIaBIlItIeS 2009 Str. 2008 Str. change Index

1 2 3 4 5=1-3 6=1:3Deposits from Central Bank 130,486 5 90,199 4 40,287 145Financial liabilities held for trading 6,051 – 10,938 – (4,887) 55Financial liabilities designated at fair value through profit or loss 39,851 1 37,719 2 2,132 106Financial liabilities at amortised cost 2,159,899 85 2,026,004 83 133,895 107– deposits and borrowings from banks 476,055 19 554,295 23 (78,240) 86– due to customers 1,453,436 57 1,288,456 53 164,980 113– debt securities in issue 134,774 5 100,125 4 34,649 135– subordinated liabilities 95,634 4 83,128 3 12,506 115Financial liabilities associated to transfer assets – – 30,991 1 (30,991) –Provisions 13,981 1 15,077 1 (1,096) 93Tax liabilities – – 1,198 – (1,198) –Other liabilities 10,574 – 13,494 1 (2,920) 78total lIaBIlItIeS 2,360,842 92 2,225,620 92 135,222 106

Share capital 16,980 1 16,980 1 – 100Share premium 51,542 2 51,542 2 – 100Revaluation reserve 4,660 – (3,767) – 8,427 (124)Profit reserves 123,074 5 116,550 5 6,524 106Treasury shares (31) – (31) – – 100Profit for the year 3,166 – 8,147 – (4,981) 39total eQuItY 199,391 8 189,421 8 9,970 105total lIaBIlItIeS aND eQuItY 2,560,233 100 2,415,041 100 145,192 106

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Due to continued lack of trust in the financial markets in 2009, reflected in unwillingness to lend, the Group obtained the major part of its financing from the European Central Bank. Loans, taken from the European Central Bank, in-creased by 45% or EUR 40,287 thousand in 2009, totalling EUR 130,486 thousand at the end of the year.

held for trading financial liabilities decreased by 45% and amounted to EUR 6,051 thousand end 2008. These include liabilities from the valuation of derivatives. The decrease is mainly the result of a reduced volume of transactions with derivatives.

Financial liabilities at fair value through profit or loss in-creased by 6% to record EUR 39,851 thousand in 2009. This item includes subordinated bonds issued in 2007 and ma-turing in 2017 and certificates of deposit maturing in 2012, which the Bank includes in the capital requirement and the capital adequacy ratio calculations in the allowed amount.

Financial liabilities at amortized cost increased by 7% compared to 2008, representing 85% of the Bank’s total liabilities.

Deposits and borrowings from banks dropped by 14% in 2009, amounting to EUR 476,055 thousand. Even though their share in the structure of liabilities decreased from 23% to 19%, the liabilities to banks still represent the second most important funding category. In spite of the measures taken by central banks all over the world, banks remained unwilling to lend in 2009, especially long-term funds. Con-sequently, the loans from banks decreased by 15% to EUR 419,445 thousand, 41% or EUR 240,464 thousand of which was represented by loans from foreign banks. Deposits from banks decreased by 6% to EUR 56,610 thousand in 2009.

The due to customers item increased by 13% or EUR 164,980 thousand, coming up to EUR 1,453,436 thousand at the end of 2009. Liabilities to corporates increased by 20% to reach EUR 750,181 thousand, while liabilities to retail increased by 6% reaching EUR 703,255 thousand. In line with the business policies long-term deposits increased most in val-ue, by EUR 222,523 thousand, amounting to EUR 345,027 thousand end 2009. At sight deposits were 7% higher, while short-term deposits, normally representing 50% of all de-posits and loans from customers, fell by 10%.

Liabilities from debt securities in issue include liabilities from plain vanilla bonds and certificates of deposit. On the basis of new certificates of deposit that were issued these increased by 35% to reach EUR 134,774 thousand.

Subordinated liabilities increased by 15% amounting to EUR 95,634 thousand at end 2009. The Group namely issued a new subordinated bond in a total of EUR 12,147 thousand. The Bank includes subordinated bonds into the calculation of capital requirements and the capital adequacy ratio in the allowed amount.

Financial liabilities associated to transfer assets, include interbank short-term repo transactions. End 2008 saw li-abilities from interbank repo transactions amount to EUR 30,991 thousand, from April 2009 onward however the Group no longer exhibited any liabilities from interbank repo transactions.

End 2009 the Group formed provisions amounting to a total of EUR 13,981 thousand. Compared with 2008 provisioning went down 7% or EUR 1,096 thousand. Provisions for the denationalization proceedings decreased by EUR 56 thou-sand, whereby additional provisions in the amount of EUR 162 thousand were formed. The Bank transferred existing provisions in the amount of EUR 218 thousand to other li-abilities for payment on the basis of a court order. Provisions toward employees decreased by EUR 110 thousand, while provisions for commitments and contingent liabilities were reversed in the amount of EUR 677 thousand as well as the provisions from the National housing Savings Scheme in the amount of EUR 252 thousand.

Corporate income tax liabilities were not recorded in 2009, they however amounted to EUR 1,198 thousand in 2008 pertaining to the liability for the payment of corporate in-come tax.

Group capital increased by EUR 9,970 thousand or 5% in 2009 to amount to EUR 199,391 thousand in total. The increase was positively impacted by the revaluation of available-for-sale financial assets to a higher fair value, the difference between net profit for the current year and the dividend payment for 2008 also had a positive effect.

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3.5 AN OVERVIEw OF ThE OPERATIONS OF ThE BANK AND ITS SUBSIDIARy COMPANy

3.5.1 Credit operationsThe Group’s total credit operations volume increased by 9%. Short-term loans increased by 3%, with long-term loans increasing by 15%. The share of long-term loans increased to 53%, while the loan structure exhibited equal amounts of short and long-term loans at the end of 2008.

According to the currency structure, domestic currency loans are prevalent. The share of foreign currency loans decreased additionally in 2009 and only amounted to 5% at the end of the year.

– amounts in thousands of EURloaNS 2009 Str. 2008 Str. change Index

1 2 3 4 5=1-3 6=1:3Loans to banks 88,501 5 45,911 3 42,590 193Loans to non-banking sector 1,394,652 78 1,305,421 79 89,231 107Retail loans 306,087 17 290,893 17 15,194 105total loans according to borrower 1,789,240 100 1,642,225 100 147,015 109

loans according to maturity 1,789,240 100 1,642,225 100 147,015 109Short-term loans 839,290 47 816,125 50 23,165 103Long-term loans 949,950 53 826,100 50 123,850 115

loans according to currency 1,789,240 100 1,642,225 100 147,015 109Domestic currency 1,708,124 95 1,541,275 94 166,849 111Foreign currency 81,116 5 100,950 6 (19,834) 80

Loans to banks increased by 93% and amounted to EUR 88,501 thousand at the end of 2009. At sight deposits in-creased by 24% to EUR 13,788 thousand due to an increase in over-night deposits. Short-term loans to commercial banks increased by 163% from EUR 27,486 thousand to EUR 72,423 thousand. Short-term deposits with domestic banks maturing in less than 30 days increased most. Long-term loans to banks decreased by 68% and amounted to EUR 2,290 thousand at the end of 2009. Long-term loans to foreign banks went down also.

In loans to the non-banking sector the Group attained a 7% growth rate. End 2009 loans to the non-banking sector, comprising loans to corporates and private entrepreneurs, amounted to EUR 1,394,652 thousand. According to matu-rity better results were achieved in long-term lending, as it increased at a 20% pace or by EUR 114,639 thousand from EUR 578,379 thousand to EUR 639,018 thousand, thus in-creasing the share in total loans to the non-banking sector from 44% in 2008 to 50%. The short-term loans fell by 3% and amounted to EUR 701,634 thousand at the end of 2009. The currency structure of corporate loans shows that 96% is represented by domestic currency, which increased by 8% during the period of observation. Foreign currency loans decreased by 15%, with their structural share falling to 4%.

The first half of 2009 showed a marked drop in economic activity, with the second half starting to exhibit mild signs of levelling out. Companies from most sectors achieved much lower income than in 2008, with the exception being

companies in tourism and IT, especially the ones linked to budget users. The Bank in the Group adapted to the trend and started decreasing its exposure to corporates while in-creasing lending activities aimed at the public sector and the companies where the country is the majority stakeholder. The bank actively approached the acquisition of funding from SID Banka, which had proven an adequate alternative for the replacement of matured foreign funding.

Retail loans increased by 5% to EUR 306,087 in 2009. To promote retail lending the Group introduced a number of special offers, which received positive client responses. Short-term loans increased by 2% to EUR 51,445 thou-sand, with long-term loans increasing by 6%, reaching EUR 254,642 thousand at the end of 2009. According to currency, domestic currency loans remained strong with 92%, hav-ing increased in during the year from EUR 264,282 to EUR 282,744 or by 7%. Foreign currency loans decreased by 12% in 2009 amounting to EUR 23,343 thousand.

3.5.2 Deposit operationsIn addition to deposits and advances from banks and the non-banking sector the Group’s deposit operations also in-clude deposits from the central bank and financial liabilities related to financial assets not eligible for derecognition.

Deposit operations increased by 5% in 2009. Short-term deposits fell by 15%, with their share in the total deposits coming down from 72% to 58%. Long-term deposits in-creased by 55%.

21

According to the currency structure the domestic currency deposits came up by 6% and the foreign currency deposits went down by 53%. Domestic currency deposits represented 98% of the total deposit structure at the end of 2009.

– amounts in thousands of EURGRoup’S lIaBIlItIeS fRom DepoSItS aND loaNS

2009 Str. 2008 Str. change Index1 2 3 4 5=1-3 6=1:3

Deposits from Central Bank 130,486 6 90,199 5 40,287 145Financial liabilities associated to transfer assets – – 30,991 2 (30,991) –Deposits from banks 56,610 3 60,158 3 (3,548) 94Borrowings from banks 419,445 20 494,137 24 (74,692) 85Deposits from the non-banking sector 750,181 37 623,569 32 126,612 120Retail deposits 703,255 34 664,887 34 38,368 106total deposits 2,059,977 100 1,963,941 100 96,036 105

Deposits according to maturity 2,059,977 100 1,963,941 100 96,036 105Short-term loans 1,194,085 58 1,404,464 72 (210,379) 85Long-term loans 865,892 42 559,477 28 306,415 155

Deposits according to currency 2,059,977 100 1,963,941 100 96,036 105Domestic currency 2,037,901 99 1,916,568 98 121,333 106Foreign currency 22,076 1 47,373 2 (25,297) 47

Deposits from the Central Bank comprise loans, which the Bank in the Group raised from the European Central Bank on the basis of pledged securities. During the first half of the year it only took short-term loans, from June onward however the European Central Bank used three auctions to offer banks one year loans aimed at increasing liquidity in the financial system. The total volume of loans raised with the European Central Bank amounted to EUR 130,486 thou-sand at the end of 2009, with short-term loans accounting for EUR 20,051 thousand and one year loans totalling EUR 110,435 thousand. Liabilities to the European Central Bank thus increased by 45% in 2009 or by EUR 40,287 thousand.

Financial liabilities associated to transfer assets include short-term interbank repo transactions. Due to the dif-ficulty in attaining funding in the international interbank market, the Group decided to enter into interbank repo transactions in 2008, which amounted to EUR 30,991 thou-sand at the end of 2008. The Group did not enter into any such transaction in 2009.

Deposits from banks decreased by 6% to reach EUR 56,610 thousand in 2009, all of it being short-term. Domestic cur-rency deposits increased from EUR 45,161 thousand to EUR 55,448 thousand, representing 98% of all bank deposits end 2009. The most significant increase came from short-term deposits with maturities up to 1 year. Foreign currency de-posits decreased from EUR 14,997 thousand to EUR 1,162 thousand. Up to 1 year short-term deposits from foreign banks decreased.

Borrowings from banks decreased by 15% in 2009 or by EUR 74,692 thousand reaching EUR 419,445 thousand end 2009. Due to continued difficult conditions in international finan-cial markets in relation to the availability and unfavourable

conditions with regard to the attainment of long-term fund-ing and on the basis of large repayments of foreign loans due, the Group raised loans from SID banka, d.d., totalling EUR 109 million. The total stood at EUR 173 million end of 2009. The second half of the year saw some improvement in the international interbank markets, which allowed for the Group to obtain a loan abroad amounting to EUR 51,5 mil-lion and maturing in three years. The response from foreign banks was good, which underscores the long-term business ties and reputation the Group enjoys abroad. The loan will be used for the repayment of syndicated loans raised in the past and for the financing of clients. In 2009 the Group also managed to obtain and renew some bilateral one year loans totalling EUR 13 million.

Deposits from the non-banking sector increased by 20% or EUR 126,612 thousand amounting to EUR 750,181 thou-sand end 2009. The Group was successful in attaining depos-its from corporates, it also got funds from the Ministry of Finance. Short-term deposits decreased from EUR 565,370 thousand to EUR 517,741 thousand, while long-term depos-its increased from EUR 58,200 thousand to EUR 232,440 thousand in line with the policy of promoting long-term transactions.

Retail deposits increased by 6% in 2009. According to matu-rity EUR 590,668 thousand meant that short-term depos-its were predominant, even though they decreased by 2% for the year. Long-term deposits increased by 75% to EUR 112,587 thousand. The Group offered its clients a number of special offers related to deposits with a favourable interest rate, which got a positive response.

According to currency domestic deposits increased by 7% to EUR 691,361 thousand, while foreign currency deposits

22

decreased by 25% to EUR 11,894 thousand. 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 provides its savers with alternative savings instruments. It had 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 insurance services it offers clients insurance in the event of unemployment, individual and collective insurance, accident and property insurance and from July 2009 onward tourist insurance.

In addition to the classical counters, the Group has been offering its clients up-to-date services that it continuously de-velops and upgrades for a number of years. These comprise non-cash and self-service operations 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 in the Group. It enables transparent operations through a client’s personal account. E-banking is constantly adapting to the new modern technologies. Safety has been provided for with the use of the most modern internet technologies. The user is identified with their own unique digital certificate and personal password.

In non-cash operations the Group offers a wide spectrum of card services. It issues payment cards of the Activa Maestro, Active / 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 95 ATMs at the end of 2009, connected into the BA network across Slovenia. Constant monitoring of the number of transactions at ATMs allowed the Group to correspond-ingly relocate existing ATMs to locations more accessible to clients. By the end of 2009 client had at their disposal 15 ATMs providing them with the option of conducting unified payment order payments.

3.5.3 Securities operationsThe Bank performs securities operations, while the subsidiary company does not.

The volume of securities investments increased by 3% in 2009 amounting to EUR 689,882 thousand. Investments in available-for-sale financial assets and held-to-maturity investments increased, while all other categories in relation to investments in financial assets decreased. Pledged assets increased also.

According to maturity, 74% of the investments was represented by investments in long-term securities, which decreased by 1% in 2009. Investments in short-term securities grew by 14%, with their share decreasing from 24% to 26%.

According to currency, domestic currency investments dominated.

– amounts in thousands of EURSecuRItIeS INveStmeNtS 2009 Str. 2008 Str. change Index

1 2 3 4 5=1-3 6=1:3Investments according to type 689,882 100 671,637 100 18,245 103Financial assets held for trading 87,747 13 109,052 16 (21,305) 80Financial assets designated at fair value through profit or loss 18,437 3 29,472 4 (11,035) 63Avaliable-for-sale financial assets 234,067 34 210,468 32 23,599 111held-to-maturity investments 213,959 31 193,761 29 20,198 110Assets pledged 135,672 19 128,884 19 6,788 105

Investments according to maturity 689,882 100 671,637 100 18,245 103Short-term security investments 181,043 26 159,484 24 21,559 114Long-term security investments 508,839 74 512,153 76 (3,314) 99

Investments according to currency 689,882 100 671,637 100 18,245 103Domestic currency 686,804 100 667,911 99 18,893 103Foreign currency 3,078 – 3,726 1 (648) 83

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held for trading financial assets comprise investments in equity and debt securities as well as the valuation of deriva-tives. In 2009 these decreased by 20% to EUR 87,747 thousand. Investments in equity securities increased from EUR 25,983 thousand to a total of EUR 35,823 thousand or by EUR 9,840 thousand. The equity securities portfolio includes a portfolio of shares intended for short-term trading, amounting to EUR 950 thousand and a portfolio of shares with forward contracts amounting to EUR 34,873 thousand. Equity securities show the prevalence of domestic issuers in the portfolio amounting to EUR 34,401 thousand or 96%. Bond investments decreased by 12% from EUR 18,068 thousand to EUR 15,958 thousand, with investments in certificates of deposit decreasing by 54% from EUR 43,570 thousand to EUR 19,837 thousand. All certificate of deposit are related to forward transactions. Receivables from the valuation of derivatives amounted to EUR 16,129 thousand end 2009 having dropped by 25% due to the decrease in the volume of transactions.

Financial assets designated at fair value through profit or loss decreased by 37% to EUR 18,437 thousand, with investments amounting to EUR 11,342 thousand having been pledged to acquire funding from the European Central Bank. Structured bonds and bonds hedged with the use of an interest rate swap are included in this item by the Bank. In 2009 the drop in value pertains to securities maturing, while the revaluation to fair value had a positive effect on the total value of this category of financial assets.

In 2009 the Group saw available-for-sale financial assets grow by 11% or by EUR 23,599 thousand to finish the year at EUR 234,067 thousand. Investments amounting to EUR 23,094 thousand had been pledged to acquire funding from the European Central Bank. The share of available-for-sale financial assets in the structure of securities held increased from 32% to 34%. Investments in equity securities and mutual funds went up by 76% to EUR 55,904 thousand, the reason being a repayment of a loan with the sale of securities pledged. Investments in debt securities remained at the level from 2008 and amounted to EUR 178,163 thousand at the end of 2009. Part of prime debt securities matured in 2009, with the Bank having replacing them with the purchase of two Republic of Slovenia bonds, issued for financing the budget, the purchase of two Slovene government guaranteed bank bonds and a foreign treasury bill.

held-to-maturity investments increased by EUR 20,198 thousand or by 10% to reach EUR 213,959 thousand in 2009. Investments amounting to EUR 101,236 thousand had been pledged to acquire funding from the European Central Bank. 2009 saw prime debt securities in a total of EUR 86,576 thousand maturing. The Bank replaced these investments by purchasing 12-month treasury bills of the Republic of Slovenia and three-year bonds issued by SID banka. Both instru-ments represent measures taken by the government of the Republic of Slovenia aimed at financing the banking sector to stimulate lending activity.

Securities issued increased by a total of 22% in 2009, with the individual types of securities and volumes shown below:

– amounts in thousands of EURSecuRItIeS ISSueD 2009 Str. 2008 Str. change Index

1 2 3 4 5=1-3 6=1:3own securities issued 270,259 100 220,972 100 49,287 122Financial assets designated at fair value through profit or loss

39,851 15 37,719 17 2,132 106

Debt securities in issue 134,774 50 100,125 45 34,649 135Subordinated liabilities 95,634 35 83,128 38 12,506 115

own securities issued according to maturity 270,259 100 220,972 100 49,287 122Own short-term securities issued 7,029 3 706 – 6,323 996Own long-term securities issued 263,230 97 220,266 100 42,964 120

own securities issued according to currency 270,259 100 220,972 100 49,287 122Own securities issued in domestic currency 270,259 100 220,972 100 49,287 122

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Financial liabilities recognized at fair value through profit or loss increased by 6% in 2009 and include subordinated 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 a derivative – the interest rate swap. Fair value of subordinated liabilities amounted to EUR 38,332 thousand end 2009, with fair value of the certificates of deposit coming in at EUR 1,519 thousand.

Debt securities in issue also increased, by 35% to EUR 134,774 thousand and include plain vanilla bonds and certificates of deposit. Liabilities from bonds remained at the level from 2008 and amounted to EUR 21,414 thousand end 2009, while liabilities from certificates of deposit grew by 44% to EUR 113,360 thousand. In 2009 the Bank issued new certificates of deposit, thus increasing liabilities from short-term certificates of deposit from EUR 706 thousand to EUR 7,029 thousand and liabilities from long-term certificates of deposit from EUR 78,024 thousand to EUR 106,331 thousand.

Subordinated liabilities amounted to EUR 95,634 thousand end 2009, having increased by 15% due to the issue of new subordinated bonds. In 2009 the Bank issued subordinated bonds maturing in 7 years, which were subscribed by 45 do-mestic legal entities and private individuals in a total amount of EUR 12,147 thousand. Bonds are included in the Bank’s additional capital, which is why they positively impacted the capital adequacy ratio.

3.5.4 Commitments and contingent liabilitiesThe risk associated with commitments and contingent liabilities, as defined by the Regulation on the assessment of credit risk losses in banks and savings banks, decreased by 26% in 2009.

– amounts in thousands of EURRISk weIGhteD commItmeNtS 2009 Str. 2008 Str. change Index

1 2 3 4 5=1-3 6=1:3Guarantees 79,819 34 88,697 31 (8,878) 90Open, non-covered documentary letters of credit 6,019 2 5,880 2 139 102Other 849 – 2,928 1 (2,079) 29Assumed liabilities 130,871 55 162,100 57 (31,229) 81Derivatives 20,457 9 25,615 9 (5,158) 80total 238,015 100 285,220 100 (47,205) 83

Commitments and contingent liabilities according to the Bank of Slovenia methodology 455,688 614,908 (159,220) 74

Guarantee operations show a 10% drop in the volume of guarantees issued. The total volume of guarantees issued featured 60% or EUR 47,498 thousand service guarantees.

The risk-bearing potential liabilities also include open, non-covered documentary letters of credit. At the end of 2009 the volume of these liabilities, including the open, non-paid letters of credit carried over from 2008, was 2% higher than a year ago. Stand-by letters of credit amounted to 79% of all open import letters of credit.

The item other includes potential liabilities from the suc-cessively agreed entry into three foreign investment funds, as well as potential liabilities from premiums received for national housing savings schemes. Due to the successive entry into foreign investment funds, the liabilities for the payment of capital investments abroad were reduced from EUR 1,933 thousand to EUR 131 thousand, while liabili-ties from premiums received for national housing savings schemes decreased by 28% to EUR 718 thousand.

Assumed liabilities dropped by 19% or EUR 31,229 thou-sand to EUR 130,871 thousand, with their share in the total

risk bearing contingent liabilities decreasing from 57% to 55%. These include liabilities from the undrawn stand-by credit lines, liabilities from approved and undrawn loans, liabilities from spot transactions and liabilities from issued letters of intent. In 2009 the value of undrawn stand-by credit lines decreased the most, which was in accordance with the Group’s business policies.

The derivatives item includes the credit replacement value of receivables from derivatives. A decrease in liabilities from derivatives is the result of a drop in the volume of derivative operations in 2009.

In accordance with the Bank of Slovenia methodologies the volume of risk-bearing commitments and contingent li-abilities amounted to EUR 455,688 thousand, being EUR 217,673 thousand more than according to the methodology as prescribed by the Regulation on the assessment of credit risk losses in banks and savings banks, where only the credit replacement value of derivatives is included in commitments and contingent liabilities. The Bank of Slovenia methodol-ogy, as prescribed by the Guidelines for the implementation of the decision on books of account and annual reports in

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banks and savings banks, requires the total nominal value of derivatives to be included in risk associated with commit-ments and contingent liabilities.

3.5.5 Derivatives In accordance with its policies, the Bank continued to actively trade derivatives in 2009. The Bank’s subsidiary did not enter into any derivative transactions, while the Bank transacted in foreign currency forwards and in forward agreements related to shares, certificates of deposit and bonds. To hedge its interest bearing positions it entered into interest rate swap transactions, having concluded two option transactions in 2007 and having started to enter into agreements on interest rate forwards in 2008. The total volume of derivatives operations was 33% lower in 2009 as compared to 2008, with only the volume of forward transactions increasing.

– amounts in thousands of EURDeRIvatIveS - ReceIvaBleS 2009 Str. 2008 Str. change Index

1 2 3 4 5=1-3 6=1:3Currency swaps 87,653 36 161,477 44 (73,824) 54Interest rate swaps 84,758 35 98,245 27 (13,487) 86Share forwards 44,819 18 37,347 10 7,472 120Certificate of deposit forwards 17,928 7 33,065 9 (15,137) 54Bond forwards 1,102 – 851 – 251 –Options 10,000 4 10,000 3 – –Forward rate agreements – – 25,000 7 (25,000) –total 246,260 100 365,985 100 (119,725) 67

3.5.6 Payment operationsThe Bank performs international and domestic payment operations, while the subsidiary company does not.

In payments 2009 saw intense activity in relation to the SEPA project. SEPA stands for Single Euro Payment Area, a unified area for euro payments and includes payment in-struments most frequently used in Europe, being credit pay-ments, direct debits, payment cards and euro cash. In 2009 the Bank began effecting SEPA credit payments, which are now performed using the new SIMP infrastructure within the Bankart framework. First cross-border credit payments were routed through the new payments system, with domes-tic credit payments following later on and standing orders being included in November.

In parallel activities were being performed in connection with SEPA direct debits, which have not been concluded in 2009. On this basis a new agreement was prepared due to the adaptation to the new Payment services and systems act. The new legislation, coming into effect on November 1, 2009 was at the forefront as it introduced a number of innovations, requiring substantive as well as technological adaptations.

International payment operations The total volume of foreign currency payment operations reached EUR 1,917 million in 2009, coming in a third lower as compared with 2008. The decreased volume of payment operations is definitely the result of a drop in the volume

of international operations performed by some companies and is in part the consequence of the introduction of SEPA cross-border credit payments, now included in domestic payment operations.

The Bank conducted 67% of total international payment operations with EU member states. On the incoming and outgoing payment sides it cooperated most closely with Ger-many and Austria. Outside of the European Union most of the incoming and outgoing payments were related to ex-yugoslav countries, where most of the volume pertains to Croatia.

Domestic payments and cross-border SEPA credit payments To perform domestic payments the Bank uses the Target 2 and Bankart systems. The number of transactions decreased by 7% in 2009. According to the number of payment orders most were effected through Bankart, while from the value point of view the majority was done through the Target 2 system.

End 2009 the Bank maintained 5,612 transaction accounts belonging to corporates and 5,634 transaction accounts belonging to private entrepreneurs and individual clients, which represents a 4% increase as compared with the end of 2008. 320 corporate transaction accounts amounting in total to EUR 50.4 million and 461 individual client transac-tion accounts (private entrepreneurs and private individu-als) amounting to EUR 7.0 million.

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3.6 RISK MANAGEMENT AND CONTROL OPERATIONS

In its operations the Group is exposed to a number of dif-ferent risks, which is why it developed a number of differ-ent procedures and methods for their management. The quality of assessing all risk types and responding to them in a timely manor 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 manag-ing risk together with nine policies, which feature detailed descriptions in connection with identifying, measuring or assessing, managing and monitoring risk. The strategy and policies of assuming and managing risk are updated annu-ally, 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.

The following includes definitions of individual banking risk types.

Credit riskCredit 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 underlying documentation for careful credit risk management has been prepared in the form of policies on assuming and managing credit risk.

The aim of assuming and managing credit risk is for the Group to ensure up-to-date management and assessment of the debtor risk or the risk related with investments and the credit portfolio. The Group measures the risk associ-ated 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 investments toward debtors with a high rat-ing. It builds the risk associated with the investment into the interest rate and ensures the best possible collateral, so that it may repay the loan by realizing collateral, thus decreasing the loss amount. The Group limits portfolio con-centration by setting up limits toward debtors or toward groups of related entities, by setting limits in connection with portfolio structure, by monitoring the diversification of the credit portfolio according to sector, region, business line, type of transaction etc. In lending abroad the Group is exposed to country risk, which is why it also monitors the risk associated with foreign countries and adapts its credit policies accordingly. 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.

Since January 1, 2008 the Group has been calculating credit risk capital requirements using the standardised approach. It also calculates an internal assessment of capital require-

ments to cover for unexpected loss from credit risk on a quarterly basis. In doing so it considers own methodologies, which it develops and improves in line with new knowl-edge and experience acquired. The Group also estimates the assessed internal capital requirements based on external factors and performs stress tests while also measuring the effect extraordinary, but probable events have on income and the Group’s financial position.

The financial and economic crisis in Slovenia and the world had substantial negative consequences on the Group’s credit portfolio in 2009. The share of defaulted debtors and non-performing receivables increased. By carefully managing its investment policies and the credit portfolio the Group is at-tempting to mitigate the effects of the crisis on its perform-ance and financial position as much as possible. Since mid-2008 it has been implementing measures to decrease the negative impact of the crisis (regular monitoring of debtor operations, their rating and the settlement of receivables due, stricter lending conditions, reduction of stand-by credit lines and unsecured loans, acquiring additional collateral, granting new loans to financially stable companies and fi-nancing investments in core business, etc.). It has also been following the strategy of diversifying investments according to debtor, sector and region and limiting investments to sectors and regions, it estimates as high risk.

Market riskThe most significant risk types within market risk include positional risk in equity and debt financial instruments and derivatives as well as foreign currency risk. The underly-ing documentation for market risk management has been prepared in the form of policies on assuming and managing market risk.

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 sov-ereigns) and to a lesser extent in other low risk countries (investment-grade countries). It classifies financial instru-ments into the banking and trading book based on the Policy on the classification of banking and trading book items, which defines the classification policies and the conditions a certain item must meet to be classified into a certain group. The Group specifies trading with financial instruments by applying limits to a number of different levels (issuer, transaction, region, etc.). Additionally, it has also adopted stop-loss limits.

The Group also enters into transactions with foreign cur-rency and interest rate derivatives. Its basic policy in connec-tion with derivatives trading is entering into transactions for the hedging of its own positions and for client position, whereby the latter transactions are hedged with counter positions. Transactions are entered into with prime foreign banks on the basis of ISDA (International Swaps and Deriva-tives Association) agreements.

In relation to foreign currency risk, the Group’s policy is that of a closed position across individual foreign curren-

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cies. Managing the open currency positions is performed through prompt transactions and with the use of foreign currency derivatives in line with the limits set, which allows the Group to maintain optimal levels exposure to currency risk. Limits are low and are meant for the management of currency open positions within the scope of regular opera-tions, not for speculative trading.

The Group calculates market risk capital requirements using the standardised approach. At the same time it also calcu-lates capital requirements with the use of advanced meth-ods such as the statistical method of value-at-risk (VaR). Additionally, it calculates the internal estimated capital requirement 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, probable events on income and the financial position of the Group.

In relation to market risk due to the financial crisis affect-ing the world financial markets, the Group adopted certain measures, which are aimed at protecting itself against large loss from financial instruments. Thus it again reviewed and adjusted limits accordingly, including stop-loss limits. It also calculates value-at-risk on a daily basis for all equity financial instruments in the trading book, measures cur-rency volatility and calculates the largest possible loss (VaR).

Interest rate riskThe risk of change in interest rates pertains to the exposure of the Group’s financial balances to unfavourable fluctua-tions in interest rate. It affects the Group’s earnings and the economic value of its receivables, liabilities as well as commitments and contingent liabilities. The underlying documentation for interest rate risk management has been prepared in the form of policies on assuming and managing interest rate risk.

The group analyzes exposure to interest rate risk separately for the net banking book position, the transferred banking book position and interest position in the trading book. In relation to interest rate risk the Group follows the policy of a closed net banking book position, which mean that the amount of open interest rate gaps is relatively low. The basic goal and purpose of the transferred banking book position is the stabilization of income and secure investment of as-sets, funded by free capital and the stable part of at sight deposits. The interest rate risk associated with the trading book is analysed within the framework of market risk.

In the event of the implementation of measures to decrease interest risk being required, the Group uses traditional statement of financial position transaction, such as lending, securities purchases, deposit taking, issue of securities, etc. In addition to the aforementioned transactions, the Group also enters into agreement based on interest derivatives to hedge individual transactions and close interest rate gaps. It does not enter into interest derivative transactions for speculative purposes.

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 meth-odologies.

The Group’s interest rate risk increased in 2009 due to un-matched maturities and the renewed fixing of the interest rate between the interest rate sensitive investments and the interest rate sensitive liabilities in an individual time interval, which is the result of acquiring fixed interest rate long-term funding facilities and using them for investments bearing variable and fixed interest rates at maturities dif-fering from the funding facilities, which in turn caused the interest rate gap. The Group plans to continue closing inter-est rate gaps in 2010 using on-balance sheet instruments and entering into interest derivatives, which will allow it to decrease the impact on the income statement resulting from the change in the fair value of an interest derivative with the use of hedge accounting.

Liquidity risk Liquidity risk is the risk of loss based on the Group not being able to settle all due liabilities or resulting from the fact that the Group is not capable of ensuring sufficient as-sets for the settlement of liabilities when they become due, which is why it is forced to provide the required assets at significantly higher cost than usual. Liquidity also pertains to providing funding for the growth of investments. The underlying documentation for liquidity risk management has been prepared in the form of policies on assuming and managing liquidity risk.

The Group provides for efficient management of operational and structural liquidity, representing the management of cash flows for a chosen (usual longer) time interval tak-ing into consideration 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 pertaining to the largest open liquidity position have been set. In connection with structural liquidity the Group has defined indicators, which are not limits, rather they represent target values for the management of liquid-ity risk. Structural liquidity limits have been set up, so as to ensure the required reserves on the basis of structural liquidity surpluses in accordance with the Decision on mini-mal requirements for ensuring adequate liquidity for banks and savings banks. within the framework of its policies the Group has prepared stress test scenarios, which point to contingency plans to be employed at the first showing of signs of a liquidity crisis.

The Group calculates the internal estimate of capital require-ments 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 the results from stress testing.

In line with its specific characteristic the Group utilises the conservative approach to liquidity risk management, which

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is reflected through its system of limits, the spectrum and size of investments in securities in the banking book and the methodology of monitoring liquidity flows.

In 2009 the Group managed liquidity risk in line with adopt-ed policies, however the conditions in relation to the access to liquidity changed. The Group did not have any problem in relation to operational liquidity, as it has sufficient finan-cial property to acquire funds from the European Central Bank and in the interbank repo market. Most of the activi-ties pertained to securing an adequate level of structural liquidity. To this aim activities were directed at the raising of long-term financing, where the Group saw success pre-dominantly in the domestic market (corporate and private individual clients) and to a lesser extent in the international interbank market.

Capital and capital adequacyTo cover unexpected loss, the capital of any bank must al-ways 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 regula-tory 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. The Group, based on its annual business plan and the three-year development plan, prepares the plan of movement in capital and capital requirements for a period of three years, which is reflected in the fluctuations of capital adequacy ratios in accordance with the planned volume of operations. In the event that planned fluctuations of capital adequacy ratios deviate from target values, the Group will commence activities to de-crease exposure to risk or increase regulatory capital. The Group’s priority is to increase capital by issuing subordi-nated debt and transfer net profit to other profit reserves. In doing so it ensures appropriate capital levels with regard to the volume and type of services it offers and the risks it is exposed to in its operations.

The Group calculates the internal capital assessment and the capital requirements in line with adopted methodologies on a quarterly basis.

In the first half of 2009 the Group again raised additional capital by issuing subordinated bonds, which increased the capital adequacy ratio. The Tier I capital ratio increased significantly as well, due to the elimination of cumulative dividend payments in relation to preference shares, which was passed at the Meeting of Shareholders in June.

Operational riskOperational risk pertains to the risk of loss as a consequence of inadequate or unsuccessful execution of internal proc-

esses, the actions of individual persons or the function-ing of systems or due to external factors. Operational risk management is based on policies adopted for assuming and managing operational risk.

Due to fast development and the characteristic of the fi-nancial system, the importance of operational risk for the Group is growing. 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 devel-opment 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.

To assess the capacity for assuming operational risk, the Bank had set up a registry of loss events as far back as 2004. It records loss events according to 7 types, coming from individual organizational units and 8 business segments, according to their number and gross and net values. In 2009 the Group upgraded the system of collating, registering, monitoring and reporting on loss events with the introduc-tion of new computer software application.

Its has catalogued its business processes, which served as a basis for the preparation of the Group’s potential exposure profile in the area of operational risk for individual proc-esses and the Group as a whole, completion of a catalogue of all operational risks, which the Group identifies and the preparation of a matrix of connections between the Group’s organizational units all through the operating process. Com-paring the catalogue of potential risks with the recorded loss events will allow for the setting up of limits in relation to assuming operational risk according to loss event category.

The Group calculates capital requirements for operational risk according to the simple approach. It calculates the in-ternal capital assessment and the capital requirements 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 rules defining procedures, activities and processes of operation and organisation in the event of a crisis, which is 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 the smooth operation of key business proc-esses 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 mate-rialise should activities and procedures be suspended, which are defined in the continuous operation plans for the Group and in the recovery plan.

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Profitability riskProfitability 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. The Group’s profitability is its first protection from risk it is exposed to and is the first defence against a decrease in capital due to a reduction in asset value. It is a general principle that profit must primarily be used to cover loss and to form required reserves, with dividends being distributed only after the aforementioned has been covered. Profitability risk manage-ment in 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 develop-ment 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 moderate nature and structure of costs.

In line with the adopted methodology the Group calculates the internal estimate of capital requirements for profit-ability risk on a quarterly basis.

The global financial crisis should continue well into 2010 according to analysts’ estimates and will most probably con-tinue to have a significant impact on profitability risk. One of the biggest dangers is represented by the crisis facing the real economy, which could cause an increase in the inability to repay loans due to bankruptcy. The Group is still facing the problem of restricted funding in the interbank market, which means that it need to reduce the level of lending ac-tivities, thus decreasing income.

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

The aim of managing strategic risk in the Group is to de-crease the risk of loss due to erroneous operational deci-

sions, the inappropriate implementation of decisions made or the low responsiveness to the changes in the operating environment. To cope with this the Group prepares frame-work strategic documents and regularly verifies their im-plementation, which allows it to adapt to the changes in the internal and external business environments in time.

In line with its risk profile the Bank in the Group did not calculate any internal estimation of capital requirements in 2009.

The global financial markets are still facing uncertainty, which is set to continue according to analysts’ estimates. The global economy as a whole has been impacted negatively as the insecurity poured over to the real economy from the financial sector and from developed to the developing mar-ket economies. This means it will be extremely important to strengthen the confidence in the financial system in the future.

Reputation riskReputation risk represents the risk of loss due to a negative image, which the Group has in the eyes of its clients, busi-ness partners, owners, investors and supervisors. Managing reputation risk within the Group is based on the adopted policies of assuming and managing reputation risk.

The Group has been operating successfully for over 145 years, its business volume is growing and it has achieved recognisability locally as well as abroad.

It is the objective and goal of the Group to preserve and strengthen the image it has in the eyes of the interested public. In its operations it adheres to the principles of due diligence, is transparent in its operations, it communicates openly with the public, it continuously trains and educates its employees and remains socially responsible.

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

The procedures in connection with the measurement and management of risk and the Group’s level of exposure to individual risk types is disclosed in more detail in the Notes to the financial statements under item 2.25.

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3.7 EQUITy AND ShAREhOLDERS

The Group’s equity comprises core capital, share premium, revaluation reserve, profit reserves and net profit, while own shares decrease it. In 2009 the equity increased by EUR 9,970 thousand to amount to EUR 199,391 thousand.

Equity in 2009 is shown in the table below:

– amounts in thousands of EUReQuItY 2009 Str. 2008 Str. change Index

1 2 3 4 5=1-3 6=1:3Share capital 16,980 8 16,980 9 – 100Share premium 51,542 26 51,542 27 – 100Revaluation reserve 4,660 2 (3,767) (2) 8,427 (124)Profit reserves 123,074 62 116,550 62 6,524 106Treasury shares (31) – (31) – – 100Profit for the year 3,166 2 8,147 4 (4,981) 39total 199,391 100 189,421 100 9,970 105

In October 2008 the Bank in the Group successfully in-creased capital from authorized capital amounting in total to EUR 35 million, based on which core capital and share premium increased in the year. The share capital after the capital increase comprised 508,629 no par value shares. Changes in 2009 pertain to the fluctuation of the revalu-ation reserve, the net profit for the year and to the pay-ment of dividends from distributable profit for 2008. The revaluation reserve changed from EUR -3,767 thousand to EUR 4,660 thousand due to the valuation of the share of some of the more successful Slovene companies to a higher fair value and the impairment of some shares and mutual funds allocated to the available-for-sale category. In 2009 the Group made a net profit of EUR 6,552 thousand. Profit in the amount of EUR 3,385 thousand was allocated to other profit reserves as at December 31, 2009 in line with the legislation and after confirmation by the Supervisory Board.

In 2009 the Bank did not purchase or sell own shares. As at December 31, 2009 it held 251 regular shares in its portfolio in the amount of EUR 31 thousand, which represents 0.05%

- in %10 largest shareholders as at 31 December 2009 ownership shareNova 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 3.75hypo Alpe Adria Bank a.g. Klagenfurt 3.33Juteks d.d. Žalec 2.43Opus Invest d.o.o. Velenje 1.88Polzela d.d. Polzela 1.53total 80.36

of its total equity. It did not acquire any own shares indi-rectly, with 1,488 shares having been pledged as security.

The book value of the Bank’s share amounted to EUR 391 as at 31 December 2009. In 2009 the shareholders received dividends for 2008 amounting to EUR 9.92 per regular and preference share in line with the decision made at the Meet-ing of Shareholders. The Bank’s subsidiary company was established as a limited liability company, not a joint-stock company.

End 2009 the share register showed 703 shareholders, 222 of which were corporates while 418 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 2009. During the year the Bank retained its status of an associated member to the NLB Banking Group.

Among the ten largest shareholders of the Bank are follow-ing companies:

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Other shareholders hold shares, which represent less than 1% of the ownership. The structure of shareholders ac-cording to activity shows that most of the ownership is maintained by other Slovene commercial banks, followed by the economic sector, financial organizations, the state, households and foreign entities.

3.8 DEVELOPMENT OF ThE BANK AND ITS SUBSIDIARy COMPANy

The Bank in the Group offers its clients universal banking services. Development and recognition are continuously taken care of. Further development is made possible by in-vesting in efficient IT support systems, its business network and employee development and training. Recognition in the domestic and international markets is achieved by ap-pearing in domestic and foreign expert publications and through the cooperation with internationally acknowledged rating agencies.

RatingsSince 1998 the Bank has been rated by one of the three leading global rating agencies, being Fitch Ratings, which has been awarding the Bank relatively high credit ratings given Slovene circumstances. Based on the recent ratings the Bank is placed between the better rated groups in Cen-tral and Eastern Europe and underscores the fact that it is a reliable and well recognised partner. The Bank’s ratings are: long-term BBB, short-term F3, individual C, support 3 and stable outlook.

RetailThe 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 center of Slovenia and has been present in Maribor since September 1, 2009. It follows modern trends and is adapting to individual client needs by investing in its retail network. At the end of 2009, in addition to its head office, the Bank had seven business units, comprising 10 offices for individual client operations and 23 agencies. Based on the analysis of the volume of operations in units with a single employee, the Bank closed three agencies in 2009 and another one on January 1, 2010. within the framework of its business units, five offices have been set up, dealing exclusively with legal entities and private entrepreneurs. The Posest subsidiary company does not have any branch offices.

Internal organisationIn 2009 the Bank continued with the activities aimed at improving internal efficiency. Two business units have been reorganised into a single one to this aim. Organisational changes have been realised in connection with risk manage-ment and card operations. The Bank’s Management Board has appointed two Executive Directors and specified the scope of authorization and functions.

Rationalization and investmentswithin the framework of measures taken to cut costs a Rulebook for the implementation of cost rationalisation measures has been prepared. In addition to managing the cost of office stationery, energy usage, routine maintenance, protection of property, insurance, postage, rent, phone costs and cleaning, the Bank closely monitored the cost of cash transportation and prepared a proposal for the rationalisa-tion of transport routes. A detailed expert report was also prepared on the protection of the Bank’s property, based on inspection conducted by an independent contractor dealing with private property protection in all of the Bank’s units. Based on the results of the inspection, security files were supplemented with protection plans.

The Bank earmarked EUR 2,761 thousand for investments in 2009. Most of the funds were used for the requirements of IT in the retail division, for external consultancy in the construction of the data warehouse and the purchase and renovation of office space and equipment.

Large scale renovation was completed to manage loss events. Based on the exchange of data on critical events in other banks, related to the misuse of ATM and day/night treasur-ies, the Bank upgraded security mechanisms on this equip-ment in October.

Investments in maintenance activities saw all necessary repairs carried out and the defects on the office buildings eliminated.

In the area of research and development, the Posest sub-sidiary company performed activities within the volume required for the performance of current and foreseen new operations of the company.

Information technologyOne of the most significant projects in the field of informa-tion technology is the 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. It is a long-term project performed in cooperation with an exter-nal consultant in line with the strategy prepared in accord-ance with the adopted project plan. The development of the data warehouse is expected to be completed in 2010, with its upgrading continuing in line with the Bank’s requirements. In 2009 the process of feeding data from the statement of financial position into the warehouse was completed, the production of reports to the European Central Bank was ensured from the data warehouse, the model for the cal-culation of capital, planned cash flows, financial account statistics, large depositors and the assignment of transfer prices in accordance with the methodology of liquidity mar-gins was also completed. In 2010 activities in connection with feeding-in data from the income statement and the preparation of a model for expanded matrix reporting to the European Central Bank will be continued.

A large part of activities pertained to the adaptation and upgrading of software. Assignments mainly dealt with the

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adaptations related to the rationalisation of operations, to ensuring alternative IT solutions in retail operations, the preparation of audit trails, the construction of solutions for reforming card operations and related to the requirements of the SISBON (electronic private individual rating system) and SEPA projects.

human resourcesIn 2009 the number of employees in the Bank decreased from 596 to a total of 571, with the average complement over the past year amounting to 586 employees. At the end of the year 23 employees were employed for a fixed period of time.

The average age of employees in 2009 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 25.2%, followed by the 46 to 50 years of age group with a share of 19.8%.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 80% of employees being female.

The average work time efficiency was 80.3%, with absentee-ism predominantly coming from the annual leave usage, while sick leave absenteeism amounted to 6%. Thus the av-erage number of absentees due to sick leave was 34 a day.

In relation to the actual educational structure the share of high school educated employee decreased from 48.8% to 45.4% in 2009. In line with the human resources policy the share of employees educated at the higher education level and at university level increased, namely from 46.3% to 50.1%.

The subsidiary company had 5 employees at the end of 2009, where there were 6 in 2008. In 2009 the accountant and director both retired. A new director was named, with the company taking a new employee under contract for the sale of housing real estate.

One of the employees in the subsidiary company holds a Master’s Degree in Economics, two have university degrees in finance and architecture and one employee holds a higher education diploma in construction, with another employee educated at the high school level. Two employees have ac-quired a number of licenses in the field of real estate ap-praisal, two also acquired a licence for conducting real estate brokerage, with two other employees taking classes at the Slovene institute for auditing to obtain an authorized real estate appraiser licence.

The realization of strategic goals and ensuring a competi-tive advantage require the Bank to direct investments in the development of employee knowledge and skills. This is why it is the most assignment of the Personnel Division in cooperation with the management to ensure optimal human resource capacity for the satisfaction of the work-space requirements. with the rationalisation of work pro-cedures, the development of IT support and reallocating the work, the Bank continues to follow its policy of reducing the

number of employees, while improving the educational and age structure with new recruitment.

3.9 SOCIAL RESPONSIBILITy OF ThE BANK AND ITS SUBSIDIARy COMPANy

The Bank has been operating successfully 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 pub-lic, 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 the aim of increasing the Bank’s reputation.

It is aware of the fact that its continued efficiency and suc-cess 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 employees, 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.

The Bank also helps its partners invest in ecologically sound projects, construct waste water treatment plants and carry out other social responsibility projects. In its operations it gives special attention to less privileged client groups, as it offers special benefits to retirees, students and to humani-tarian and other organisations.

3.10 ThE INTERNAL AUDIT DEPARTMENT OPERATIONS

The operations performed by the Internal Audit Service are consistent with the internal audit standards of professional practice, the code of internal auditing principles and the internal auditor’s professional ethics code. It is an independ-ent department, which reports directly to the Management Board, at the managerial and business unit level. The afore-mentioned gives the Service’s employees the possibility 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 plan documents allowing for the appropriate performance of the Internal Audit Service comprise the stra-tegic plan and the annual operational program, which the Management Board adopts annually, with approval given by the Supervisory Board. Both documents are based on the

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Bank’s risk profile, its annual and development plan, the fundamental characteristics of the environment in which it operates, while taking into consideration the requirements by the Supervisory Board on compulsory internal auditing of certain operational areas and the Posest, d.o.o., subsidi-ary. Planned Internal Audit Service’s activities are detailed in semi-annual operational plans, which the Management Board adopts. The Management Board and the Supervisory Board (the latter after previously considering them at the Audit Committee) endorse semi-annual reports on the ac-tivities of the Department, showing the significant activities performed by it as well as the audits conducted by external regulatory institutions.

The assignments of Internal Audit pertain foremost to qual-ity assessment in connection with the management of all types of risk (including 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 an-nual operational program (as approved by the Management Board, the Supervisory Board and the Bank’s Audit Commit-tee) has been set up. The Bank’s Management Board is made aware of the realization of recommendations at least twice: first after every internal audit has been completed and then a comprehensive annual report on the implementation of all the recommendations is given. Internal Audit also regularly monitors the realization of the Bank of Slovenia require-ments as well as those expressed by the external auditor, on which it regularly reports to the Bank’s Management Board, the Supervisory Board and to the Audit Committee. It also coordinates activities in connection with the selection of the external auditors (through the Management Board, the Audit Committee and the Supervisory Board).

The following represent the most important functions or areas of operation, which were audited in 2009: the correct-ness of procedures performed in lending to foreign corpo-

rate entities, the system for the calculation of liquidity scale ratios, consideration of the decision on due diligence by the bank management and supervisory boards, quality of IT security and a comprehensive review of information protec-tion management, operations of the Posest, d.o.o., subsidi-ary, the system of interest calculation in retail operations, currency of information on the Bank’s website, complaints from card operations, the system for the prevention of the misuse of internal information, service agreements related to IT, anti-money laundering and non-deposit investment products related to insurance services. Due to a number of extraordinary activities performed, part of the internal audits scheduled for 2009 will be performed in 2010.

In all internal audits and reviews special attention was given to: identification of procedures built-in for the manage-ment of risk, assessing the current situation, the quality of internal control systems, compliance with the legislation and internal rules, especially when these change, the pos-sibilities 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 opin-ions pertaining to different fields of operation with the basic goal of improving risk management.

All of the Service’s assignments described had been per-formed in 2009 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. Addi-tionally, one employee holds an insurance broker licence and three employees hold the European Banking Certificate. One of the employees continued with a post-graduate Master’s course in 2009. As in the previous years in 2009 education and training of employees remained a constant mission, with additional knowledge attained in internal auditing, banking operations, computer skills, stress management and language skills courses.

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4 MANAGING BODIES OF ThE BANK

GENERAL MEETING OF

ShAREhOLDERS

MANAGEMENTBOARD

MANAGEMENT BODy

IT COMMITTEE

CREDIT COMMITTEE

LIQUIDITy COMMITTEE

ASSETS LIABILITy COMMITTEE – ALCO

OThER BOARDS AND COMMITTEES

AUDIT COMMITTEE

SUPERVISORyBOARD

ORGANIZATIONALUNITS

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5 ORGANIZATION STRUCTURE OF ThE BANK ON 1 JANUARy 2010

MANAGEMENT BOARDMemberofthe

ManagementBoard

Aleksander Vozel, M.Sc.President&CEO

Dušan Drofenik, M.Sc.

MemberoftheManagementBoard&DeputyCEO

Davorin Leskovar

ACCOUNTING DIVISION

FINANCIAL MARKETS DIVISION

LEGAL OFFICE AND PERSONNEL

OPERATION SUPPORT DIVISION

SECRETARIAL SERVICES

DEPARTMENT

PR DEPARTMENT

GENERAL AFFAIRS DIVISION

EXECUTIVE DIRECTOR

hMEZAD ŽALEC BRANCh

MAIN BRANCh LJUBLJANA

PAyMENTS DIVISION

INTERNAL AUDIT

CORPORATE DIVISION

EXECUTIVE DIRECTOR

IT DIVISION RETAIL DIVISION

RISK MANAGEMENT DIVISION

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POSEST d.o.o. (100%)BANKA CELJE d.d.

6 ThE GROUP ON 31 DECEMBER 2009

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 limited 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.

In 2009 the thereto director of the company Boris Mihelčič retired, with Davor Zavasnik being named new director.

The company’s operations in 2009The company completed phase 4 of construction of a business facility in Prebold in 2009 and leased it using two financial leasing agreements.

The Posest, d.o.o. is actively marketing the completed commercial and residential building Ljubljanska in Celje. By the end of 2009, the company had sold the commercial part of the building, 63 apartments and 77 parking spaces.

Additionally, the company participated in numerous recovery enforcement procedures of the Bank, conducted the moni-toring of purposeful use of loans granted to investors, conducted property and equipment appraisals and the appraisals of individual projects required by the Bank in connection with its financing offers.

Based on the Development plan for the 2008 to 2012 period the company plotted the expansion in the volume of opera-tions, especially in the area of leasing and property engineering activities. In the second half of 2007 the company had already adopted a new Development plan for the 2008 to 2012 period and plotted the expansion in the volume of opera-tions, especially in the area of leasing and property engineering activities. In relation to these activities based on the existing conditions in the environment, divesting the housing inventories in residential building Ljubljanska in Celje will be required as well as the formation of a portfolio of individual smaller, mostly real estate related, leasing arrangements with clients from different branches of the economy.

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* branch office for companies and private individuals.

At 1st January 2010 one agency was closed in the Celje Business Unit.

7 RETAIL DIVISION OF ThE BANK ON 31 DECEMBER 2009

MANAGEMENT BOARD

RETAIL DIVISION

hMEZAD ŽALEC BRANCh

Celje Business Unit

Slovenske Konjice Business Unit

Žalec Business Unit

Šentjur Business Unit

Laško Business Unit

Rogaška Slatina Business Unit

Maribor Business Unit

3 branch offices1 branch office for c. & p.i.*8 agencies

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

1 branch office8 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

Ljubljana Branch Office

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8 STATEMENT OF CORPORATE GOVERNANCE

The Bank’s Corporate Governance statement has been pre-pared in line with the provisions of the Companies Act and includes the Statement on conformity with the Corporate Governance Code dated February 5, 2007 made by the Man-agement Board and the Supervisory Board under item 8.1, while items 8.2 through 8.13 including Notes in accordance with Paragraphs 5 and 6 of Article 70 of the Companies Act and item 8.14 pertains to the statement made by the Posest, d.o.o., subsidiary company.

8.1 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 and the Companies Act as well as the Market in Financial Instruments Act 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., complies with the Corporate Governance Code dated February 5, 2007 except for some deviations or particularities, explained below:

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 nomi-nation 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 in an organized manor, 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 instruc-tions for the shareholders. The Bank does not publish this data additionally on its web site.

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

Clause 1.3.19 The 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 1.3.21 In line with clause 1.3.20 of the Code the Bank publicly announces the General Meeting’s decisions and the infor-mation on possible challenging actions, as declared at the General Meeting and places the notification on its own web-site also, while shareholders’ queries and the replies are not published separately.

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

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

Clause 8.2The Bank publishes the consolidated annual report in the English language, however individual public announce-ments are not translated.

Clause 8.6In its significant announcements to shareholders and the public the Bank takes into account statutory time limits, therefore it does not prepare a calendar of significant an-nouncements.

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

Clause 8.17.2 The 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.

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8.2 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 comprehen-sive 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 activities:

– 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 in-crease the Bank’s liabilities, must be approved by the au-thorized 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 pre-pared, 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 mar-ket risk,

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

– the system of financial records needs to provide timely, reliable, 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.

8.3 SIGNIFICANT DIRECT AND INDIRECT OwNERShIP OF ThE BANK

Qualifying holdings, as defined by the law dealing with takeovers, in the Bank’s equity are held by three compa-nies, 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 law dealing with takeovers.

8.4 hOLDERS OF SECURITIES ENSURING SPECIAL RIGhTS OF CONTROL

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

8.5 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 vot-ing rights entered into the register at least 10 days prior to the General Meeting of Shareholders and which remain so registered 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 to 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.

8.6 ThE BANK’S RULES ON:– appointment and replacement of the management

or supervisory 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., Supervi-sory 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 conditions 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 Supervisory Board members having been appointed at the General Meeting of Shareholders, replacements are appointed at the following General Meeting. The replace-

40

ment is appointed until the end of the originally appointed member’s term.

Each member 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 Supervisory Board it is to be sent to his deputy and the Bank’s Management Board. At the Gen-eral 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 ap-pointment as defined by the Companies Act and the Banking Act may be appointed to the post of president or member of the Management Board.

The President and Members of the Bank’s Management Board are appointed for a term of five years and may be re-appointed. They may be recalled early in line with the applicable legislation. Each member of the Bank’s Manage-ment 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 Articles 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 author-ize the Supervisory Board to amend the Articles of Associa-tion, which would mean harmonization of the text with the adopted resolutions in effect.

8.7 AUThORIZATION OF ThE MANAGEMENT BOARD

Based on the amendment to the Articles of Association hav-ing 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 Supervi-sory Board, is authorized to increase share capital by EUR 7,045,952.26 at the most (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.

8.8 DATA ON ThE ACTIVITy OF ThE GENERAL MEETING OF ThE BANK’S ShAREhOLDERS, ITS KEy RESPONSIBILITIES AND ShAREhOLDER RIGhT AND hOw ThESE ARE EXERCISED

The Bank’s Management Board calls the Meeting of Share-holders. 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 Management 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 mem-bers;

– 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 ac-cordance 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 deci-sion on. In such an event the Management Board is required to call the Meeting no later than 5 weeks after receiving a written request.

Shareholders, holding 5% of the share capital in total, 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 in-cludes a prepared proposition of a decision falling under the responsibilities 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.

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8.9 DATA ON ThE COMPOSITION AND ACTIVITIES OF MANAGEMENT AND SUPERVISORy BODIES AND ThEIR COMMISSIONS

At the Bank’s General Meeting of Shareholders in May of 2007 a new Supervisory Board of Banka Celje, d.d., was elected. It comprises seven members: Alojz Jamnik as Presi-dent, 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. The members’ term of office ends at the General Meeting of Shareholders in the fourth year after their election, namely in 2011.

In 2008 the Supervisory Board of Banka Celje, d.d., es-tablished 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.

The Management Board comprises three members. From the beginning of 2009 these were: President of the Management Board, Dušan Drofenik, M. Sc., Member of the Management Board, Davorin Leskovar and Member of the Management Board, Viktorija Svet, who upon expiry of her term, on June 17, 2009 retired. From then onward and until December 31, 2009 the Management Board comprised only two mem-bers. In September 2009 the Supervisory Board appointed Aleksander Vozel, M.Sc. as the third member of the board. Upon receipt of consent from the Bank of Slovenia he took his post on January 1, 2010. The Bank’s Management Board usually meets once a week and considers materials 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 Association of Slovenia and a member of the Supervisory Board at the Slovene-German Chamber of Commerce. Da-vorin Leskovar is a member of the Supervisory Board at Finetol, d.d., while Viktorija Svet was not a member of any supervisory boards.

The composition of the managerial bodies changed a number of times in 2009 (due to retirements and reallocations), which is why the following is the representation of the changes during 2009 and the final situation on December 31, 2009.

In 2009 the Credit Committee 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 Commit-tee and the following members: General Manager of the Corporate Division, General Manager (or Assistant General Manager) of the Risk Management Division, General Man-ager of the hmezad Branch, General Manager of the Main Branch Ljubljana, General Manager of the Retail Division, General Manager of the Financial Markets Division and General Manager of the Payments Division. The General

Manager of the Legal and Personnel Division had a standing invitation to the meetings.

The Liquidity Committee comprised six members in 2009: General Manager of the Financial Markets Division as Com-mittee President and the following members: Vice President of the Management Board, Member of the Management Board until her retirement (from that date until December 31, 2009 the Liquidity Committee comprised 5 members), General Manager of the Corporate Division, General Man-ager of the Retail Division, General Manager (or Assistant General Manager) of the Risk Management Division. The Liquidity Committee met at least three times a week and supervised 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 2009 until Sep-tember 30 it comprised the Bank’s Management Board, the General Managers of the functionally independent organi-sational units and the Director of the subsidiary company. From October 1 onward it comprises: the Bank’s Manage-ment Board, the Executive Directors, the General Managers of the functionally independent organisational units, which functionally 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 meet-ings are usually held once a month to allow for a thorough analysis of the fluctuations in the financial statements and to discuss other significant decisions to be made in relation to the Bank’s operations.

At the 1st Regular Management Board meeting in 2009 the Assets and Liabilities Committee – the ALCO was formed as an independent advisory body to the Management Board, dealing with material related to the management of the Bank’s statement of financial position. The Committee comprises: the President of the Management Board at the post of President of the Committee, the Vice President of the Management Board at the post of Vice President of the Committee, Member of the Management Board (until re-tirement), General Manager of the Accounting Division, General Manager (or Assistant General Manager) of the Risk Management Division and General Manager of the Financial Markets Division.

In January 2009 the Bank’s Management Board established the IT Committee, which is its counselling body in connec-tion with the execution of its rights and liabilities related to IT. It meets on a monthly basis. In addition to the Presi-dent of the Management Board, the Vice President of the Management Board and Member of the Management Board (until retirement) it also comprised the General Manager of the IT Division and the Assistant General 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.

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On January 1, 2010 upon taking up the post of Management Board Member, Aleksander Vozel, M. Sc. also took up the posts of member of Liquidity Commission, Credit Commit-tee Management Body, ALCO and IT Committee.

8.10 STRUCTURE OF ShARE CAPITAL, wITh SPECIAL REFERENCE TO:– rights and liabilities, ensured by shares or shares

in individual 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 value 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 Articles of Association, which pertain to the ratio of the number of these shares to the share capital and in connec-tion 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 pri-ority 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.

8.11 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 regula-tions pertaining to dematerialized securities. Current share-holders 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 approval by the Bank of Slovenia. There is no need to get approval by the Bank or other shareholders to transfer shares.

8.12 EMPLOyEE STOCK OPTIONS

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

8.13 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.

This Statement is valid until revoked from 21 April 2010, when it was confirmed by the Supervisory Board of the Bank at the proposal of the Management Board. On the day of this statement coming into effect the statement made on 22 April 2009 seizes to be valid.

8.14 STATEMENT OF ThE POSEST, D.O.O., SUBSIDIARy COMPANy

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

Celje, 21st April 2010

43

9 STATEMENT OF MANAGEMENT’S RESPONSIBILITIES

The Management Board herewith confirms the consolidated financial statements for the year ended 31 December 2009 on the pages 46 to 51 and the accounting policies and notes to the accounting policies on the pages 52 to 121 of the 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 2009.

The Management Board additionally confirms that appro-priate accounting policies were consistently used and that the accounting estimates were prepared according to the principles of precaution and good management. The Man-agement Board furthermore confirms that the 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.

The Management Board is also responsible for appropriate accounting practice, for the adoption of appropriate meas-ures for the insurance of property and for the prevention and identification of fraud and other irregularities or un-lawfulness.

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 Corpo-rate 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, 22nd March 2010

44

10 REPORT OF ThE AUDITORS

46

II CONSOLIDATED FINANCIAL STATEMENTS1 CONSOLIDATED INCOME STATEMENT

The Notes on pages 52 to 121 form an integral part of the Consolidated Financial Statements.

– amounts in thousands of EUR

Note1 January to

31 December 20091 January to

31 December 2008Interest and similar income 3 120,432 140,010Interest and similar expense 3 (66,927) (90,246)Net interest and similar income 3 53,505 49,764

Dividend income 4 722 1,290

Fee and commission income 5 19,003 20,278Fee and commission expense 5 (2,260) (3,421)Net fee and commission income 5 16,743 16,857

Net gains from financial assets and liabilities not classified as fair value through profit or loss 6 1,345 8,640Net gains / losses from financial assets and liabilities held for trading 7 4,230 (2,628)Net losses from financial assets and liabilities designated at fair value through profit or loss 8 (705) (3,562)Foreign exchange translation net gains 9 314 4,910Net gains from derecognition of assets other than non-current assets held for sale 10 29 58Net other operating income 11 784 1,941Administrative expenses 12 (36,818) (38,753)Depreciation and amortisation 13 (3,914) (4,391)Provisions 14 235 (4,003)Impairment charges 15 (28,145) (15,563)

pRofIt BefoRe INcome tax 8,325 14,560Income tax expense 16 (1,773) (2,988)

pRofIt foR the YeaR 6,552 11,572Basic and diluted earnings per share 17 13 23

47

The Notes on pages 52 to 121 form an integral part of the Consolidated Financial Statements.

2 CONSOLIDATED STATEMENT OF COMPREhENSIVE INCOME

– amounts in thousands of EUR1 January to


31 December 2008pRofIt foR the YeaR 6,552 11,572

otheR compReheNSIve INcome 8,427 (35,781)Net gains / losses from available for sale revaluation reserve 10,593 (45,812)Valuation gains / losses taken to comprehensive income 6,823 (44,602)Transferred to income statement 3,770 (1,210)Income tax relating to other comprehensive income (2,166) 10,031

total compReheNSIve INcome foR the YeaR afteR tax 14,979 (24,209)

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3 CONSOLIDATED STATEMENT OF FINANCIAL POSITION

– amounts in thousands of EUR31 December

Note 2009 2008Cash and balances with Central Bank 18 40,240 49,044Financial assets held for trading 19 87,747 109,052Financial assets designated at fair value through profit or loss 20 18,437 29,472Available-for-sale financial assets 21 234,067 210,468Loans and advances 1,789,240 1,642,225– loans and advances to banks 22 88,501 45,911– loans and advances to customers 23 1,700,739 1,596,314held-to-maturity investments 24 213,959 193,761Assets pledged part 20, 21, 24 135,672 128,884Property and equipment 25 20,629 23,896Investment property 26 306 8,591Intangible assets 27 5,342 4,116Income tax assets 28 4,622 3,566– current tax assets 1,862 –– deferred tax assets 2,760 3,566Other assets 29 9,972 11,966total aSSetS 2,560,233 2,415,041

Deposits from Central Bank 30 130,486 90,199Financial liabilities held for trading 31 6,051 10,938Financial liabilities designated at fair value through profit or loss 32 39,851 37,719Financial liabilities at amortised cost 2,159,899 2,026,004– deposits from banks 33 56,610 60,158– due to customers 34 1,453,436 1,288,456– borrowings from banks 35 419,445 494,137– debt securities in issue 36 134,774 100,125– subordinated liabilities 37 95,634 83,128Financial liabilities associated to transfer assets 38 – 30,991Provisions 39 13,981 15,077Tax liabilities 28 – 1,198Other liabilities 40 10,574 13,494total lIaBIlItIeS 2,360,842 2,225,620

Share capital 41 16,980 16,980Share premium 41 51,542 51,542Revaluation reserve 41 4,660 (3,767)Profit reserves (including retained earnings) 41 123,074 116,550Treasury shares 41 (31) (31)Profit for the year 3,166 8,147total eQuItY 199,391 189,421total lIaBIlItIeS aND eQuItY 2,560,233 2,415,041

The Notes on pages 52 to 121 form an integral part of these Consolidated Financial Statements. These Consolidated Financial Statements have been approved for issue by the Management Board on 22nd March 2010 and signed on its behalf by:

49

The Notes on pages 52 to 121 form an integral part of these Consolidated Financial Statements.

4 CONSOLIDATED STATEMENT OF ChANGES IN ShAREhOLDERS’ EQUITy


Share capital

Share premium

Revaluation reserve

profit reserves

Retained earnings (including net profit for

the year)

treasury shares

total equity

BalaNce at 1 JaNuaRY 2008 14,092 19,492 32,014 112,470 11,042 (31) 189,079comprehensive income for the year after tax – – (35,781) – 11,571 – (24,210)New share capital subscribed (or paid-up) 2,888 32,050 – – – – 34,938Dividends paid – – – – (10,408) – (10,408)Allocation of net profit to profit reserves – – – 3,425 (3,425) – –Other – – – 22 – – 22BalaNce at 31 DecemBeR 2008 16,980 51,542 (3,767) 115,917 8,780 (31) 189,421

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

50

5 CONSOLIDATED CASh FLOw STATEMENT

– amounts in thousands of EUR1 January to


31 December 2008

a. opeRatING caSh flowSInterest received 123,498 136,326Interest paid (62,984) (86,291)Dividends received 722 1,290Fee and commission received 18,967 20,338Fee and commission paid (2,270) (3,418)Realized gains from financial assets and financial liabilities not classified as fair value through profit or loss 1,456 10,632Realized losses from financial assets and financial liabilities designated at fair value through profit or loss (80) (1,898)Gains less losses from financial assets and financial liabilities held for trading 3,525 (6,190)Payments to employees and suppliers (37,470) (38,753)Operating income 1,330 2,581Operating expenses (1,246) (1,248)

a) cash flows from operating activities before changes in operating assets and liabilities 45,448 33,369

b) (Increases) in operating assets (117,186) (6,845)Net decrease in trading assets 20,553 27,166Net decrease in financial assets, designated at fair value through profit or loss 3,910 16,977Net (increase) / decrease in available-for-sale financial assets (29,936) 110,779Net (increase) in loans and advances (113,251) (166,741)Net decrease in other assets 1,538 4,974

c) Increases in operating liabilities 128,836 107,711Net increase in deposits from Central Bank 9,009 70,702Net (decrease) / increase in financial liabilities held for trading (4,503) 4,826Net increase / (decrease) in financial liabilities designated at fair value through profit or loss 3,982 (41)Net increase in deposits and loans measured at amortised cost 87,005 49,379Net increase / (decrease) of debt securities issued measured at amortised cost 35,653 (16,353)Net (decrease) in other liabilities (2,310) (802)

d) cash generated from operating activities (a + b + c) 57,098 134,235e) Income tax (payment) (6,219) (3,346)f) Net cash used in operating activities (d + e) 50,879 130,889

51

The Notes on pages 52 to 121 form an integral part of these Consolidated Financial Statements.


Note1 January to


31 December 2008

B. caSh flowS fRom INveStING actIvItIeSa) Receipts from investing activities 90,543 41,196

Proceeds from sale of property and equipment and investment property 25, 26 110 921Redemption of held-to-maturity investments 89,254 40,275Other receipts from investing activities 1,179 –

b) payments from investing activities (112,417) (172,436)(Purchase of property and equipment and investment property) (1,307) (4,925)(Purchase of intangible assets) (1,998) (1,460)(Purchase of held-to-maturity investments) (109,112) (166,051)

c) Net cash used in investing activities (a – b) (21,874) (131,240)

c. caSh flowS fRom fINaNcING actIvItIeSa) proceeds from financing activities 12.147 35.003

Issue of subordinated liabilities 12,147 –Issue of shares and equity instruments – 35,003

b) payments from financing activities (12,552) (12,112)(Dividends paid) 41.4 (5,043) (10,408)(Subordinated liabilities repayed) 37 (7,509) (1,639)(Other payments relating to the financing) – (65)

c) Net cash from financing activities (a – b) (405) 22,891

D. effects of exchange rate changes on cash and cash equivalents 918 (679)

e. Net increase / (decrease) in cash and cash equivalents (af + Bc + cc) 28,600 22,540

f. cash and cash equivalents at beginning of year 44 96,931 75,070

G. cash and cash equivalents at enf of year (D+e+f) 44 126,449 96,931

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1. GENERAL INFORMATION

Banka Celje d.d. is a Slovene joint stock company, providing universal banking services. Its largest stockholders 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 Consolidated Financial Statements for the year ended on 31 December 2009 include the Bank and its subsidiary company Posest d.o.o.

The Bank’s owners have no power to amend the Financial Statements after their issue.

Amounts in these Consolidated Financial Statements and in the Notes hereto are expressed in thousands of euros, except where otherwise stated.

Disclosures required by the Decision regulating disclosures by banks and savings banks are incorporated in the financial statements section of the annual report in accordance with the Bank's policy.

2. SUMMARy OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the prepara-tion of these Consolidated Financial Statements are set out below. These policies were, if not stated otherwise, used in the previous years as well.

2.1 Basis for the presentation of financial statementsThe Group’s Consolidated Financial Statements have been prepared in accordance with International Financial Re-porting Standards, as adopted by the European Union. Ad-ditional information required by national regulations is included where appropriate.

The consolidated financial statements comprise the consoli-dated income statement and statement of comprehensive income showing as two statements, the statement of finan-cial positions, the statement of changes in equity, the cash flow statement 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 and investment properties, which have been measured at fair value.

NOTES TO ThE CONSOLIDATED FINANCIAL STATEMENTS

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

The disclosures on risks from financial instruments are pre-sented in the financial risk management report contained in Note 2.25.

The consolidated statement of cash flows shows the changes in cash and cash equivalents arising during the period from operating activities, investing activities and financing ac-tivities. Cash and cash equivalents include highly liquid investments and are shown in Note 44.

The Group prepares the cash flow statement using the di-rect method, by amending the appropriate items from the 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 ac-cordance 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 differ from estimates. The most important accounting policies and assessments are shown in note 2.26.

In 2009 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), the use of which is mandatory for the accounting period beginning on 1 January 2009.

a)Standards,supplementsandnotes,validfromJanuary1,2009:

– IAS 1 (supplement): Presentation of Financial Statements. The change pertaining to this standard prescribes entities to report on all transactions with other entities, which are not their shareholders using a single comprehensive income statement or by preparing two statements (an income statement and a statement of comprehensive income). The change also requires for the statement of financial position to be presented as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective reinstatement of items in its financial statements.

53

– IAS 8 (supplement): Accounting Policies, Changes in Ac-counting Estimates and Errors.

– IAS 10 (supplement): Events After the Reporting Date. – IAS 16: Property, Plant and Equipment (and consequen-tial amendments to IAS 7 – Statement of cash flows). In line with the amended standard, entities, which lease and later on sell assets, recognise the return on property sold as income. Assets held for sale must be accounted for under inventory. Cash flow from leasing and sales of these assets are shown in the cash flow statement under operating income.

– IAS 18 (supplement): Revenue. – IAS 19 (supplement): Employee Benefits. The amendment defines the basis for distinguishing between short- and long-term benefits and supplements the definition of planned profitability.

– IAS 23 (supplement): Borrowing Costs. The major differ-ence in comparison to the previous version is the elimi-nation of the option to immediately recognise the cost of borrowing under expenses in the income statement. The change is of no significance to the Bank. The definition of borrowing costs, measured using actual interest rates, has been supplemented and harmonised with IAS 39 – Financial Instruments: Recognition and Measurement.

– IAS 28: Investments in Associates (and consequential amendments to IFRS 7 and IAS 32). For the purpose of im-pairment testing this supplement proposes an investment to be treated as a single asset. The determined impairment charge is not allocated to a specific asset included within the investment, such as goodwill. The eventual reversal of the impairment loss is recognised as an adjustment of the investment up to its recoverable amount.

– IAS 29 (supplement): Financial Reporting in hyperinfla-tionary Economies.

– IAS 31: Interests in Joint Ventures (and consequential amendments to IFRS 7 and IAS 32). The amendment re-duces the disclosure requirements relating to joint ven-tures accounted for at fair value through profit or loss.

– IAS 32 and IAS 1: Puttable Financial Instruments and Ob-ligations Arising on Liquidation. The amendment requires classification as equity of some financial instruments that meet the definition of a financial liability.

– IAS 34 (supplement): Interim Financial Reporting. – IAS 36: Impairment of Assets. Should the fair value, de-creased by the amount of sales costs, be calculated using the method of discounting future cash flows, appropriate disclosures must be provided in the annual report.

– IAS 38: Intangible Assets. This supplement explains that services paid in advance are only recorded as costs when the Group has a certain right or gets access to a service. A stipulation has been removed from the standard, on the basis of which it can be ascertained that only rarely are there objective grounds for the use of a depreciation method, allowing for lower depreciation rates as compared to the linear depreciation method.

– IAS 40: Investment Property (and consequential amend-ments to IAS 16). Property that is under construction or development is recognised in financial statements as investment property. where the fair value model is ap-plied, such property is measured at fair value. where the

fair value of investment property under construction is not reliably measurable, the property is measured at cost until the construction is completed or until the fair value becomes reliably measurable.

– IFRS 2 (supplement) and the note from the committee IFRIC 11: Share-based Payment. The aim is to define fi-nancial reporting of companies in the event of payment transaction conducted with shares. The standard requires the income statement and the statement of financial po-sition to show the effects of payment transaction with shares, including the costs related to transactions, where stock options have been given to the employees. The Group does not reward employees with own shares.

– IFRS 5: Non-current Assets held for Sale and Discon-tinued Operations. The amendment proposes that after partial sale of a subsidiary, leading to loss of control, all of its' assets and liabilities should be classified as held for sale. Additionally, the relevant disclosures need to be presented, when an investment in a subsidiary corre-sponds with the definition of discontinued operations. The amendment will have no effect on the Group’s financial statements.

– IFRS 7 (supplement): Financial Instruments: Disclosures. The standard includes new, extended requirements for disclosures related to the valuation of financial instru-ments at fair value and the management of liquidity risk. The adoption of the amendment results in additional dis-closures but does not have an impact on the financial position.

– IFRS 8: Operating Segments. The standard replaces the previous IAS 14. This IFRS applies to individual and con-solidated financial statements of an entity whose debt or equity instruments are traded in a public market, or that an entity files its financial statements with a securi-ties commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market. The application of IFRS 8 does not have any ma-terial affect for the Group but has an impact on segment disclosure.

– IFRIC 9 and IAS 39: Reassessment of embedded deriva-tives. This note holds no significance to the Group.

– IFRIC 13: Customer Loyalty Programmes. Customer loyalty programmes are used to provide customers with incentives to buy their goods or services. The Group does not have customer loyalty programmes.

– 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 meas-urement of a defined benefit asset within the context of post-retirement defined benefit plans, when a minimum funding requirement exists. This note holds no signifi-cance to the Group at the current time.

– IFRIC 15: Agreements pertaining to the area of building construction and real estate. This note holds no signifi-cance to the Group.

– IFRIC 16: hedges of a Net Investment in a Foreign Opera-tion. This note holds no significance to the Group.

54

b)Standardsandinterpretationsissuedbutnotyeteffective: – IAS 24: Related Party Disclosures. Effective for annual periods beginning on or after 1 January 2011. IAS 24 was revised in 2009 by: (a) simplifying the definition of a relat-ed party, clarifying its intended meaning and eliminating inconsistencies from the definition and by (b) providing a partial exemption from the disclosure requirements for government-related entities. The Group is currently assessing the impact of the standard on disclosures in its financial statements.

– IAS 27: Consolidated and Separate financial statements. The objective of IAS 27 is to enhance the relevance, reli-ability 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 (supplement): Financial instruments: Recogni-tion 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 and IAS 27: Cost of an investment in a subsidi-ary, jointly-controlled entity or associate. The amended standard allows first-time adopters to use a deemed cost of either fair value or the carrying amount under previous accounting practice to measure the initial cost of invest-ments in subsidiaries, jointly controlled entities and as-sociates in the separate financial statements.

– IFRS 3: 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 compa-ny's financial statements, and shall apply only to the man-ner of disclosure of individual segments of operations.

– IFRS 9: Financial instruments part 1: Classification and measurement - effective for annual periods beginning on or after 1 January 2013. IFRS 9 was issued in November 2009 and replaces those parts of IAS 39 relating to the classification and measurement of financial assets. The Group is currently assessing the impact of the standard on its financial statements.

– 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 obliga-tion should be recognised at the fair value of the net assets to be distributed.

– IFRIC 18: Transfers of assets from customers. It clarifies how to account for transfers of items of property, plant and equipment by entities that receive such transfers from their customers.

– IFRIC 19:Extinguishing Financial Liabilities with Equity Instruments. Effective for annual periods beginning on or after 1 July 2010. This IFRIC clarifies the accounting when an entity renegotiates the terms of its debt with the result that the liability is extinguished through the debtor issuing its own equity instruments to the creditor. A gain or loss is recognised in the profit and loss account based on the fair value of the equity instruments compared to

the carrying amount of the debt. The Group is currently assessing the impact of the interpretation on its financial statements.

The use of the above stated standards and notes do not sig-nificantly influence the Group's financial statements.

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

2.2 ConsolidationThe financial statements of the consolidated subsidiary used to prepare the consolidated financial statements were prepared as of the parent company’s reporting date. The consolidation principles are unchanged as against the pre-vious year.

The fully-owned Subsidiary Company has been fully con-solidated in the Consolidated Financial Statements. The subsidiary has been fully consolidated since the day of the acquisition of control and will be excluded from consolida-tion on the date control is lost. where necessary, accounting policies for subsidiary have been changed to ensure consist-ency with the policies adopted by the Group.

All intercompany transactions, balances and unrealised gains and losses on transactions between group companies have been eliminated.

2.3 Segment reportingOperating 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.

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

2.4 Foreign currency translationa)FunctionalandpresentationcurrencyItems, reported in these 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 reported in euros, which is the Group's functional and presentation currency.

b)TransactionsandbalancesForeign 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 transac-tions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

Translation differences related to changes in the amortised cost of monetary assets denominated in foreign currency

55

classified as available-for-sale are recognised in 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 income statement under “Net gains/(losses) from financial assets and liabilities held for trading”.

2.5 Sale and repurchase agreements Securities sold subject to repurchase agreements (‘repos’) are retained in the financial statements as financial li-abilities associated to transferred assets. Securities sold subject to repo agreements are reclassified in the financial statements as pledged assets when the transferee has the right by contract to sell or repledge the collateral. Securities purchased under agreements to resell (‘reverse repos’) are recorded as loans and advances to other banks or customers, as appropriate. The difference between the sale and repur-chase price is treated as interest accrued over the life of the agreements using the effective interest method.

2.6 Financial assets and liabilitiesIn accordance with IAS 39, all financial assets and liabilities – which include derivative financial instruments – have to be recognised in the consolidated statement of financial position and measured in accordance with their assigned category.

2.6.1 Financial assetsThe Group classifies its financial assets in the following cat-egories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. Management determines the classification of a financial asset at initial recognition.

a) FinancialassetsatfairvaluethroughprofitorlossThis category includes financial assets held for trading, and those designated at fair value through profit or loss at incep-tion. A financial asset is classified in this group if acquired principally for the purpose of selling in the short term or if so designated by management. 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 derivatives. They are recognised in the consolidated statement of financial position as “Financial assets held for trading”.

Financial instruments included in this category are recog-nised 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 direct-ly 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 dividend income and expenses on financial assets held for trading are included in “Net interest income” or “Dividend income”, respectively.

According to IAS 39 financial assets are designated at fair value through profit or loss when:

– doing so significantly reduces measurement inconsisten-cies that would arise from the valuation of financial assets on different bases or

– the financial assets are part of a portfolio of financial in-struments which is risk managed and reported to senior management on a fair value basis or

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

To reduce accounting mismatch, the fair value option is applied to certain loans and receivables that are hedged with credit derivatives or interest rate swaps but for which the hedge accounting conditions of IAS 39 are not fulfilled.

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)LoansandreceivablesLoans 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 inter-est rate method. Loans and receivables are reported in the consolidated statement of financial position as loans and advances to banks or customers or as investment securi-ties. Interest on loans is included in the consolidated in-come 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 and recognised in the consolidated income statement as “Loan impairment charges”.

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c)Held-to-maturityfinancialassetsheld-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, other then:

– those that the Group upon initial recognition designates as at fair value through profit or loss,

– those that the Group designates as available-for-sale and – those that meet the definition of loans and receivables.

These are initially recognised at fair value including di-rect and incremental transaction costs and measured sub-sequently 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 and similar income”. In the case of impairment, the impair-ment loss is been reported as a deduction from the carrying value of the investment and recognised in the consolidated income statement as “Loan impairment charges”. held-to-maturity investments are government and bank bonds and treasury bills.

d)Available-for-salefinancialassetsAvailable-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices or that are not classified as loans and receivables, held-to-maturity investments or financial assets at fair value through profit or loss.

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 statement of comprehensive income, except for impairment losses and foreign exchange gains and losses, until the finan-cial asset is derecognised. If an available-for-sale financial asset is determined to be impaired, the cumulative gain or loss previously recognised are included in the consolidated income statement. Interest is calculated using the effective interest method, and foreign currency gains and losses on debt securities classified as available-for-sale and received dividends from equity securities classified as available-for-sale are recognised in the consolidated income statement.

e)RecognitionThe Group uses trade date accounting for regular way con-tracts when recording financial asset transactions - this is the date on which the Group commits itself to purchase or sell financial assets. Financial assets that are transferred to a third party but do not qualify for derecognition are presented in the consolidated statement of financial posi-tion as “Financial liabilities related to financial assets not eligible for derecognition”, if the transferee has the right to sell or repledge them.

2.6.2 Financial liabilitiesThe Group is holding in financial liabilities is in financial liabilities at fair value through profit or loss (including finan-cial liabilities held for trading and those that designated at fair value) and financial liabilities at amortised cost. Finan-cial liabilities are derecognised when extinguished.

a)Financialliabilitiesdesignatedatfairvaluethroughprofitorloss

This category comprises two sub-categories: financial li-abilities classified as held for trading, and financial liabilities designated by the Group as 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 statement of financial position.

Gains and losses arising from changes in fair value of fi-nancial liabilities classified 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”.

The group designated certain debt securities upon initial recognition as at fair value through profit or loss (fair value option); this designation cannot be changed subsequently. According to IAS 39, the fair value option is applied, for those debt securities that are hedged.

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)OtherliabilitiesmeasuredatamortisedcostFinancial liabilities that are not classified as at fair value through profit or loss fall into this category and are meas-ured 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)DeterminationoffairvalueFor 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. Indications that a mar-ket is inactive are when there is a wide bid-offer spread or

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significant increase in the bid-offer spread or there are few recent transactions.

For all other financial instruments, fair value is determined 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 dates of the consolidated statement of financial position.

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

2.6.3 Derecognition of financial instrumentsFinancial assets and liabilities are derecognised when the contractual rights to receive the cash flows from these as-sets have ceased to exist or the assets have been transferred

and substantially 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 redeemed or otherwise extinguished.

Collateral (shares and bonds) furnished 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.

2.7 Classes of financial instrumentThe Group classifies the financial instruments into classes that reflect the nature of information and take into account the characteristics of those financial instruments. The clas-sification made can be seen in the table below:

financial assets

Financial assets at fair value through profit or loss

Financial assets held for trading

Debt securitiesEquity securitiesDerivatives

Financial assets designated at fair value through profit and loss

Debt securitiesEquity securitiesLoans and advances to banksLoans and advances to customers

Loans and receivables

Loans and advances to banks

Loans and advances to customers

Loans to individuals (retail)

– overdraft accounts and cards– housing loans– consumer loans– violation of overdraft limits

Loans to corporate entities

– large companies– SMEs– others

Investment securities – debt instruments Unlisted

held-to-maturity Investments Investment securities – debt securities Listed

Available-for-sale financial assets

Investment securities – debt securities Listed

Investment securities – equity securities ListedUnlisted

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2.8 Offsetting Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial posi-tion 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 si-multaneously.

2.9 Interest income and expenseInterest income and expense from interest-bearing financial instruments, are recognised for all debt instruments using the effective interest method based on the actual purchase price. Interest income includes interest from fixed income investments and investments in securities held at fair value through profit or loss as well as from discounts and premi-ums 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 interest rate used to discount future cash flows for the purposes of the impairment calculation.

2.10 Fee and commission incomeFees and commissions are generally recognised as the serv-ice 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.

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

2.12 Impairment of financial assets2.12.1 Assets carried at amortised costThe 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 reli-ably estimated.

The criteria that the Group uses to determine that there is objective evidence of an impairment loss include:

– debtor’s significant financial problems, – violation of the contract entered into with the Group (non-payment of the principal and/or interest or non-fulfilment of other contractual obligations),

– probability that the debtor will enter into bankruptcy, compulsory settlement or another form of financial re-structuring,

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

The Group first assesses whether there is objective evidence of impairment in significant financial assets individually 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 identi-

financial liabilities

Financial liabilities at fair value through profit or loss

Financial liabilities held for trading (Derivatives)

Designated at fair value through profit and loss – Debt securities in issue

Financial liabilities at armortised cost

Deposits from banks

Deposits from customersRetail customers Large companiesSMEs

Debt securities in issue

Subordinated debt

commitments and contingent liabilities

Loan commitments

Guarantees, acceptances and other financial facilities

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fication is determined by local management for each identi-fied portfolio. In general, 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 carry-ing amount and the current value of the expected future cash flow, which also includes guarantees and collateral, discounted at the financial assets original effective inter-est rate. Future 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 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 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 as-sets, branch, 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 observable 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 ex-perience.

when a loan is uncollectible, it is written off against the re-lated provision for loan impairment. Such loans are written

off after all the necessary procedures have been completed and the amount of the loss has been determined. Impair-ment charges relating to loans and advances to banks and customers and financial instruments hold to maturity are recognised in income statement. Any subsequent repay-ment of written off receivables is recognised as income in the income statement.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the consolidated income statement.

2.12.2 Assets available-for-saleThe Group assesses at each reporting date whether there is objective evidence that financial assets available-for-sale are impaired. In the case of equity investments classified as available-for- sale, a significant or prolonged decline in the fair value of security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss is removed from equity and recognized in the income statement as an impairment loss. Impairment losses recognized in the income statement on equity in-struments are not reversed through the income statement; subsequent increases in their fair value after impairment are recognized in equity.

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 income statement.

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

2.12.3 Renegotiated loansLoans that are either subject to collective impairment as-sessment or individually significant and whose terms have been renegotiated 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 renegoti-ated again.

2.13 Cash and cash equivalentsFor the purpose of the cash flow statement, cash and cash equivalents comprise balances with a maturity of less than 90 days from the date of acquisition: cash and balances with the Central Bank and short term deposits with banks.

2.14 Derivative financial instrumentsDerivatives are recognized in the statement of financial position according to their fair value at on the date of the transaction. They are valued at fair value, determined on the basis of the listed market price, the model of discounted future cash flows and with the use of pricing models. Fair

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values are recognized in the statement of financial position as assets in case of positive valuation or as liabilities in case of negative valuation.

Individual derivative financial instruments that provide effective economic hedges, which however do not qualify for hedge accounting under the specific accounting rules, are therefore 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”.

2.15 Accounting for leasesa)theGroupisthelesseeThe leases entered into by the Group are operating leases. The total payments made under operating leases are in-cluded to other operating expenses in the 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 termina-tion takes place.

b)theGroupisthelessorPayments received under operating leasing are recognised as other operating income in the income statement on a straight line basis over the period of the lease. Assets leased out under operating leases are presented in the statement of financial position as investment 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 primary lease period, reflecting a constant periodic return on the lessor’s net investment outstanding.

2.16 Investment propertyInvestment property includes buildings held for rental yields and not occupied by the Group.

when purchased, investment property is recognized at cost, increased by the direct transaction costs. It depreciates dur-ing its lifetime. The Group uses the same method and depre-ciation rates in relation to investment property as it does for commercial real estate (item 2.17). Should there be a change in the type of use in relation to a piece of real estate, this is transferred to proprietary assets used.

2.17 Property and equipment All property and equipment is initially recorded at cost, which includes expenses, directly connected to the pur-chase of the asset. Subsequent costs are included in the asset’s present value, or are recognised as a separate asset, when it is probable that future economic benefits associated with the item will be generated and the cost of these can be measured reliably. Repairs and maintenance costs are charged to operating expenses during the financial period in which they are incurred.

Later property and equipment is measured at cost less ac-cumulated depreciation and any accumulated impairment loss. Property and equipment start to depreciate, when they are put into use. Land does not depreciate. Depreciation of fixed assets is calculated on a straight line basis allocating value of the assets to cost over their estimated useful lives, as follows (in %):

Buildings 1.9 – 4.9

Furniture and equipment 7.0 – 20.0

Computer equipment 10.0 – 33.0

Leasehold improvements 10.0 – 20.0

Each year the Group checks whether the residual value and the useful life of the asset correspond to the assessment and whether there are any signs which would point to impair-ment of the property and equipment. Should it be ascer-tained that such signs are indeed present, the estimation of the recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use. where the value in use is greater than the carrying amount of an asset, there is no requirement for impairment. End 2009 none of the property or equipment assets were impaired.

Gains and losses based on disposal of property and equip-ment are determined on the basis of the difference between net profit at disposal and their carrying amount, effecting operating profit in the income statement.

2.18 Intangible assetsIntangible assets comprise software and licences for soft-ware use and are initially recognised at cost. The cost of an intangible asset acquired in a business combination is its fair value at the date of acquisition. Intangible assets with a definite useful life are amortized using the straight-line method over their estimated useful economic life. Intangi-ble assets with an indefinite useful life are not amortised. Generally, the identified intangible assets of the Group have a definite useful life. At each date of the consolidated state-ment of financial position, intangible assets are reviewed for indications of impairment or changes in estimated 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 Group chooses to use the cost model for the measure-ment after recognition. 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 Software 13.0 – 30.0

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2.19 TaxationCorporate income tax is charged in accordance with the currently applicable Slovene legislation and is recorded to-gether with the changes in deferred taxes as tax expense in the income statement.

Deferred tax is accounted for in relation to all temporary differences between the value of assets and liabilities for tax purposes and their carrying amount. Deferred tax receiva-bles from temporary differences are accounted for in accord-ance with rates, which are expected to be used in the period when the receivable is obtained and the liability 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, relating to the valuation of available-for-sale financial assets according to fair value is shown directly through other comprehensive income and is transferred to the income statement together with the realized profit or loss from valuation.

The statement of financial position does not include netted receivables for corporate income tax.

2.20 Employee benefitsThe Group provides benefits for employees as legal obliga-tion: jubilee benefits and retirement indemnity bonuses. The valuation of the provisions for these obligations is carried out by independent qualified actuaries. The important as-sumptions, used in an actuarial calculation, are:

– salary increases in line with the inflation index, promo-tions and salary growth according to past years of services;

– a discount rate of 5.40% per annum; and – the number of employees, eligible to claim benefits.

According to legislation employees who retire after 35 to 40 years of employment, are entitled to a pension benefit paid out in a lump sum. 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 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.

2.21 ProvisionsProvisions 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 end of each business year the justification 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.

2.22 Financial guarantee contractsFinancial 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. Fees are transferred to the income statement through the entire lifetime of a contract using the straight line method. Subsequently, the Groups liabilities under guarantees is-sued are measured at the higher of the initial measurement, less amortization calculated to recognize fee income and the best estimate of the expenditure required to settle the obligation.

2.23 Share capitala)ShareissuecostsExpenses, directly connected with the issue of new shares are recognized through capital as a decrease in inflows.

b)DividendsonordinarysharesDividends on ordinary shares are recognised in equity in the period in which they are approved by the bank’s owners.

c)TreasurysharesShould the Group purchase treasury shares, the remunera-tion is shown as a decrease in capital. In the eventuality of a subsequent sale of the acquired treasury shares the remuneration is shown as an increase in capital. The Group formed own share reserves for the acquired treasury shares.

2.24 ComparativesThere have been no adjustments and reclassifications made in the financial statements for 2009.

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2.25 Financial risk management2.25.1 The Group’s approach to risk managementDue to the development and the characteristics of the fi-nancial system, assuming and managing risk has become an important element in the Group’s strategy as a whole.

The Posest, d.o.o., subsidiary company is not exposed to any significant risks or uncertainty. The company uses the documents and guidelines as set forth by the Bank, being its founder and owner, as appropriate considering the existing volume and type of its activities as well as the manner in which it performs them. Due to the real estate crisis, 2009 was not unlike 2008, with the company being more signifi-cantly exposed to price risk as compared to previous years. To reduce exposure it adopted measures to promote the sales of housing real estate, including additional discounts and low price loans, which were made possible by the cost price of the real estate.

In accordance with banking legislation the Group has set up a solid and reliable risk management system, incorporating:

– a clear organizational structure with detailed, transpar-ent and consistent internal relations with regarding re-sponsibility,

– efficient procedures for detection, measurement or assess-ment, management and monitoring of the risks the Group is or could be exposed to in its operations,

– an adequate system of internal controls, including ad-equate administrative and accounting procedures.

The aforementioned organisational structure of the Group is based on detailed, transparent and consistent internal relations regarding responsibilities and allows for efficient communications and cooperation across all organisational levels, including appropriate upstream and downstream information flow. Procedures and systems are clearly and understandably defined and are proportional to the char-acteristics, the volume and the complexity of operations performed by the Group. In determining proportionality the Group took into consideration multiple factors, such as size, relevance for financial stability, the risk profile, historical compliance of operations with regulations, etc.

In defining the risks for which it has prepared a strategy and individual policies of assuming and managing risk, the Group used the same classification of risk types as utilised by the Decision regulating risk management and the im-plementation of the adequate internal capital assessment procedure. Thus it determined all of the major risks, which it is or could be exposed to. The Group classifies risk accord-ing to type as follows:

– quantifiable risk: credit, market, operational, interest rate, liquidity, capital related and profitability risk;

– non-quantifiable risk: strategic and reputation risk.

Not considering the aforementioned types of risk the Group also provides the capacity to manage all other significant risk types, including internal and external risks, quantifi-

able and non-quantifiable risks, controllable and uncontrol-lable risks. Should new risk types appear these too will be included in all risk management activities.

To comply with the requirements of the Decision regulating risk management and the implementation of the adequate internal capital assessment procedure for banks and sav-ings banks, the Bank has established and is implementing:

– a strategy of assuming and managing risk (single docu-ment), conveying the Bank’s fundamental perception of risk within the framework of its operations, including:

– goals and general principles or policies in connection with assuming and managing risk,

– an approach to managing individual risk types, – an approach to the implementation of an adequate in-ternal capital assessment process and

– plans related to major business lines and changes in the Group’s business strategy;

– policies of assuming and managing risk (individual docu-ments) for:

– credit risk, – market risk, – interest rate risk, – liquidity risk, – capital related risks, – operational risk, – profitability risk, – strategic risk, – reputation risk.

The policies of assuming and managing individual risks include the following:

– the ability to assume risk, – the risk management process (organisational rules of process implementation, processes of detection, meas-urement or assessment, management and monitoring, the system of internal controls),

– the calculation of capital requirements and the process of assessing adequate internal capital levels and

– the responsibilities of the Bank’s Management Board and senior management personnel.

Strategies and policies are formed and adopted in the fol-lowing manor:

– risk management personnel prepares the documentation, – the Risk Management Board checks it in detail, harmo-nises it and gives consent,

– the Bank’s Management Board confirms it, – the Audit Committee agrees, – the Bank’s Supervisory Board considers it and gives con-sent.

The Group provides for a regular independent examina-tion of the assumption and management of risk through its Internal Audit.

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with the development of internal reporting and the con-sideration as well as adoption of decisions at a number of the Bank’s bodies, the risk management process actively includes the Bank’s Management Board and the entire sen-ior management. By managing risk effectively the Group’s aim is to achieve quicker and more effective responsiveness to the changes in the environment, to follow client needs more closely and to ensure long-term financial stability of the Group.

Risk management is directly monitored:

– at the Risk Management Division (division’s primary ac-tivity),

– at Credit Committee meetings (weekly), credit risk, – at Liquidity Committee meetings (three times a week), liquidity risk,

– at ALCO (monthly): credit, market, liquidity, interest rate, capital related, operational (based on in-depth reports) and other risk types,

– at Risk Committee meetings: all risk types the Group is exposed to.

In relation to assuming and managing risk the Risk Com-mittee plays an important role as a coordinator and advisory body to the Bank’s Management Board, having comprehen-sive insight into all risk types the Group is exposed to and continuing the implementation of the new Basel II capital accord (confirming the methodologies of assessing internal capital and capital requirements, risk profile, etc.).

In line with the new Basel II capital accord the Group is set-ting up the ICAAP process, which:

– is based on the identification, measurement and assess-ment of risk, the preparation of an aggregate risk estimate and the monitoring of significant risk types,

– allows for ensuring adequate internal capital levels in relation to the risk profile and

– is appropriately included in the management process (decision-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 identification, meas-urement or assessment, management and monitoring that these might significantly impact its operations, thus requir-ing it to ensure appropriate capital levels.

The Group calculates the internal capital assessment and capital requirements on a quarterly basis, with the calcula-tion being confirmed at the Risk Committee and considered at ALCO.

The risk profile is a documented and categorised compilation of quantitative and qualitative assessments of quantifiable and non-quantifiable risk types the Group assumes in its operations. The preparation of the risk profile is extremely important for the Group, as it is used in a number of fields:

planning and implementing risk management activities, calculating internal capital requirements and planning the operations of the Internal Audit. The risk profile is also the common denominator for comparison with banks and be-tween different time periods.

In 2009 the Group continued to perform a number of activi-ties in relation to the implementation of the ICAAP process. It developed new methodologies and perfected the existing methodologies of the calculation of internal capital esti-mates and the internal capital requirements for all signifi-cant risk types.

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 risk profile and pre-pared a risk matrix. Based on the risk profile, calculated in December 2009, the Group’s exposure to risk is acceptable. 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.

The Group is required to disclose in line with Paragraph 1 of Article 4 of the Decision on disclosure. At the same time, based on the required use of IFRS, it is also required to disclose in accordance with IFRS 7. The Group’s disclosures include significant information and do not include any in-formation deemed a business secret or deemed confidential. Should certain disclosures be omitted, the Group states it did not disclose all information and lists the reasons for omission.

The provisions of the Decision regulating risk management and the implementation of the adequate internal capital as-sessment procedure for banks and savings banks are being met by the Bank in the Group on an individual basis in line with the position taken by the Bank of Slovenia.

2.25.1.1 TheprocessofmanagingindividualtypesofriskCredit riskCredit risk is assessed for financial assets measured at cost, for financial assets recognised at fair value and for com-mitments and contingent liabilities exposures. Credit risk is mainly based on business, consumer and housing loans granted, credit cards, account overdraft limits, guarantees and granted undrawn loans as well as debt security invest-ments and exposures from derivative transactions. The Group’s exposure to credit risk depends on exposure size, probability of default and the loss amount in case of non-payment, which also depends on the collateralization and recovery procedures.

Credit risk is measured at the debtor level and at the entire portfolio level. In case of objective evidence of impairment, the Group assesses loss in line with the internal credit risk loss assessment methodology in accordance with IFRS.

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The Group has developed a number of procedures and methodologies for the management of credit risk. Prior to granting a loan it assesses debtor risk and classifies them in the appropriate rating class based on the assessment of quantitative and qualitative elements. It monitors debtor risk during the entire duration of the credit relationship and reclassifies them accordingly. The Group strives to at-tain high quality collateral on its receivables, which is why it regularly monitors risk in relation to collateral. To limit large concentration it has set up limits for the indebtedness of individual debtors and groups of related entities as well as structural limits for the credit portfolio. The implemented process of loan monitoring allows for timely detection of increased credit risk and an early start of activities for the settlement of due receivables. Bad exposures are monitored by the Legal Office and Personnel Division.

The monitoring of the Group’s exposure to credit risk, the consideration of limits and the introduction of different measures is performed on the basis of a number of analyses and reports, which are submitted to top management and to different bodies in the Bank (Credit Committee, ALCO Committee, the Bank‘s Management Body, etc.).

Market risk The procedures of assessing risk in transactions with securi-ties and in transactions with derivatives based on securities put a lot of emphasis on being familiar with all the relevant risks upon purchase or at issue of the relevant securities. This is especially important in purchases of structured secu-rities and derivatives based on securities. It is also necessary to be familiar with the effects these transactions might have on an increase in currency risk.

In connection with measuring risk related to securities, the anticipated return on the security, assessed through its coupon rate, the calculation of yield to maturity, dividends and the difference between the purchase and sale price are all taken into consideration. Additionally, the Group has also started measuring risk using the value-at-risk method (VaR).

In measuring derivatives risk, the methodology on the valu-ation of trading items includes detailed procedures for the measurement of individual types of risk associated with derivatives. The calculation models take into consideration market values and are calculated independently from the trading unit. In calculating value-at-risk (VaR) in accord-ance with the internal model, the “delta normal” model is used as well as the “historic simulation” model.

The Group measures foreign currency risk using the classi-cal model in accordance with the current regulations (plain currency openness), with value-at-risk methodology also being introduced.

Managing risk is a process under the auspices of the ALCO and is conducted at its meetings, where decisions are made and policies are adopted relating to the amount of mar-ket risk that the Group is prepared to assume. The Risk

Management Division prepares limit proposals, which are subsequently approved at ALCO meetings. Limits for trad-ing items are set based on the consideration of the regional location, issuer, type of transaction, quotes and ratings. In addition to the traditional limits related to exposure to trad-ing securities, “stop-loss” limits have also been adopted. At the Financial Markets Division transactions are performed in accordance with the limits set as well as the authoriza-tions and other adopted rules.

To manage foreign currency risk, foreign currency limits have been defined, determining the maximum amount of an open position in an individual foreign currency as well as the total open position allowed.

Market risk monitoring is performed with the preparation of reports, showing the amount of exposure to market risks, by supervising limit consideration, preparing reports on gains or losses achieved in the area of securities trading and other. Reporting to ALCO is performed once per month, whereas the Risk Management Division monitors the con-sideration of all trading limits detached from commercial activities on a daily basis.

Interest rate riskThe procedures of risk assessment are performed by deter-mining the interest rate sensitivity for all existing transac-tions or by determining whether these affect the level of interest rate risk. Derivatives sensitive to the interest rate are emphasized especially.

Measurement of interest rate risk is based on the classifica-tion of interest rate sensitive products into three groups, where it is performed separately. These three groups are: net banking book position, transferred banking book position and trading book.

Items in the net banking position are analysed using the method of interest rate gaps, which means all the items are classified into individual time intervals depending on their final maturities or the date of the next interest rate fixing. The exposure to interest rate risk of the net banking position is also measured using the duration gap method, which allows for an estimate of the change in the economic value of interest rate sensitive items when the interest rate curve changes.

The transferred banking position is used to achieve a trans-formation of stable at sight funding sources to liquid debt securities with appropriate ratings and maturities on the one side all the while representing an attempt to stabili-ties the Group’s interest income on the other. The analysis of the transferred position measures duration or modified duration.

The interest rate risk in the trading book is represented by the interest rate sensitive financial instruments therein. These are analysed in more detail within the framework of market risk, where modified duration is calculated and

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sensibility analyses as well as stress tests are performed on debt securities from the trading book.

with the use of interest rate gap method, the group meas-ures interest rate risk exposure in the banking book as a whole, while also using simulations to ascertain the impact changes in the interest rate have on interest income and expenses. The methodology is based on maturity of transac-tions and on the dates of the next changes of interest rates for all interest rate sensitive transactions in the banking book within a year. The exposure to the risk of the banking book as a whole is also monitored with the use of the method of duration gasp and the estimated changes in the economic value of interest rate sensitive items when the interest rate curve changes.

Managing risk is a process under the auspices of the ALCO conducted at its meetings, where decisions are made and policies on the amount of interest rate risk that the Bank is prepared to assume, are determined. ALCO dispenses instructions to the commercial divisions on the types of transactions to perform, so that the interest rate risk does not exceed the predetermined limits. Analyses of interest rate risk, comprising sensitivity analyses and stress tests are the basis for these decisions.

The monitoring of interest rate risk is performed with the preparation of reports showing the exposure to interest rate risk (separately for the net banking position and together with the transferred banking position), the supervision of risk consideration, which are considered at ALCO once a month. The Financial Markets Division is involved in day-to-day monitoring, being the coordinator of agreements in connection with larger interest rate sensitive transactions performed on a daily basis. Independently of the above, the Group also monitors interest rate risk based on profitability.

Capital related risksThe methodology of assessing capital related risks is based on determining the components of capital, the capital re-quirements and the capital adequacy ratio during a longer period of time by analyzing related changes.

The Group ensures regular monthly measurement of capital components through compliance with the legislation, the Bank of Slovenia regulations, the internal limits and in line with other assumed risks.

within the framework of capital related risk management, the Group has set the limit for the capital adequacy ratio above 10%, the limit for the Tier 1 capital adequacy ratio at over 7.5% and the ratio between the internal capital esti-mate and the capital requirements from the 1st pillar above 130%. It has also foreseen measures to be taken for reducing capital related risk. Prior to the beginning of the imple-mentation of measures to increase capital the Group man-ages capital risk by taking measures to reduce exposures to individual types of risks, except when actually deciding to increase the assumed risk in line with the prepared esti-mation on the capacity to assume risk.

Monitoring activities are performed by forwarding pre-scribed reports to the Bank of Slovenia in connection with the measurement of capital related risks once every quarter (Basel II first pillar). Monthly reports are prepared for in-ternal use and presented at ALCO. In addition to the actual calculation these also include the analysis of changes as compared to the previous period.

As regards the need to monitor the Group’s capital adequacy related to the entire assumed risk within the framework of its operations, internal capital and the internal estimation of capital requirements are calculated on a quarterly basis and presented to the ALCO.

Operational riskThe assessment of operational risk takes into account inter-nal and external factors and pertains to the identification, determination and classification of loss events, their causes and consequences as well as their effects. New products, activities, processes and systems are also assessed thor-oughly from the operational risk point of view prior to their introduction. The Group performed the identification of operational risk as part of its business processes review thus ensuring a sound foundation for the monitoring of its own exposure to this type of risk.

Measurement includes those loss events, which have a gross impact on the income statement and their value equals or exceeds EUR 40. The recording system is designed so that the loss events are recorded at 100 reporting posts. The Group has defined the criteria for the valuation of small and large loss events and a standard for the determination of a significant operational risk event form the value and quality aspects. The Bank also identifies indicators (such as fast growth, movement of labour, frequency of system shutdowns), which can be warning signs in relation of in-creased risk of future loss.

within the operational risk management system measures have been set as well as rules and plans for the implemen-tation of the captioned measures related to assuming, re-ducing, diversifying, transferring or avoiding operational risk. Activities include the assessment of probability for loss events to materialize on the basis of the identified causes and the estimated effects. The Group also monitors and as-sesses potential loss events, which it treats as an opportu-nity to improve, as they include all operational deviations, which could potentially affect or cause a loss event. A good basis for the managing of risk is provided by the 37 compiled operational processes, on the basis of which the Group has prepared: a matrix of connections between the operational units within the Group’s operational processes, the potential profile of the Group’s exposure to operational risk for each individual operation and the Group as a whole as well as a catalogue of all operational risks the Group identifies.

Monitoring of operational risk is performed at the Risk Management Division, which prepares different types of analyses and reports to the Management Board and senior management on the larger realized loss events in all organi-

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zational units on a monthly basis. Continuous monitoring of measures taken to manage this type of risk is provided for.

The Group has prepared different documents for the even-tuality of operating in conditions of serious business dis-ruption. In the field of information technology a Secondary Location has been provided for in case of need. A Disaster Recovery Plan has also been prepared to provide for the set up of operations after a disaster event and Contingency Plans for continuous operations have been prepared as well.

The Group has also prepared manual procedures for the per-formance of significant operational processes in the event of inoperability of the IT systems. Analyses of the risks in con-nection with IT are prepared regularly for these processes.

Profitability riskAssessing profitability risk is based on the assessment of the statement of financial position structure, the items from the income statement and their quality, the interest rate margin and the cost efficiency over a longer period of time through the analysis of changes.

By regularly measuring the elements of profitability risk the Group ensures their adequacy for achieving planned profit levels.

The Group manages profitability risk by implementing meas-ures for its reduction, should individual items from the in-come statement not reach the plan and the Group did not expect any improvement in the future. In the implementa-tion of measures to increase profitability, the Group will first attempt to increase income, especially in the case of decid-ing to increase the assumed risk level, which subsequently increases impairment charges and provisions. Should the measures taken not sufficiently improve profitability the Group will then take measures to decrease costs. Should it be ascertained that a number of income statement items are not reaching the plan, this will in turn be revised. A revision of the plan will only be performed in circumstances, where external factors, which cannot be influenced, such as the general interest rate level, general economic conditions and the changes in the competitive environment of the Group’s operations, have caused it to not be attainable.

Monitoring profitability risk takes on the form of quanti-tative and qualitative analyses, which are reported at the ALCO meetings on a monthly basis. The reporting system thus enables all of the Group’s organizational units to be acquainted with profitability risk.

Strategic riskThe assessment of strategic risk is based predominantly on the assessment of the Group’s vision, the clarity and con-servative nature of its strategy, the correctness of strategic objectives and the support provided by the required capital, the management and personnel as well as technological capabilities.

This type of risk is not quantifiable however through regu-lar estimations of its elements, with a view to monitoring the realization of strategic objectives and goals, the Group ensures their adequacy.

The management of strategic risk includes measures, which will provide for its reduction and will be implemented should strategic objectives not be realized to the required extent and improvement is not expected in the future. On the basis of analysed deviations, operational measures will be taken to accelerate the necessary activities for the implementa-tion of strategic objectives. Should significant deviations of actual operations from the strategic objectives be ascer-tained, the Group will adapt its strategy. In times of instable conditions in its environment deviations are analysed more frequently. Every year a business policy and an annual plan as well as a development plan for a three-year period are prepared and are regularly updated and prolonged by one additional year. As a rule, estimates for the realization of the annual plan are prepared twice during the year and are presented at the ALCO meetings.

Monitoring the business policy implementation and the realization of the annual plan is performed through interim reports to the Supervisory Board, which include qualitative analyses of operations.

Reputation riskThe indicators for assessing reputation risk are monitored according to the respective interested public (owners, em-ployees, supervising institutions, clients, business partners, private individuals). These indicators may differ, e.g. the estimates of the Bank of Slovenia, auditor’s report, operat-ing and financial results, surveys, media presence, internal relations.

Reputation risk is not a quantifiable type of risk, which is why the abovementioned indicators are estimated in a pre-dominantly qualitative manor, adapted to each individual criterion, empirically, based on the timeline, at different intervals and when they occur. The operating and financial results are quantifiable and are considered on a monthly, quarterly, semi-annual and annual basis, internally as well as by auditors, the Bank of Slovenia, the Supervisory Board and other supervisory institutions as well as the interested public.

Reputation risk is managed through operational results, by ensuring transparency of operations based on regular and comprehensive information made available, by monitoring public opinion, through systematic marketing and corpo-rate communications, regular and systematic employee and management training and the verification of their qualifica-tion, by training and educating employees in marketing and measuring client satisfaction with the use of anonymous surveys, by monitoring relations with clients and by being socially responsible, etc.

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2.25.2 Credit riskCredit risk is the risk of loss resulting from a debtor’s in-ability 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. It is one of the most important types of risk. The Risk Man-agement Division, being an organizationally independent unit in relation to commercial units and directly 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 exposure 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. Authorisa-tions 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 organizational structure is de-signed to provide for independent operations of individual organizational units, ranging up to the managerial level and allows for an adequate flow of information upstream and downstream as well as between organizational units.

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

2.25.2.1 MeasuringandmanagingcreditriskThe Group measures credit risk for active statement of fi-nancial position items and for commitments and contingent liabilities.

Internal rating systemThe Group’s exposure to credit risk depends on three el-ements: (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 expected 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 differ-ent debtor groups (legal entities, individual entrepreneurs and banks). Debtor classification is based on the estimated qualitative and quantitative elements. In the classification of banks and sovereigns external ratings are usually consid-ered (Moody’s Investor Service, Fitch Ratings, Standard & Poor’s). Prior to every individual private loan or investment approval each individual’s creditworthiness is assessed and the settlement of existing liabilities checked. Before ap-proving a loan, as a rule, an inquiry is made with the use of the SISBON system (Slovenski informacijski sistem bonitet fizičnih oseb – the Slovene Information System on the Rat-ing of Private Individuals), which includes data on indebted-ness and settlement of liabilities by private individuals in the Slovene banking environment. SISBON became fully functional in August of 2008.

Prior to approving a transaction the Group classifies a debt-or into a rating class, measuring the probability of default and loss. On an ongoing or at least 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 be-tween 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:

Rating class

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** the C2 class includes debtors exhibiting liabilities, which are over 90 days overdue. The internal rating system considers this class as default.

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(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. For financial assets measured at fair value, the loss is evaluated based on market prices.

Debt securitiesIn managing credit risk from debt securities, the Group uti-lizes external ratings (Fitch Ratings, Standard & Poor's and Moody's Investor service). In cases, where the fair value of an individual security is significantly 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.

DerivativesThe exposure to credit risk due to derivatives equals the credit replacement value, calculated on the basis of the cur-rent exposure method in accordance with the regulation. The Group enters into derivative instrument agreements with prime debtors mainly in foreign currency transactions, interest rate swaps and securities transactions. The expo-sure 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 upper 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 do-ing 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 20% (for entities in a special relationship with the Group) or 25% of the Group’s capital. The limits are monitored on an ongoing basis and are adjusted for changes in the economic environment and adapted to debtor risk. Total limits and their possible increases are confirmed by the Group’s Credit Committee.

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 limits 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.

CollateralThe Group’s exposure to credit risk is reduced with the im-plementation of policies regarding collateral. To minimize loss in the event of default, the Group tends to acquire ad-

equate collateral from the debtor, such as a mortgage on commercial or residential real estate, pledges of financial property (bank deposits, securities) or the acquisition of personal credit insurance by an adequate provider. The Group considers other forms of collateral such as physical collateral, inventories and cash claims to be of lesser qual-ity. Usually 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 worsens, the Group would negotiate additional col-lateral 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 price;

– personal assurances given by: sovereign and central bank, regional or local authorities, public sector entities, insti-tutions, insurance companies and companies with a high credit rating.

when utilising collateral, the Group is exposed to residual risk, which is why it has prepared the policy on assuming and managing collateral related risk. The Group assesses and monitors inefficiency risk or the risk of a reduced ef-ficiency of collateral, the collateral valuation risk, the risk of concentration in an individual type of security and the risk associated with the termination of collateral.

The Group manages collateral based market and credit risk by regularly monitoring the fair value and liquidity of individual collateral types. The Group specifies minimal collateral ratios, which are determined according to the type of collateral and borrower risk. Collateral ratios are changed on a regular basis and additional collateral is always required when its value or quality decreases or when bor-rower's creditworthiness deteriorates. The Group manages the concentration of collateral based market and credit risks by regularly monitoring and analysing collateral received.

Due to the macroeconomic conditions and the circumstanc-es prevailing in the real estate and capital markets in 2009, a great deal of attention was directed at monitoring 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 lossesA methodology for the estimation of credit risk losses has been prepared in accordance with IFRS, which is updated at

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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 ba-sis of commitments and contingent liabilities. Should such evidence exist, the Group needs to calculate the amount of the loss due to impairment charges or form provisions for commitments and contingent liabilities. The methodology of estimating impairment charges is set up according to type of debtor: prime debtors, banks and savings banks, legal entities, individual entrepreneurs and private individuals.

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 characteristics (exposures in excess of 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 cost is also assessed for financial assets and com-mitments and contingent liabilities, 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 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 histori-cal default data and loss estimates. The group estimation percentage includes a general risk factor, reflecting the de-terioration 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 gen-eral 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.

For banks the impairments are estimated solely on an in-dividual basis. Exposures to prime debtors (sovereigns and central banks) and exposures, collateralized with the use of prime property, are not impaired. Exposures to private individuals are impaired collectively, except in cases of sig-nificant exposures showing signs of impairment.

when the Group assesses that a loan may no longer be re-paid from the debtor’s cash flow or from the realization of collateral, it proposes for the debt to be written-off, which is only effected after all reasonable steps have been taken to reach settlement.

Capital requirements in connection with credit riskSince January 1, 2008 the Group has been calculation the capital requirements for credit risk in accordance with the standardized approach. To decrease the capital requirement it utilises eligible collateral. To calculate the effects of finan-cial collateral, the Group utilises a method developed for the purpose. The calculation takes into consideration personal collateral of eligible providers as well, whereas the pledging of commercial and residential real estate is not yet included in the reduction of capital requirements. To determine the risk weighting the Group has recognized Fitch Ratings and Moody’s Investor Service (named eligible ECAI – External Credit Assessment Institution) for the category of exposures to sovereigns and central banks, whereas the Moody’s Inves-tor Service is used for the exposure to institutions. For all of the exposures in relation to the abovementioned categories, the Group consistently uses available debtor ratings and the ratings of their securities in issue. The Group did not name an eligible ECAI for other exposure groups, which is why risk weighting is assigned on the basis of the debtor’s govern-ment weighting and the risk associated with the investment.

Managing credit risk during the crisisDue to the economic and financial crisis the Group applied its credit policies and managed its credit portfolio with great care during 2009. It continued to implement measures to dampen the effects of the crisis on its financial position and performance. It limited lending to higher risk debtors and toward real estate projects, while trying to increase the collateral in connection with its own receivables, keeping in close contact with borrowers, monitoring their operations and cash flow for the repayment of debt and adapting debtor ratings and limits accordingly. New investments were ap-proved to finance the regular activities of debtors on the basis of appropriate collateral. In retail lending it applied stricter criteria for the assessment of creditworthiness.

A large-scale recovery is not expected for 2010. This could cause increased exposure to risk, as the number of defaults might intensify and the Group could see additional loss in its credit portfolio. Should the share of irrecoverable receivables (E rated loans) increase threefold, the income statement would show additional impairment charges of EUR 17,538 thousand.

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2.25.2.2 Largest credit risk exposure

– amounts in thousands of EUR31 December 2009 31 December 2008

largest exposure to

credit risk

Impairment and

provisionsfair value of

collateral3

largest exposure to

credit risk

Impairment and

provisionsfair value of

collateral3

Balance sheet assets 2,476,638 79,271 1,703,572 2,326,503 58,500 1,373,534loans 1,863,067 73,827 1,621,440 1,696,032 53,807 1,373,534Loans and advances to state1 8,113 – – 10,819 – –Loans and advances to banks 88,568 67 – 46,395 484 –Loans and advances to private individuals 313,818 7,731 408,301 296,964 6,071 386,001– overdraft accounts and cards 32,328 323 23,889 29,882 299 22,584– housing loans 131,004 2,988 248,309 115,000 2,173 234,747– consumer and other loans 149,542 3,874 136,103 151,035 2,912 128,670– violation of overdraft limits 944 546 – 1,047 687 –Loans to companies2 1,452,568 66,029 1,213,139 1,341,854 47,252 987,533– large companies 677,430 14,299 465,613 514,251 9,285 320,977– small and medium sized enterprises (SME) 734,602 47,195 728,468 771,806 34,122 635,766– other 40,536 4,535 19,058 55,797 3,845 30,790financial assets held for trading 51,924 – – 83,069 – –Derivatives 16,129 – – 21,431 – –Debt securities 35,795 – – 61,638 – –financial assets designated at fair value through p&l 18,437 – – 29,472 – –Debt securities 18,437 – – 29,472 – –available–for–sale financial assets 182,523 4,360 29,169 182,191 3,566 –Debt securities 182,523 4,360 29,169 182,191 3,566 –held–to–maturity investments 213,959 – – 193,761 – –Debt securities 213,959 – – 193,761 – –assets pledged 135,672 – 52,963 128,884 – –Debt securities 135,672 – 52,963 128,884 – –other assets 11,056 1,084 – 13,093 1,127 –

off–balance sheet exposures 238,015 2,695 90,486 285,220 3,372 110,014Guarantees 79,819 1,031 41,989 88,697 1,075 59,247Other off-balance sheet exposures 158,196 1,664 48,497 194,377 2,297 50,767total 2,714,653 81,966 1,794,058 2,611,723 61,872 1,483,548

1 State (sovereigns) includes direct beneficiaries of the Republic of Slovenia budget and foreign state central 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, societies and other debtors, which do not provide data 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 highly rated companies,– values of residential and commercial real estate equal market values of comparable real estate sales levels.

The table shows the Group’s largest gross credit risk expo-sure from loans, investments in securities and commitments and contingent liabilities as at December 31, 2009 and 2008. In 2009 the exposure increased by 4%, with loans to corpo-rate, retail and banks having had the strongest influence. Exposure from debt securities and derivatives decreased. A decrease is also evident in commitments and contingent liabilities due to reduced balances of stand-by credit lines and guarantees.

By responsibly managing the investment policy and success-fully managing credit risk, the Group achieved the following results in 2009:

– as at December 31, 2009 loans that were classified into the highest of investment grade rating classes, namely A and B, represented 93.39% of all loans (2008: 96.66%), impair-ment charge coverage amounted to 3.96% (2008: 3.17%);

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– the coverage of exposure with adequate collateral improved in 2009, due to additional collateral applied to existing loans as well as collateral obtained for new loans, thus 87% of all loans was collateralised as at December 31, 2009;

– the Group holds over 90% of debt security investments rated at least A; – the income statement shows impairment charges and provisions amounting to EUR 27,910 thousand, wherein impair-ment charges for loans measured at amortised cost represented EUR 20,373 thousand (2008: EUR 6,462 thousand) and available-for-sale financial asset impairment charges amounted to EUR 7,772 thousand (2008: EUR 9,100 thousand), while provisions for commitments and contingent liabilities and other provisions decreased by EUR 235 thousand. Increased impairment charges reflect the economic and financial crisis, which resulted in increased defaults;

– the impairment charges and provisions formed for the portfolio exposed to credit risk amounted to EUR 81,966 thou-sand as at December 31, 2009, representing 3.02% of the exposure (2008: EUR 61,872 thousand or 2.37%).

2.25.2.3 Creditriskexposureaccordingtoratingclasses

Exposure from loans


Rating classloan

amountImpairment

amountloan

structureImpairment

structureloan

amountImpairment

amountloan

structureImpairment

structurePrime (A) 1,106,653 7,146 59.40% 9.68% 1,089,808 8,107 64.26% 15.07%Standard (B) 633,279 25,462 33.99% 34.49% 549,591 24,695 32.40% 45.89%Substandard (C) 65,546 10,944 3.52% 14.82% 34,718 5,788 2.05% 10.76%Default (D) 48,254 21,135 2.59% 28.63% 13,106 6,659 0.77% 12.38%Default (E) - recovery 9,336 9,139 0.50% 12.38% 8,809 8,559 0.52% 15.91%total 1,863,067 73,827 100.00% 100.00% 1,696,032 53,807 100.00% 100.00%

Gross exposure from loans as at December 31, 2009 amounted to EUR 1,863,067 thousand, representing a 10% increase as compared to the balance the previous year (2008: EUR 1,696,032 thousand). After accounting for impairment charges the loan carrying amount is EUR 1,789,240 thousand or by 9% larger as compared to 2008 (2008: EUR 1,642,225 thou-sand). Portfolio quality deteriorated slightly due to the difficult conditions, as shown by the fact that as at December 31, 2009 the percentage of highest rated loans (classes A and B) was 93.39% (2008: 96.66%). Exposure to loans, classified as substandard and default increased to 6.61% (2008: 3.34%) due to increased exposures to C and D rating classes, with the Group recognising additional impairment charges.

According to loan type


31 December 2009 loans to private individuals loans to companies

Rating class

overdraft accounts

and cardshousing

loansconsumer

loans

violation of overdraft

limitslarge

companies 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 – – 9,335Impairment 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

72

Loans to private individuals increased by 5% as compared to the previous year. housing loans and overdraft accounts increased, whereas consumer spending loans went down. Loan quality remained high (2009: 96% of loans was classified prime; 2008: 97%).

Lending to companies increased by 7%, with the strongest effect coming from an increase in exposure to large enterprises, as the Group increased lending to government controlled companies, which are of special social significance and therefore carry less risk.

Credit exposure to banks increased in 2009, while the exposure to the state remains low. The Group cooperates with sovereign entities and banks, presenting a low level of risk.

2.25.2.4 Creditriskexposureaccordingtomaturity

Loans according to maturity


31 December 2008 loans to private individuals loans to companies

Rating class

overdraft accounts

and cardshousing

loansconsumer

loans


limitslarge

companies Sme other

loans and advances

to state


Prime (A) 29,882 110,253 147,646 200 391,792 341,952 21,599 10,819 35,665 1,089,808Standard (B) – 3,344 1,661 100 120,633 383,145 29,978 – 10,730 549,591Substandard (C) – 805 568 88 262 31,660 1,335 – – 34,718Default (D) – 123 31 11 1,564 11,313 64 – – 13,106Default (E) - recovery – 475 1,129 648 – 3,736 2,821 – – 8,809Impairment 299 2,173 2,912 687 9,285 34,122 3,845 – 484 53,807total 29,583 112,827 148,123 360 504,966 737,684 51,952 10,819 45,911 1,642,225


loans according to maturity

loans to private

individualsloans to

companiesloans to

stateloans to

banks

loans to private

individualsloans to

companiesloans to

stateloans to

banksLoans outstanding 308,183 1,369,986 8,113 88,566 293,379 1,262,400 10,819 46,392Loans due - impaired 4,346 76,597 – 2 3,585 69,615 – 3Loans due - non impaired 1,289 5,984 – – 9,839 – –Impairments 7,731 66,029 – 67 6,071 47,251 – 484total 306,087 1,386,539 8,113 88,501 290,893 1,294,603 10,819 45,911

As at December 31, 2009 the exposure from impaired loans to corporates past due amounted to EUR 76,597 thousand (2008: EUR 69,615 thousand) with only EUR 5,984 thousand represented by non-impaired loans (2008: EUR 9,839 thousand).

The Group’s policy regarding settlement and recovery of retail loans due is adequate, therefore their value is low.

73

Loans due and non-impaired

Loans due and impaired


loans to private

individualsloans to

companiesloans to

banks total

loans to private

individualsloans to

companiesloans to

banks totalReceivables up to 30 overdue 287 9,950 1 10,238 723 13,240 1 13,964Receivables from 30 to 90 days overdue 1,070 4,819 – 5,889 384 21,751 – 22,135Receivables over 90 days overdue 2,989 61,828 1 64,818 2,478 34,625 2 37,105total 4,346 76,597 2 80,945 3,585 69,616 3 73,204Fair value of collateral 4,032 49,565 – 1,380 52,755 –


loans to private

individualsloans to

companiesloans to

banks total

loans to private

individualsloans to

companiesloans to

banks totalReceivables up to 30 overdue 272 1,534 – 1,806 – 607 – 607Receivables from 30 to 90 days overdue 1,017 705 – 1,722 – 220 – 220Receivables over 90 days overdue – 3,745 – 3,745 – 9,012 – 9,012total 1,289 5,984 – 7,273 – 9,839 – 9,839Fair value of collateral 369 7,668 – – 3,298 –

Restructured loans


carrying amount carrying amountRestructured loans 33,764 301

The carrying amount of restructured loans in 2009 increased due to the economic crisis. The Group decided to restructure receivables from debtors, which exhibited a deteriorated economic and financial position and lead it to the assumption that the loans will not be settled at the initially agreed maturities. Restructuring was mainly preformed by prolonging the maturity on principals. Collateral coverage is high, as the value of collateral received as at December 31, 2009 amounted to EUR 31,767 thousand.

74

2.25.2.5 Creditriskexposureaccordingtoimpairmentapproach

Exposure from loans


Group approach Individual approach Group approach Individual approachRating class loans Impairments loans Impairments loans Impairments loans ImpairmentsPrime (A) 973,772 7,146 132,880 – 1,006,769 8,106 83,039 –Standard (B) 219,145 8,273 414,134 17,189 135,048 6,333 414,543 18,362Substandard (C) 9,160 1,913 56,386 9,030 6,125 1,252 28,593 4,536Default (D) 2,756 1,494 45,498 19,641 1,588 976 11,518 5,683Default (E) - recovery 5,463 5,428 3,873 3,711 4,803 4,760 4,006 3,799total 1,210,295 24,255 652,771 49,572 1,154,333 21,427 541,699 32,380Fair value of collateral 1,101,130 500,169 1,013,356 360,178

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 in default are impaired indi-vidually on the basis of the estimated future cash flows, with other exposures, where there is no objective evidence for impairment, impaired collectively. As at December 31, 2009 35% of the loan portfolio or 60% of impairment charges was made individually (2008: 32% of the loan portfolio or 67% of impairment charges performed individually).

Loans rated A, which are assessed collectively and individually, and B, assessed collectively, are represented by unmatured and non-impaired facilities. As at December 31, 2009 these accounted for EUR 1,325,797 thousand (2008: EUR 1,224,856 thousand).

According to loan type


31 December 2009 loans to private individuals loans to companiesoverdraft

accounts and cards

housing loans

consumer loans


limitslarge

companies Sme other

loans and advances

to state


Group approach 32,328 131,004 149,542 944 462,406 399,776 34,296 – – 1,210,296Impairments 323 2,988 3,874 546 3,718 11,154 1,652 – – 24,255Individual approach – – – – 215,024 334,826 6,240 8,113 88,568 652,771Impairments – – – – 10,581 36,041 2,883 – 67 49,572Impairment compared 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


31 December 2008 loans to private individuals loans to companiesoverdraft

accounts and cards

housing loans

consumer loans


limitslarge

companies Sme other

loans and advances

to state


Group approach 29,882 115,000 151,035 1,047 380,292 453,708 23,371 – – 1,154,335Impairments 299 2,173 2,912 687 3,895 10,009 1,452 – – 21,427Individual approach – – – – 133,959 318,098 32,426 10,819 46,395 541,697Impairments – – – – 5,390 24,113 2,393 – 484 32,380Impairment compared to loan value 1.00% 1.89% 1.93% 65.62% 1.81% 4.42% 6.89% – 1.04% 3.35%total 29,583 112,827 148,123 360 504,966 737,684 51,952 10,819 45,911 1,642,225

75

As at December 31, 2009 loans to private individuals in total were assessed collectively, while the impairments on loans and advances to banks and the state were assessed individually. Loans and advances to corporates are assessed individu-ally and collectively, depending on the exposure level and the classification or based on the assessment, whether there is objective evidence for impairment.

2.25.2.6 CreditriskexposureaccordingtoregionThe table below shows loan exposure according to regions as at December 31, 2009. The exposure according to regions is determined according to debtor’s address.

In 2009 the exposure to the EU and SE Europe increased, however growth was adjusted to the economic conditions. Expo-sure to SE Europe mainly increased on the basis of loans to companies owned by Slovene parents or to companies which Slovene companies cooperate with. The Group enters foreign markets with due care and only on the basis of good collateral.

2.25.2.7 Creditriskexposureaccordingtoactivity

– amounts in thousands of EURSlovenia eu Se europe other regions total

Loans to state 8,113 – – – 8,113Loans to banks 52,711 33,821 334 1,702 88,568Loans 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– SME 644,019 2,740 86,228 1,616 734,602– other 40,536 – – – 40,536Impairment 65,125 93 8,308 300 73,827as at 31 December 2009 1,642,359 36,605 100,753 9,523 1,789,240Loans overdue 76,769 – 11,447 1 88,217

as at 31 December 2008 1,508,851 29,739 90,961 12,674 1,642,225


31 December 2009 process-ing

commerce and motor ve-

hicle repairsconstruc-

tionfinancial

mediation

Real estate, leases,

services

utilities, de-fence, social

security otherprivate

individuals total

Loans to state – – – – – 8,113 – – 8,113Loans to banks – – – 88,568 – – – – 88,568Loans to private individuals – – – – – – – 313,818 313,818Loans to companies: 334,303 249,631 143,884 220,601 220,220 20,897 263,032 – 1,452,567– large companies 226,832 104,542 45,376 101,001 36,726 – 162,954 – 677,430– 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 – 40,536Impairment 14,540 13,248 12,179 7,580 11,748 63 6,737 7,731 73,827as at 31 December 2009 319,764 236,383 131,705 301,589 208,472 28,947 256,295 306,087 1,789,240Loans overdue 13,745 8,636 26,040 8,680 20,548 – 4,934 5,635 88,217

as at 31 December 2008 289,200 219,897 126,343 322,407 216,369 20,746 156,370 290,893 1,642,225

In 2009 exposure increased most in relation to processing activities and decreased most in connection with financial mediation. In 2010 the Group will continue to strive for diversification of investments according to activity and limit or decrease investments in the higher risk activities.

76

92% of the Group’s investments are represented by sovereign and bank debt securities (2008: 79.77%). As at December 31, 2009 investments in EU countries represent 98% of all investments, same as 2008.

In 2009 the Group recognised impairment charges on available-for-sale debt securities issued by foreign banks in a total amount of EUR 795 thousand (2008: EUR 3,372 thousand). Impairment charges were formed due to a significant long-term decrease in the fair (market) value of the instruments and the deterioration of the issuer’s creditworthiness. The fair value of impaired instruments as at December 31, 2009 amounted to EUR 2,643 thousand (2008: EUR 3,428 thousand).

2.25.2.9 Creditriskexposurefromderivatives

2.25.2.8 ExposuretocreditriskfromdebtsecuritiesThe table below shows debt securities, classified according to issuers and ratings by Moody’s Investor Service as at De-cember 31, 2009:


IssuerRating by moody's

financial assets held for trading

financial assets recognised at fair

value through p&l

available-for-sale financial

assets

held-to-maturity

investmentsassets

pledged

total financial

assetsGovernments Aaa to Aa3 – 1,091 32,241 210,895 79,843 324,070

A1 to A3 – – 4,359 – – 4,359Banks Aaa to Aa3 – 11,505 69,974 3,065 41,819 126,362

A1 to A3 18,555 3,246 54,289 – 5,669 81,759Baa1 to Baa3 – 1,834 7,729 – – 9,562unrated * 9,742 761 2,197 – – 12,700

others unrated * 7,498 – 7,374 – 8,342 23,214as at 31 December 2009 35,795 18,437 178,163 213,959 135,672 582,026

as at 31 December 2008 61,638 29,472 178,625 193,761 128,884 592,380

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


Derivative financial instruments fair value fair valueFutures and forwards 10,503 12,805IRS 4,801 3,449Currency swaps 755 5,085Option 70 92total 16,129 21,431

Credit exposure in derivatives is based on the possibility of counterparty’s 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.

Forwards on the basis of securities are entered into with corporates rated in the highest rating class A. when enter-ing into agreements with lower rated companies the Group collateralizes its receivables additionally with appropriate types of collateral. The fair value decreased in 2009 due to more stable securities’ prices and due to a reduction in the volume of transactions.

2.25.2.10 CreditriskexposurefromCreditLinkedNotes(CLN)On December 31, 2009 the Group held 4 bonds in an amount of EUR 7,168 thousand (2008: EUR 7,578 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 aforemen-tioned structured debt securities also mean taking on the credit risk of the issuer.

77

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. If a security is not publicly quoted, the Group tries to obtain its price from the issuer or from a custodian.

In addition to the captioned methods of acquiring prices, the Group also monitors the movement of zero-coupon interest rates (the “Zero Curve”) and credit margins (ItraXX) for its credit risk exposure. 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 2009:

clN assumed credit risk clN type moody’s rating 2009 moody’s rating 2008BANK AUSTRIA CREDITANSTALT AG First to Default A1 Aa2

Country I. Baa3 Baa3Country II. A1 A1Country III. Baa3 Baa3Country IV. Baa1 A3Country V. A2 A2Country VI. Baa3 Baa3

ING AMSTERDAM CLN on Subordinated Loan A3 A2Bank I. A2 A1

AFINANCE B. V. CLN on Subordinated Loan – –Bank II. Baa3 Baa3

UBS ZURICh Credit Inverse Note Floater Aa3 Aa2Country I. Baa3 Baa3

2.25.2.11 CreditriskcapitalrequirementSince December 1, 2008 the Group has been calculating the credit risk capital requirement using the standardized ap-proach. The capital requirement is reduced by including eligible collateral (personal collateral by eligible providers, financial collateral).


Net exposure

value of collateral with guarantees

(inflows - outflows)

value of financial

collateral

exposure after consideration

of collateral and conversion factors

Risk adjusted exposure

capital requiremens

Exposure to sovereigns and central banks 341,221 108,920 – 450,141 – –

Exposure to regional and local units 21,006 1,043 – 22,049 11,025 882

Exposure to public sector entities 4,020 (1,856) (13) 2,069 1,035 83

Exposure to institutions 270,736 (47,194) – 223,343 64,922 5,194

Exposure to corporates 1,191,928 (60,435) (30,058) 1,056,660 1,056,660 84,533

Retail 581,079 (478) (10,388) 482,208 361,656 28,932

Overdue items 46,427 – (52) 46,374 64,179 5,134

Regulatory high risk exposures 77,358 – (7,317) 70,023 93,173 7,454Exposure to short-term rated institutions and corporates 19,412 – – 19,412 3,882 311

Exposure from investment funds 1,501 – – 1,501 1,501 120

Other exposure 82,514 – (646) 81,868 36,286 2,903

as at 31 December 2009 2,637,203 – (48,473) 2,455,650 1,694,319 135,546

78

According to the balance on December 31, 2009 the capital requirement for credit risk amounted to EUR 135,546 thousand or 87% of total capital requirements (2008: EUR 129,146 thousand or 87% of total capital requirements). The highest capital requirement pertains to exposure to corporates, followed by the retail banking capital requirement.

The Group includes exposure form equity financial instruments, forming part of the banking book, in the calculation of credit risk capital requirements. As at December 31, 2009 the Group showed EUR 8,076 thousand of such investments. These pertain mainly to investments in mutual funds EUR 6,539 thousand, with the rest being investments in close-end investment funds (EUR 799 thousand) and other equity shares (EUR 738 thousand). The Group bought the abovementioned instruments to achieve long-term profit, with strategic purposes being the reason for the purchase of other equity shares. From an accounting point of view these investments are classified as available-for-sale financial assets, recognised at fair value. Due to a significant long-term decrease in the fair value of the investments below their purchase price, the Group recognised impairment charges for individual investments amounting to EUR 3,440 thousand as at 31 December 2009.

2.25.3 Market riskThe Group defines market risk as a result of changes in securities market prices, interest rates and foreign currency rates, which affect banking positions when they change. The following factors form part of market risk:

– interest rate risk – risk of a change in interest rates; – equity risk - the risk of a change in the price of equity securities; – foreign currency risk; and the correlation between them.

2.25.3.1 MarketriskmeasurementtechniquesIn accordance with the first pillar of the new European Capital Accord the Group calculates market risk capital require-ments using the standardised approach. It calculates capital requirements for positional risk in debt and equity financial instruments and the capital requirements for foreign currency risk.

As at December 31, 2009 market risk capital requirements amounted to EUR 9,037 thousand or 6% of all capital require-ments, whereas December 31, 2008 saw the capital requirements amounting to EUR 8,181 thousand or 6% of all capital requirements. The increased capital requirement for positional risk in equity financial instruments is the result of pur-chased financial instruments based on the repayment of loans and the realization of collateral.

Minimal market risk capital requirement fluctuations at the Group:

– amounts in thousands of EURcapital requirement 31 December 2008 31 march 2009 30 June 2009 30 September 2009 31 December 2009MKR SA TDI 4,524 4,025 3,521 3,659 2,610 MKR SA EQU 3,046 3,092 3,649 6,781 5,853MKR SA FX 611 605 530 549 574 mkR 8,181 7,722 7,700 10,989 9,037mkR in % 6% 5% 5% 7% 6%

Note:MKR SA TDI Capital requirement for positional risk in debt financial instrumentsMKR SA EQU Capital requirement for positional risk in equity financial instrumentsMKR SA FX Capital requirement for foreign currency riskMKR Capital requirement for total market risk

The Group also defines risk in connection with trading activities as market risk and the risk it is exposed to in non-trading activities related to market risk factors. In line with the policy of distinguishing items, positions in debt financial instruments, equity financial instruments, foreign currency positions, positions in other securities, as well as all positions in equivalents to derivatives are usually deemed trading items.

within the framework of the second pillar of the new capital accord the Group uses sensitivity and Value-at-Risk analyses in connection with assuming and managing market risk. These are up-graded with the estimation of the required

internal capital and stress testing (the latter models have not been approved by the Bank of Slovenia and are only used for internal purposes).

2.25.3.2 Value-at-RiskanalysisThe 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 prob-ability and for a certain period of time.

For foreign currency and positional risk related to equity securities the Group utilises historical simulation, whereas for debt securities the duration based VaR method is used.

79

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):

– amounts in thousands of EUR31 December 2008 average value maximum value minimum value 31 December 2009

total vaR 7,255 5,866 10,877 3,288 4,549IR VaR 343 709 992 279 279EQ VaR 6,907 5,144 9,796 3,004 4,263FX VaR 5 13 89 5 7

Notes:IR VaR Interest rate sensitive tradable debt instruments VaR EQ VaR Tradable equity securities VaRFX VaR Foreign currency VaR

IR VaR is based on the calculated duration and the Group uses it to measure the risk of held for trading debt securities. EQ VaR is based on historical simulations and is used for the measurement of risk in net trading positions related to equity securities. FX VaR is based on historical simulation and is calculated for the Group as a whole.

Equity securities position VaR (10 day holding period, 99% level of confidence):

18,000

10 day EQ VaR

in t

hous

ands

of e

uros

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

1.1.200927.1.2009

22.2.200920.3.2009

15.4.200911.5.2009

6.6.20092.7.2009

28.7.200923.8.2009

18.9.200914.10.2009

9.11.20095.12.2009

31.12.2009

80

The Group’s policy is that of a closed currency position. The currency risk VaR in 2009 fluctuated between EUR 5 thousand and EUR 89 thousand. Currency market volatility remained high as in the previous year. The aim of the used method is to monitor currency risk with the use of advances statistical methods.

2.25.3.3 Sensitivityanalysisforfinancialinstrumentsincludedinthebankingbook

The sensitivity analysis of all interest rate sensitive items in the banking book on the assets and on the liabilities side as at December 31, 2009 shows an increase in net present value of financial instruments, included in the banking book, by EUR 80 thousand when a parallel rise of the interest rate curve by 1 basis point occurs. In the event of a parallel rise of 200 basis points of the interest rate curve, the net present value of financial instruments included in the banking book increases by EUR 16,091 thousand. The net present value of financial instruments is calculated using the method of duration gaps between financial assets and liabilities.

The simulation of the impact that the interest rate has on the income statement shows that in the event of an increase of the interest rate by one basis point, the interest income on the asset side increases by EUR 144 thousand annually, while on the liabilities side the interest expense increases by EUR 107 thousand. Net interest income increases by EUR 37 thousand annually when the interest rate increases by one basis point.

Stress tests show that an increase of the interest rate by 200 basis points increases net interest income by EUR 7,427

thousand. The analysis includes all interest sensitive trans-actions, which are due to mature or where the interest rate is due to change with a one year interval. The liabilities exclude at sight deposits as the Group estimates these not to be sensitive to the interest rate. The simulation has been prepared in such a way as to modify the interest rate and measure the effect of changes in an interest calculation period of one year. A change in the referential interest rate without change in the credit margin is presumed.

Managing interest rate risk during the crisisDue to the financial crisis affecting the world financial mar-kets the Group adopted certain measures with regard to in-terest rate risk, with which it intends to hedge itself against loss from financial instruments. Accordingly it reviewed and adjusted the limits according to region and issuers as well as stop-loss limits. It calculates value at risk daily for all trading book equity financial instruments, it measures currency volatility on a daily basis and calculates the largest acceptable loss related to it.

2.25.3.4 ForeigncurrencyriskForeign currency risk is based on the exposure to negative trends in foreign exchange rates, which may adversely affect the Group’s profit. Foreign currency risk is encountered in international transactions on a daily basis and may be at-tributed to two factors:

– 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 changes in the prices of trading book securities fluctuated between EUR 3,004 thousand to EUR 9,796 thousand in 2009. Volatility in the equity markets decreased in 2009, which impacted the value-at-risk. In August value-at-risk reached a peak, as the Group saw its securities portfolio increase due to the realisation of collateral. The goal of using this method is monitoring market risk with the use of advanced statistical methods.

Currency risk VaR (10 day holding period, 99% level of confidence):

10 day FX VaR

in t

hous

ands

of e

uros

140

120

100

80

60

40

20

0

1.1.200927.1.2009

22.2.200920.3.2009

15.4.200911.5.2009

6.6.20092.7.2009

28.7.200923.8.2009

18.9.200914.10.2009

9.11.20095.12.2009

31.12.2009

81

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.

As at 31 December 2009 a long foreign currency position was prevalent. The level of total open position was primarily a result of client relations, market conditions and income effects.

The following table shows the Group’s exposure to foreign currency risk as at 31 December 2009. It shows carrying amounts of assets and liabilities according to currency.

Foreign currency risk exposure

– amounts in thousands of EURuSD chf other euR total

31 December 2009Cash and balances with Central Bank 113 104 522 39,501 40,240Financial assets held for trading – – 1,001 86,746 87,747Financial assets designated at fair value through P&L – – – 18,437 18,437Available-for-sale financial assets 2,077 – – 231,990 234,067Loans and advances 21,329 56,218 3,569 1,708,124 1,789,240– loans and advances to banks 1,108 528 2,676 84,189 88,501– loans and advances to customers 20,221 55,690 893 1,623,935 1,700,739held-to-maturity investments – – – 213,959 213,959Assets pledged – – – 135,672 135,672Other assets 1 – 4 2,155 2,160total aSSetS 23,520 56,322 5,096 2,436,584 2,521,522

Deposits from Central Bank – – – 130,486 130,486Financial liabilities held for trading – – – 6,051 6,051Financial liabilities designated at fair value through P&L – – – 39,851 39,851Financial liabilities at amortised cost 8,995 10,365 2,716 2,137,823 2,159,899– deposits from banks 870 102 190 55,448 56,610– due to customers 8,125 3,527 2,526 1,439,258 1,453,436– borrowings from banks – 6,736 – 412,709 419,445– debt securities in issue – – – 134,774 134,774– subordinated liabilities – – – 95,634 95,634Other liabilities – – – 10,177 10,177total lIaBIlItIeS 8,995 10,365 2,716 2,324,388 2,346,464

Net balance sheet position on 31 December 2009 14,525 45,957 2,380 112,196 175,058

31 December 2008total aSSetS 31,234 67,547 6,649 2,260,347 2,365,777total lIaBIlItIeS 18,307 25,653 3,415 2,161,569 2,208,944Net balance sheet position on 31 December 2008 12,927 41,894 3,234 98,778 156,833

The table shows a low level of open currency positions. The Group manages it by using FX derivatives (e.g. FX swaps). As at December 31, 2009 the position in ChF derivatives related to commitments and contingent liabilities amounted to EUR 46,074 thousand and EUR 14,671 thousand in USD. Taking into account the aforesaid the USD and ChF posi-tions were closed.

2.25.3.5 InterestrateriskInterest 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 liabilities. 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 divi-sion of interest rate sensitive products to the banking book and the trading book.

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The interest rate sensitive items in the banking 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.

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.

The interest rate risk the Group is exposed to increased in 2009 due to unmatched maturities and renewed interest rate fixing pertaining to the 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 2010 with the use of balance sheet instruments and derivatives.

Interest rate risk exposure

– amounts in thousands of EURup to

1 month1 - 3

months3 -12

months 1- 5 yearsover

5 yearsNon-interest

bearing total31 December 2009Cash and balances with Central Bank 28,427 – – – – 11,813 40,240Financial assets held for trading – 4,351 6,502 16,683 7,498 52,714 87,747Financial assets designated at fair value through P&L 1,995 3,996 – 10,478 1,967 – 18,436Available-for-sale financial assets 35,185 67,409 6,709 64,392 4,468 55,905 234,067Loans and advances 455,456 403,394 786,961 134,004 9,426 – 1,789,240– loans and advances to banks 86,211 – 2,290 – – – 88,501– loans and advances to customers 369,245 403,394 784,671 134,004 9,426 – 1,700,739held-to-maturity investments 44,969 38,377 18,106 73,550 38,957 – 213,959Assets pledged 2,867 39,550 25,311 47,498 20,447 – 135,672Other assets – – – – – 2,160 2,160total aSSetS 568,899 557,075 843,589 346,606 82,762 122,592 2,521,522

Deposits from Central Bank 486 – 130,000 – – – 130,486Financial liabilities held for trading – – – – – 6,051 6,051Financial liabilities designated at fair value through P&L – 38,332 1,519 – – – 39,851Financial liabilities at amortised cost 744,104 375,599 771,081 247,408 21,707 – 2,159,899– deposits from banks 27,724 1,886 27,000 – – – 56,610– due to customers 666,953 216,943 423,257 144,223 2,060 – 1,453,436– borrowings from banks 38,901 136,098 191,946 45,000 7,500 – 419,445– debt securities in issue 7,548 20,672 60,869 45,685 – – 134,774– subordinated liabilities 2,978 – 68,010 12,500 12,147 – 95,634Other liabilities – – – – – 10,177 10,177total lIaBIlItIeS 744,590 413,931 902,601 247,408 21,707 16,228 2,346,464

Share capital – – – – – 16,980 16,980Share premium – – – – – 51,542 51,542Revaluation reserve – – – – – 4,660 4,660Profit reserves (including retained earnings) – – – – – 123,074 123,074Treasury shares – – – – – (31) (31)Profit for the year – – – – – 3,166 3,166total eQuItY – – – – – 199,391 199,391

total lIaBIlItIeS aND eQuItY 744,590 413,931 902,601 247,408 21,707 215,619 2,545,855

GAP on 31 December 2009 (175,691) 143,144 (59,012) 99,198 61,055 (93,027) (24,333)

31 December 2008total aSSetS 589,788 684,621 580,832 345,174 85,643 88,814 2,374,872total lIaBIlItIeS aND eQuItY 722,625 689,294 702,022 68,823 2,149 213,853 2,398,766GAP on 31 December 2008 (132,837) (4,673) (121,190) 276,351 83,494 (125,039) (23,894)

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2.25.4 Liquidity riskLiquidity risk is the risk of loss stemming from the Group not being able to settle all due liabilities or based on the fact that the Group is not capable of ensuring sufficient assets for the settlement of liabilities when they become due, which is why it is forced to provide the required assets at significantly higher cost than usual.

Liquidity risk exposure

– amounts in thousands of EURcarrying

amounttotal cash flow (undiscounted)

up to 1 month

1 - 3 months

3 - 12 months 1 - 5 years

over 5 years

31 December 2009Cash and balances with Central Bank 40,240 40,240 40,240 – – – –Financial assets held for trading 87,747 92,946 52,244 4,880 4,402 23,764 7,656Financial assets designated at fair value through profit or loss 18,437 22,346 57 734 116 13,838 7,600Available-for-sale financial assets 234,067 248,884 56,123 10,801 35,155 133,172 13,633Loans and advances 1,789,240 1,926,885 250,092 219,238 678,104 564,734 214,717– loans and advances to banks 88,501 88,621 86,254 – 172 2,195 –– loans and advances to customers 1,700,739 1,838,264 163,839 219,238 677,932 562,539 214,717held-to-maturity investments 213,959 258,376 47,817 42,445 4,900 105,086 58,128Assets pledged 135,672 147,238 1,740 38,926 2,710 88,123 15,739Other assets 2,160 2,160 2,160 – – – –total aSSetS 2,521,522 2,739,076 450,473 317,025 725,387 928,718 317,473

Deposits from Central Bank 130,486 131,822 – – 131,822 – –Financial liabilities held for trading 6,051 6,051 6,051 – – – –Financial liabilities designated at fair value through profit or loss 39,851 54,839 – 1,850 76 9,031 43,882Financial liabilities at amortised cost 2,159,899 2,268,700 691,021 263,473 699,476 510,002 104,728– deposits from banks 56,610 57,253 27,723 1,894 27,637 – –– due to customers 1,453,436 1,489,357 656,717 222,644 442,552 163,634 3,811– borrowings from banks 419,445 446,806 1,439 11,508 148,376 255,414 30,069– debt securities in issue 134,774 145,120 4,312 23,773 66,818 50,217 –– subordinated liabilities 95,634 130,164 831 3,655 14,093 40,738 70,848Other liabilities 10,177 10,177 10,177 – – – –total lIaBIlItIeS 2,346,464 2,471,589 707,248 265,323 831,373 519,034 148,610

GAP on 31 December 2009 175,058 267,487 (256,775) 51,701 (105,986) 409,684 168,862

commItmeNtS aND coNtINGeNt lIaBIlItIeSGuarantees 79,819 – 3,322 9,332 26,062 36,088 5,015Loan commitments 158,196 – 48,918 16,765 62,884 3,026 26,603total 238,015 – 52,240 26,097 88,946 39,114 31,618

31 December 2008total aSSetS 2,374,872 2,636,397 407,751 460,885 569,625 856,936 341,200total lIaBIlItIeS 2,209,345 2,305,475 708,899 407,020 692,878 365,005 131,673GAP on 31 December 2008 165,527 330,922 (301,148) 53,865 (123,253) 491,931 209,527

The above table discloses undiscounted cash flow, which in addition to the carrying amounts of financial instruments include the anticipated interest cash flows by remaining maturities at the end of the year. The amounts disclosed are based on spot rates and interest rates at the date of the statement of financial position. Innovative subordinated bonds do not 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 8 years. In addition to the possibility of being called, these

instruments also include a “step-up” clause, which comes into effect should the innovative instrument not be called after 10 years. The Group plans to execute the clause, which is why expecting 8 years of cash flow is realistic.

The liquidity gap in the time interval up to 1 month though negative merits the consideration of the fact, that financial liabilities include all at sight deposits, even though the cen-tral bank regulation only considers their 50% weighting for the purpose of calculating the liquidity position.

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The management and monitoring of maturities and interest rates in assets and liabilities is one of the fundamental as-signments of the Group’s liquidity management. It would be unusual for banks to have assets that would match liabilities at all times as different types of transactions are entered into under differing conditions. An unmatched position may potentially increase profitability; it however also increases the risk of loss.

The maturity of assets and liabilities and the capacity for their substitution at acceptable pricing levels upon maturity is an important criterion when assessing the Group’s liquid-ity and its exposure to interest rate and foreign currency rate fluctuations.

The Group performs stress tests based on prepared meth-odologies for the preparation of stress test scenarios in ex-treme situation, such as a drop in rating or the crisis of the financial system. Based on the performed stress scenarios it has been ascertained that the Group is more sensitive to the drop in rating then the events in its environment. Thus it is important to put in place a system of early warning sign detection, to be able to implement measures in accordance with the contingency plan on time.

In 2009 the Group managed liquidity risk in line with adopted policies, it however encountered a change in the conditions related to accessing liquid assets. It did not have any problems with operational liquidity, as it holds suffi-cient financial assets to acquire funding from the European Central Bank and through the interbank repo market. It directed more activities to ensuring structural liquidity. To this aim it was active in acquiring long-term financing, with success mainly coming from the domestic market (legal entities and private individuals) and to a lesser extent from the international interbank market.

2.25.5 Capital and capital adequacyCapital and capital related risksIn 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 busi-ness 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:

– core capital, – additional capital I, – additional capital II.

Core capital represents the highest quality of capital and may be used, together with additional capital I, for the fulfil-ment of capital requirements relating to credit, market and operational risk. Additional capital II 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:

– additional capital may not exceed the level of core capital, – the sum of preferential cumulative shares with a fixed return and subordinated debt included in the additional capital I may not exceed 50% of the core capital,

– the total amount of innovative instruments, which may be included into the components of core capital, may never exceed 15% of core capital.

Core capitalThe components of core capital must exhibit at least the following characteristics:

– stability, – unlimited availability for the immediate coverage of risks and loss during regular operations,

– subordination to the liabilities of all other creditors or the holders of instruments, which do not have the char-acteristics of core capital,

– the Group has the option of limiting the payment of re-turns,

– must be free of all foreseeable tax burdens.

The Group’s core capital comprises:

– paid up core capital and capital reserves from regular shares,

– reserves and retained profit, free from possible future liabilities and approved at the General Assembly in rela-tion to the part, foreseen to remain a part of the capital and not be distributed,

– innovative instruments, which may not exceed 15% of core capital.

Deductibles from the Group’s core capital:

– own shares, with the characteristics of core capital, – intangible long-term assets, – 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 rec-ognised at fair value (included in the trading book),

– impairments and provisions not shown due to bookkeep-ing gap.

Additional capital IThe components of additional capital must exhibit at least the following characteristics:

– unlimited availability for immediate coverage of risks and loss during regular operations,

– must be free of all tax burdens.

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The Group’s additional capital I comprises:

– preferential cumulative shares without a fixed return, – surplus from innovative instruments in the part exceeding the limit for inclusion in core capital, – subordinated debt, which is gradually discounted from additional capital I at a 20% cumulative discount during the last five years prior to maturity,

– 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 securities as well as those recognised at fair value (included in the trading book).

Deductions form core and additional capital IAs at December 31, 2009 and December 31, 2008 the Group did not exhibit and deduction from core and additional capital I, as stipulated under Article 22 of and the Decision on the calculation of own funds, capital requirements and capital adequacy of banks and savings banks.

Additional capital IIAs at December 31, 2009 and December 31, 2008 the Group did not have any debt instruments in issue, which would merit inclusion into additional capital II.

– amounts in thousands of EURcapital and capital requirements 2009 2008I. total capItal for capital adequacy requirements (1+2) 299,729 283,591

1. core capital 215,758 189,906Paid-up share capital 13,584 13,584Share premium 36,820 36,820Profit reserves and retained profit 123,074 116,130Non-innovative instruments 17,971 –Innovative instruments 32,364 28,486Deductible items from core capital: (8,055) (5,114)(–) Own shares (455) (599)(–) Intangible long-term assets (5,342) (4,116)(–) Revaluation reserves (RR) - rating filters (2,258) (399)

2. additional capital I 83,971 93,685

II. capItal ReQuIRemeNtS 156,113 148,167Sum of capital requirements for credit and counterparty risk 135,546 129,205Sum of capital requirements for positional and currency risk 9,037 8,181Operational risk capital requirement 11,530 10,781

III. capItal aDeQuacY RatIo (I / II × 8) (in %) 15.36% 15.31%Iv. coRe capItal RatIo (I.1. / II × 8) (in %) 11.06% 10.25%

In the first half of 2009 the Group increased regulatory capital by issuing subordinated bonds in the amount of EUR 12,147 thousand, which resulted in an increase of the capital adequacy ratio. The core capital ratio increased significantly due to the elimination of the provision on the cumulative payment of dividends to preferential shareholders (adopted at the Shareholders Meeting held in June), based on which the subscribed core capital on the basis of preferential shares and the capital surplus from these were included in core capital (non-innovative instruments). Prior to this decision they were included in additional capital I.

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2.25.6 Fair value of financial assets and liabilities

a) Financial instruments not measured at fair value

– amounts in thousands of EURcarrying amount fair value

2009 2008 2009 2008Loans 1,789,240 1,642,225 1,825,903 1,665,132– loans and advances to banks 88,501 45,911 88,517 45,955– loans and advances to customers 1,700,739 1,596,314 1,737,386 1,619,177held-to-maturity investments 213,959 193,760 227,783 206,734held-to-maturity assets pledged 101,236 99,795 101,065 100,022total financial assets 2,104,435 1,935,781 2,154,750 1,971,887

Deposits from the Central bank 130,486 90,199 130,363 90,141Financial liabilities at amortised cost 2,159,899 2,026,004 2,182,829 2,036,467– deposits from banks 56,610 60,158 56,772 60,456– due to customers 1,453,436 1,288,456 1,465,292 1,295,058– borrowings from banks 419,445 494,137 424,111 495,512– debt securities in issue 134,774 100,125 138,230 100,843– subordinated liabilities 95,634 83,128 98,425 84,598Financial liabilities associated to transfer assets – 30,991 – 31,164total financial liabilities 2,290,385 2,147,194 2,313,192 2,157,772

To calculate the fair values of financial assets held-to-ma-turity 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 as-signed 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 hierarchyThe Group defines a hierarchy of valuation techniques based on whether the inputs to those valuations are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs

reflect the Group's 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 derivative contracts, issued structured debt and financial liabilities. The sources of input parameters like EURIBOR yield curve or counterparty credit risk are Bloomberg and Reuters.

Level 3 - inputs for the asset or liability that are not based on observable market data. This level includes equity invest-ments with significant unobservable components.

This hierarchy requires the use of observable market data when available. The Group considers relevant and observable market prices in its valuations where possible.

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Assets and liabilities measured at fair value

31 DecemBeR 2009– amounts in thousands of EUR

level 1 level 2 level 3 totalFinancialassetsmeasuredatfairvalue:Financial assets held for trading 33,940 35,966 17,841 87,747– Debt securities 15,958 19,837 – 35,795– Equity securities 17,982 – 17,841 35,823– Derivatives – 16,129 – 16,129Financial assets designated at fair value through profit or loss 15,093 3,344 – 18,437– Debt securities 15,093 3,344 – 18,437Pledged assets 11,342 – – 11,342total assets 60,375 39,310 17,841 117,526

Financialliabilitiesmeasuredatfairvalue:Financial liabilities designated at fair value through profit or loss – 39,851 – 39,851Derivatives – 6,051 – 6,051total liabilities – 45,902 – 45,902

Reconciliation of Level 3 Items

– amounts in thousands of EURas at 1 January 2009 8,334Profit or loss –Purchases 9,642Settlements (135)as at 31 december 2009 17,841

Financialassetsmeasuredatfairvalue:Financial assets held for trading– Equity securities

2.26 Major accounting policies and assessmentsa) Impairment of loans and receivableswith 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 income statement, the Group verifies that information exists, which signifies a drop in estimated cash flows from loans. Such evidence includes the information on deterioration of debtor creditworthiness or on deterio-ration of economic conditions 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 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. Individually insignifi-cant exposures are assessed collectively. The methodology and presumptions, used in estimating future cash flow are based on regular reviews aimed at decreasing the differ-

ences between the estimated and actual losses. Should the current value of future cash slows decrease by 1 percentage point, it would result in additional impairment charges in the amount of EUR 6,032 thousand.

b) Fair value of financial instrumentsFair value of listed financial instruments is determined on the basis of market prices quoted on the reporting date. For the valuation of financial assets the Group uses the prices most accurately reflecting the best bid or the price, representing the best offer for the valuation of financial li-abilities. Fair values of financial instruments not traded on organised markets are determined using valuation models. These include comparisons with the most recent transac-tions, the use of discounted future cash flows and other frequently used valuation methods. Fair value valuation models have been reviewed by independent parties. All mod-els in use have been verified to ensure that the results offer an adequate 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 financial assets.

c) Available-for-sale equity instrumentsAvailable-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 2.11.2. 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 2,823 thousand.

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d) Fair value of derivativesFair values of derivatives are determined on the basis of market data. The valuation uses market currency rates, market interest rates, yield curves and volatility. In con-nection with banking book derivatives the Group enters into economically hedged transaction exclusively, meaning it is not exposed to the risk of changes in prices, rather is hedges counter positions.

2.27 Business segments2009 sees the Group reporting according to segments in line with IFRS 8 in 2009 for the first time. Segment informa-tion for 2008, reported for comparison with 2009, has been prepared in line with the requirements set by the IFRS 8. The Group's operations comprise three segments:

– retail, incorporating private customer current accounts, savings, deposits, investment savings products, credit and debit cards, loans;

– corporates and public sector, incorporating current ac-counts, deposits, loans and other credit facilities, payment operations, foreign currency and derivative products;

– banking, incorporating current accounts, deposits, loans, financial instruments trading, payment operations.

The Group's core activity is conducting the basic banking service. The Assets and Liabilities Committee relies prima-rily on net interest revenue and net non-interest income and expenses, which is why the income statement items are presented on a net basis. During the year there have been no significant changes in reporting segments.

All transactions between the business segments are car-ried out at arm’s length. The revenue from external parties reported to the Assets and Liabilities Management Com-mittee is measured in a manner consistent with that in the consolidated income statement.

Internal charges and transfer pricing are represented in the income from each respective segment. The transfer pricing system for the allocation of net interest revenue has been methodologically designed and confirmed by the Assets and Liabilities Management Committee. The Bank's man-agement receives operational reports on the total result, which includes net interest revenue, net fee revenue, net financial operations revenue, other net operating revenue, net provisions and impairment charges, depreciation costs.

The report on operations according to segments has been prepared on a non-consolidated basis and is as follows in 2009:


Banks companies and public sector households totalTotal income 7,776 113,837 24,168 145,781– External income 7,776 113,185 24,168 145,129– Income from other segments – 652 – 652Net 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 69 14 107Administrative expenses with depreciation and amortisation (1,433) (16,756) (22,037) (40,226)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

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Reconciliation of results by geographic areas:

Reconciliation of segment results of operations to consolidated results of operations:

31 DecemBeR 2009– amounts in thousands of EURRevenues 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


Results for the Banka celje d.d.

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 nad 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

Segment 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

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Banks companies and public sector households totalTotal income 2,666 134,845 32,356 169,867– External income 2,666 133,920 32,356 168,942– Income from other segments – 925 – 925Net interest and similar income (4,767) 30,870 24,517 50,620Net fee and commission income (1,732) 12,247 6,353 16,868Net gains from financial transactions (10,738) 17,019 2,401 8,682Net other operating income (98) 104 24 30Administrative expenses with depreciation and amortisation (1,577) (17,927) (22,776) (42,280)Provisions (4,024) 177 (154) (4,001)Impairment charges (3,381) (11,923) (258) (15,562)Profit before income tax (26,317) 30,567 10,107 14,357Income tax expense (2,948)profit for the year 11,409

Segment assets 376,625 1,640,092 353,897 2,370,614Subsidiary – 16,352 – 16,352Not allocated 26,500total assets 2,413,466

Segment liabilities 720,045 769,433 735,268 2,224,746Subsidiary – 35 – 35Equity 188,685total liabilities and equity 2,413,466

other segment itemsInvestments in property and equipment and in intangible assets 92 4,665 1,120 5,877Depreciation and amortisation 63 3,198 767 4,028

The report on operations according to segments has been prepared on a non-consolidated basis and is as follows in 2008:

Reconciliation of segment results of operations to consolidated results of operations:

During the reported period in 2009 the Group did not make 10% or more from operations with any single client. The same applies to the previous reporting period.


Results for the Banka celje d.d.

consolidation and adjustments

total consolidated

Net interest and similar income 50,620 (856) 49,764Net fee and commission income 16,868 (11) 16,857Net gains from financial transactions 8,682 26 8,708Net other operating income 30 1,911 1,941Administrative expenses with depreciation nad amortisation (42,280) (864) (43,144)Provisions (4,001) (2) (4,003)Impairment charges (15,562) (1) (15,563)Profit before income tax 14,357 203 14,560Income tax expense (2,948) (40) (2,988)profit for the year 11,409 163 11,572

Segment assets 2,413,466 1,575 2,415,041

Segment liabilities 2,224,781 839 2,225,620Equity 188,685 736 189,421total liabilities and equity 2,413,466 1,575 2,415,041

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3 NET INTEREST AND SIMILAR INCOME

3a Net interest and similar income according to type of assets and adequate asset source

– amounts in thousands of EUR2009 2008

Interest and similar income 120,432 140,010Loans and advances to customers 95,263 106,386Loans and advances to banks 798 2,374Securities 21,475 28,165– held for trading 2,115 3,455– financial assets designated at fair value through profit or loss 1,108 2,384– available-for-sale financial assets 6,047 12,365– held-to-maturity investments 12,205 9,961Deposits with Central Bank 409 1,156Derivatives - interest rate swap 2,487 1,929

Interest and similar expense (66,927) (90,246)Loans and advances from customers (37,486) (39,224)Loans and advances from banks (14,656) (34,289)Deposits from Central Bank (1,243) (2,091)Securities in issue and CDs (11,376) (12,966)Derivatives - interest rate swap (2,166) (1,676)

Net interest and similar income 53,505 49,764

NOTES TO INDIVIDUAL ITEMS INCLUDED IN CONSOLIDATED FINANCIAL STATEMENTS

In 2009 the Group realized EUR 29,540 thousand of the income due from individually impaired loans (2008: EUR 36,039 thousand).

3b Net interest and similar income according to sector


Interest and similar income 120,432 140,010Companies 83,540 88,715Private individuals 18,898 23,577Non-residents 8,337 8,619Banks 5,050 12,589Public sector (all levels) 4,607 6,510

Interest and similar expense (66,927) (90,246)Banks (19,191) (38,051)Companies (18,993) (23,003)Private individuals (15,929) (16,904)Public sector (all levels) (12,594) (12,124)Non-residents (220) (164)

Net interest and similar income 53,505 49,764

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4 DIVIDEND INCOME


Dividends from available-for-sale financial assets 263 718Dividends from financial assets held for trading 459 572total 722 1,290

5 NET FEE AND COMMISSION INCOME


fee and commission income 19,003 20,278Payments 9,639 10,017Cards 7,073 7,576Guarantees 1,430 1,596Other services 861 1,089

fee and commission expense (2,260) (3,421)Cards (1,363) (2,144)Payments (529) (628)Guarantees (95) (102)Other services (273) (547)

Net fee and commission income 16,743 16,857

5a Net fee and commission income according to sector


fee and commission income 19,003 20,278Companies 11,030 12,595Private individuals 5,347 5,050Self-employed persons 1,351 1,303Banks 905 911Public sector 214 175Non-residents 156 244

fee and commission expense (2,260) (3,421)Banks (1,803) (2,643)Public sector (216) (226)Companies (138) (439)Non-residents (103) (113)

Net fee and commission income 16,743 16,857

93

6 NET GAINS FROM FINANCIAL ASSETS AND LIABILITIES NOT CLASSIFIED AS FAIR VALUE ThROUGh PROFIT OR LOSS


available–for–sale financial assets 1,204 8,532Debt securities 43 (1,206)– bonds 43 (1,210)– certificates of deposit – 4Equity securities 1,161 9,738– shares 1,161 7,076– mutual funds – 2,662

financial assets recognised at amortised cost 141 108Profit from receivables written off 173 202Loss from receivables written off (32) (94)

total 1,345 8,640

Compared with the previous year the Group achieved less profit from the sale of shares in 2009. The Group sold large investments in shares amounted to EUR 1,148 thousand (2008: EUR 6,621 thousand).

7 NET GAINS / LOSSES FROM FINANCIAL ASSETS AND LIABILITIES hELD FOR TRADING


Equity securities 350 (3,085)Debt securities (403) (135)Gains from forwards and futures with associated securities 1,927 3,279Gains / losses from currency financial instruments 826 (4,391)Gains from IRS valuation and options 1,157 1,273Foreign currency trading 373 431total 4,230 (2,628)

Comparison with the previous year, marked by a drop in the fair value of securities, which consequently resulted in loss from the valuation of equity and debt securities totalling EUR 3,220 thousand, shows the Group only realising a minor loss of EUR 53 thousand from the above in 2009.

From currency financial instruments the Group realized gains in the amount of EUR 826 thousand in 2009, mostly attributable to the financing of the ChF position. The Group realized EUR 314 thousand in gains from exchange rate translation differences (see Note 9).

Gains from the valuation of IRS’s and options in the amount of EUR 1,157 thousand, includes the IRS valuation in the amount of EUR 1,037 thousand (2008: EUR 1,303 thousand) and gains of options (interest rate cap) in the amount of EUR 120 thousand (2008: EUR -30 thousand).

Foreign currency trading saw the Group achieving a profit of EUR 373 thousand.

94

8 NET LOSSES FROM FINANCIAL ASSETS AND LIABILITIES DESIGNATED AT FAIR VALUE ThROUGh PROFIT OR LOSS


Gains / losses from bond valuation 1,391 (5,114)Losses / gains from own securities issued (2,096) 1,552total (705) (3,562)

Gains from bond valuation in amount of EUR 1,391 thousand resulted from the positive valuation of bonds purchased. Fair value has been determined on the basis of available quotes from the Reuters or Bloomberg information portals.

In 2009 the Group realised a loss of EUR 2,096 thousand from securities issued based on a valuation in accordance with its internal model. Due to deterioration of credit risk of the issuer the value of BCE10 increased. In this valuation the impact of credit risk was EUR 1,489 thousand.

9 FOREIGN EXChANGE TRANSLATION NET GAINS


Positive exchange rate differences 13,261 29,799Negative exchange rate differences (12,947) (24,889)total 314 4,910

10 NET GAINS FROM DERECOGNITION OF ASSETS OThER ThAN NON-CURRENT ASSETS hELD FOR SALE


From sale of office space and housing 49 70From sale of computer and other equipment (20) (12)total 29 58

Gains from derecognition of property and equipment amounting to EUR 29 thousand includes gains from the sale of investment property in the amount of EUR 51 thousand reduced for losses from derecognition of assets other than non-current assets held for sale.

95


Income 1,123 2,562Income from sale of real estate 605 2,066Income from leases 207 244Other operating income 311 252

expense (339) (621)Contributions to humanitarian organizations (117) (119)Membership fees (110) (125)Paid taxes and contributions (106) (119)Other expenses (6) (258)

total 784 1,941

11 NET OThER OPERATING INCOME

12 ADMINISTRATIVE EXPENSES

– amounts in thousands of EURadministrative expenses 2009 2008labor cost (21,407) (22,596)Gross salaries (16,592) (17,600)Pension security costs (2,201) (1,224)Social security costs (1,172) (2,237)Other staff costs (1,442) (1,535)

General and administrative expenses (15,411) (16,157)IT costs (3,852) (3,375)Business card costs (2,540) (2,713)Maintenance cost (2,067) (2,119)Advertising cost (1,003) (1,317)Materials and energy costs (661) (664)Office stationery costs (576) (796)Rent (518) (806)Consultancy and audit costs (263) (211)Other services (3,931) (4,156)

total (36,818) (38,753)

The Group harmonised its basic salary for the month of January with the legislation currently in force. Lower cost of labour was impacted by the elimination of tax on salaries paid, a decreased amount of holiday allowance and performance bonuses paid out as well as a reduction of the number of employees during the period in question. Lower labour costs are also a result of the cancellation of performance bonuses formed in 2008 and not paid out, which amounted to EUR 93 thousand.

During 2009 the Group decreased the cost of bonuses paid to the Supervisory Board based on 2008, on account of which it decreased the cost of other services by EUR 18 thousand, with the difference amounting to EUR 20 thousand recorded under other operating income.

The cost of auditing and consulting services includes EUR 53 thousand from annual report auditing in 2009, EUR 129 thousand is referring to payments for consulting services to Bank of Slovenia, Fitch Ratings and KPMG, Poslovno sve-tovanje d.o.o. and the rest in amount of EUR 81 thousand is referring to other consulting services.

96

13 AMORTISATION AND DEPRECIATION

– amounts in thousands of EURNote 2009 2008

Depreciation of property and equipment 25 (2,902) (3,152)Amortisation for intangible assets 27 (979) (882)Depreciation of investment property 26 (33) (357)total (3,914) (4,391)


Provisions for off-balance sheet liabilities 39 677 193Provisions for liabilities to employees 39 (252) (103)Provisions for legal action pending 39 (162) (4,024)Other provisions 39 (28) (69)total 235 (4,003)

14 PROVISIONS

15 IMPAIRMENT ChARGES


Impairment of loans measured at amortised cost (20,373) (6,462)

Impairment of available–for–sale financial assets (7,772) (9,100)– impairment of equity securities (6,618) (2,841)– impairment of debt securities (895) (3,372)– impairment of mutual funds (259) (2,887)

Impairment of other assets – (1)

total (28,145) (15,563)

In 2009 the Group recognized increased impairment charges as compared to the previous year.

Impairment of available-for-sale financial assets have been recognized in 2009 due to the fall in the fair value of securities, namely in an amount of EUR 6,618 thousand in relation to equity securities, EUR 895 thousand was represented by debt securities with EUR 259 thousand coming from mutual funds. Due to impairment of interest accounted for in previous years, the income statement shows impairments of available-for-sale financial assets at an amount higher by EUR 101 thousand as compared to the available-for-sale financial assets as shown in Note 21.

97


Current tax (3,133) (6,676)Deferred tax 28.3 1,360 3,688Income tax expense (1,773) (2,988)

Profit before tax 8,517 (14,560)Tax calculated at a tax rate of 21% (2008: 22%) (1,788) (3,196)Expenses not deductible for tax purposes (421) (383)Tax relief 218 224Income not assesable for tax purposes 218 367total (1,773) (2,988)

16 INCOME TAX EXPENSE

A lower income tax amount is the result of a lower profit and lower taxation rate, which amounted to 21% in 2009.

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.

17 BASIC AND DILUTED EARNINGS PER ShARE


Net profit for the year 6,552 11,572Net profit - preferential shareholders (1,310) (2,314)Net profit – ordinary shareholders 5,242 9,258

Number of ordinary shares 406,653 406,653Basic and diluted earnings per share (euR per share) 13 23

Basic earnings per share have been calculated with the division of net profit by the weighted average number of shares issued, decreased by the treasury shares.

Subordinated debt securities hold no right for a swap into capital, which is why they do not represent potential shares.

18 CASh AND BALANCES wITh ThE CENTRAL BANK


Cash in hand 11,814 13,396Balances with Central Bank 28,426 35,648total 40,240 49,044

98

The Group decreased deposits with the Central Bank in 2009 on the basis of a balance of overnight deposits.

The average minimum reserve requirement amounted to EUR 27,417 thousand in 2009 (2008: EUR 24,884 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 2009 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 44).

19 FINANCIAL ASSETS hELD FOR TRADING


Derivatives 19a 16,129 21,431

Debt securities 35,795 61,638Bonds 15,958 18,068– listed on stock exchange 15,958 16,041– not listed on stock exchange – 2,027Certificates of deposit 19,837 43,570

equity securities 35,823 25,983Shares 35,823 25,983– listed on stock exchange 17,982 17,356– not listed on stock exchange 17,841 8,627

total 87,747 109,052

The decrease in financial assets held for trading recorded in 2009 resulted from the sale of certificates of deposit.

The objects of repo transactions in 2009 were bonds amounting to EUR 896 thousand (2008: EUR 531 thousand), certifi-cates of deposit amounting to EUR 19,076 thousand (2008: EUR 35,856 thousand) and shares amounting to EUR 34,873 thousand (2008: EUR 25,382 thousand).

Financial assets held for trading did not form part of assets pledged in 2009, and no debt securities with original maturi-ties up to three months are held.

19a Derivatives

– amounts in thousands of EURcontractual amount fair value

Derivative financial instruments 2009 2008 2009 2008Futures and forwards 63,849 71,263 10,503 12,805IRS 84,758 98,245 4,801 3,449Currency swaps 87,653 161,477 755 5,085Forward rate agreement – 25,000 – –Option 10,000 10,000 70 92total 246,260 365,985 16,129 21,431

99

In 2009 the Group saw a positive valuation come from futures and forwards amounting to EUR 10,503 thousand (2008: EUR 12,805 thousand).

The IRS item includes positive valuations from IRS transactions entered into on the basis of the issued bond. here the Group received higher fixed interest due to a decrease in market-based interest rates, while paying lower variable interest rates, thus attaining a positive net result.

In 2009 the Group significantly decreased currency swap positions, including forward and swap agreements. The positive valuation from this item decreased due to a reduced volatility of currency rates.

20 FINANCIAL ASSETS DESIGNATED AT FAIR VALUE ThROUGh PROFIT OR LOSS

– amounts in thousands of EURDebt securities 2009 2008Bonds 18,437 29,472Pledged government bonds 11,342 4,421total 29,779 33,893

This item includes structured, innovative and plain-vanilla bonds. EUR 13,852 thousand worth of bonds are economically hedged with interest rate swaps (2008: EUR 16,969 thousand). The decrease in investments in financial assets at fair value through profit or loss in 2009 is the result of securities maturing, with a positive impact in a total amount of EUR 1,391 thousand coming from the revaluation of bonds to a higher fair value (see Note 8 for details).

Accounting for financial assets, designated at fair value through profit or loss is based on the elimination of accounting mismatch.

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 2009 the Group pledged government bonds, recognised at fair value through profit or loss, amounting in total to EUR 11,342 thousand (2008: EUR 4,421 thousand). The assets had been pledged to secure financing from the European Central Bank.

21 AVAILABLE-FOR-SALE FINANCIAL ASSETS

21a Analysis by type of available-for-sale financial assets


Balances Impairment Balances ImpairmentDebt securities 182,523 4,360 182,191 3,566Bonds 172,573 4,360 162,273 3,566Bills and treasury bonds 9,950 – 19,918 –

equity securities 58,824 9,459 29,471 2,841Shares 58,318 9,459 28,965 2,841Contribution 506 – 506 –

mutual funds 9,685 3,146 8,100 2,887

total gross 251,032 16,965 219,762 9,294total net 21a 234,067 210,468

100

Investments into equity securities include investments into shares and interests that are included in the banking and trad-ing book. The banking book includes investments in the amount of EUR 1,537 thousand, while the trading book includes investments in the net amount of EUR 47,828 thousand. Investments included in the banking book represent investments into three closed foreign investment funds and some companies of particular relevance for the Group, such as Bankart d.o.o. Ljubljana, Skupna pokojninska družba d.d. Ljubljana, KDD d.d. Ljubljana, Regionalna razvojna agencija d.o.o. Celje (Celje Regional Development Agency) and Swift La hulpe Belgium. Except for the Regionalna razvojna agencija d.o.o. Celje (Celje Regional Development Agency), where the Group holds a 15.7% interest, bank’s shares in other companies are lower and do not exceed 6.0%.

Investments into mutual funds are included in the banking book.

In 2009 the Group pledged available-for-sale government and bank bonds, amounting in total to EUR 23,094 thousand (2008: EUR 24,668 thousand). The assets had been pledged to secure financing from the European Central Bank.

Changes in available-for-sale financial assets:


Government bonds 17,426 9,348Bank bonds 5,668 15,320total 21b 23,094 24,668

total 21a and 21b 257,161 235,136

– amounts in thousands of EURequity securities Debt securities

Shares Interests mutual funds BondsBills and

treasury notestotal financial assets

available-for-saleBalance 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

21b Securities pledged

In 2009 impairment charges against bonds amounted to EUR 794 thousand, against shares EUR 6,618 thousand and against mutual funds EUR 259 thousand. Details on impairment charges are shown in Note 15.

101

22 LOANS AND ADVANCES TO BANKS


Balances Impairments Balances Impairmentsat sight 13,788 – 11,160 – In local currency 11,672 – 7,150 – In foreign currency 2,116 – 4,010 –

Short–term loans 72,423 – 27,486 – In local currency 70,511 – 25,002 – In foreign currency 1,912 – 2,484 –

long–term loans 2,357 67 7,749 484 In local currency 2,006 – 2,020 – In foreign currency 351 67 5,729 484

total gross 88,568 67 46,395 484total net 88,501 45,911

Total average interest rate for loans to banks in 2009 amounted to 0.91% (4.06% in 2008).

Cash and cash equivalents (Note 44) include loans to banks with maturity up to 90 days, in the amount of EUR 86,209 thousand (2008: EUR 37,908 thousand).

In 2009 impairments were reported for loans to one foreign commercial bank (in 2008 to three commercial banks).

102


Short-term Impairment of short-term long-term Impairment of long-termlocal currency 758,258 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 705,065 35,311 693,087 29,762– large companies 308,512 6,514 358,449 7,662– SME 385,698 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 790,548 37,468 983,952 36,292Net total according to maturity 753,080 947,660Net total according to total maturity 1,700,740

23 LOANS AND ADVANCES TO CUSTOMERS

Analysis by types of borrowers, by transactions, maturity and currency:


Short-term Impairment of short-term long-term Impairment of long-termlocal currency 764,627 22,289 794,363 29,598Loans and advances to public sector – – 10,819 –Loans to private individuals 51,701 1,338 218,323 4,404– overdraft accounts and cards 29,882 299 – –– housing loans 1 – 95,069 1,914– consumer loans 20,771 352 123,254 2,490– violation of overdraft limits 1,047 687 – –Loans to companies 712,926 20,951 565,221 25,194– large companies 247,011 4,524 254,777 4,589– SME 449,242 14,303 272,448 18,902– other 16,673 2,124 37,996 1,703

foreign currency 35,643 502 55,004 934Loans to private individuals 75 1 26,865 328– housing loans – – 19,930 259– consumer loans 75 1 1,637 16– other loans – – 5,298 53Loans to companies 35,568 501 28,139 606– large companies 6,164 85 6,299 87– SME 29,404 416 20,712 501– other – – 1,128 18

total 800,270 22,791 849,367 30,532Net total according to maturity 777,479 818,835Net total according to total maturity 1,596,314

103

In 2009, total average interest rate for loans and advances to customers amounted to 5.41% (6.51% in 2008).

Impairments and debt cancellations for customers, by types of credit facilities:

Changes in impairments of loans to customers:


2009 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) 7,731– current account and credit card overdrafts 299 24 – 323– real estate loans 2,173 965 (150) 2,988– personal loans 2,859 1,095 (129) 3,825– current account overdrafts 687 8 (149) 546– other loans 53 7 (11) 49

credits to companies 47,252 20,143 (1,366) 66,029– large companies 9,285 5,099 (86) 14,298– SME 34,122 14,354 (1,280) 47,196– others 3,845 690 – 4,535

total 53,323 22,242 (1,805) 73,760


2008 Balance as at 1 January 2008

changes in impairments write-offs

Balance as at 31 December 2008

loans to individuals 5,865 476 (270) 6,071– current account and credit card overdrafts 265 34 – 299– real estate loans 1,724 450 (1) 2,173– personal loans 2,992 (78) (55) 2,859– current account overdrafts 884 17 (214) 687– other loans – 53 – 53

credits to companies 44,191 6,966 (3,905) 47,252– large companies 8,491 3,753 (2,959) 9,285– SME 25,033 10,035 (946) 34,122– others 10,667 (6,822) – 3,845

total 50,056 7,442 (4,175) 53,323

– amounts in thousands of EURImpairments

due to credit riskBalance as at 1 January 2008 50,056Loan impairments 43,555Loan impairment eliminations (40,288)Balance as at 31 December 2008 53,323

Loan impairments 54,782Loan impairment eliminations (34,345)Balance as at 31 December 2009 73,760

104

24 hELD-TO-MATURITy INVESTMENTS

24a Analysis by type of held-to-maturity investments


Bonds 130,613 183,782Treasury bills 83,346 9,979total 24a 213,959 193,761

In 2009 the Group pledged held-to-maturity government and bank bonds amounting in total to EUR 101,236 thousand (2008: EUR 99,795 thousand). The assets had been pledged to secure financing from the European Central Bank. A Group may only pledge financial assets, which qualify as eligible.

Changes in held-to-maturity investments:


Government bonds 59,418 69,285Foreign government bonds – 30,510Bank bonds 41,818 –total 24b 101,236 99,795

total 24a and 24b 315,195 293,556

24b Securities pledged

– amounts in thousands of EURDebt securities

totalBonds treasury billsBalance as at 1 January 2008 29,920 – 29,920Balance as at 31 December 2008 283,577 9,979 293,556

Purchase 26,838 82,274 109,112Realization at maturity (76,576) (10,000) (86,576)Interest (2,678) 1,093 (1,585)Capital adjustment transferred due to transfer from AFS to hTM 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 2009 the Group bought the Republic of Slovenia bonds and treasury bills as well as bonds issued by prime banks.

105

25 PROPERTy AND EQUIPMENT


Noteland and buildings computers

other equipment

assets in course of construction total

cost as at 1 January 2008 33,076 13,659 7,946 414 55,095Additions – – – 5,888 5,888Transfer from intangible assets 563 – 280 – 843Transfer from assets in the course of construction 1,076 1,920 933 (3,929) –Disposals (1,400) (1,644) (550) – (3,594)Transfer to investment property – – – (947) (947)cost as at 31 December 2008 33,315 13,935 8,609 1,426 57,285

Revaluation adjustments as at 1 January 2008 18,610 9,493 4,521 – 32,624Transfer from intangible assets 331 – 156 – 487Depreciation charge 13 991 1,470 691 – 3,152Disposals (742) (1,628) (504) – (2,874)Revaluation adjustments as at 31 December 2008 19,190 9,335 4,864 – 33,389

Net book amount 31 December 2008 14,125 4,600 3,745 1,426 23,896

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

Revaluation adjustments as at 1 January 2009 19,190 9,335 4,864 – 33,389Depreciation charge 13 650 1,545 707 – 2,902Disposals (74) (1,632) (349) – (2,055)Revaluation adjustments 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

The major additions in 2009 pertain to the purchase of office buildings in Podčetrtek, financing activities for the con-struction of investment property, purchases of computer equipment (POS terminals) and other equipment. Decreases mainly resulted from disposal and destruction of worn-out useless computer equipment and other equipment as well as the transfer of completed investment property to an independent item.

Property and equipment have not been pledged nor in 2009 or 2008.

106

26 INVESTMENT PROPERTy


Balance as at 1 January 8,591 8,801Addition 121 947Transfer from assets in the course of construction 2,003 –Sale (25) (800)Transfer to long-term leasing (10,351) –Depreciation 13 (33) (357)Balance as at 31 December 306 8,591

Total amount of investment property pertains to the present value of property and buildings, purchased to be leased. The decrease in the amount in 2009 resulted from agreement on financial leasing and the transfer of investment property to long-term financial investments.

27 INTANGIBLE ASSETS

Notable purchases in 2009 are represented by investments in the construction of a data warehouse, which has been put into service during this time. Additional investments included computer software purchases, primarily for the needs of retail banking in the amount of EUR 1,575 thousand. Records exclude expired software and licences.

The fair value of intangible assets at the end of the business year does not deviate from their carrying value.


Note Software licensesmaterial rights

and otherassets in course

of installation totalcost as at 1 January 2008 9,412 843 324 10,579Additions – – 1,951 1,951Transfer to fixed assets – (843) (7) (850)Transfer from fixed assets in preparation 1,460 – (1,460) –cost as at 31 December 2008 10,872 – 808 11,680

Revaluation adjustments as at 1 January 2008 6,682 487 – 7,169Amortisation charge 13 882 – – 882Transfer to fixed assets – (487) – (487)Revaluation adjustments as at 31 December 2008 7,564 – – 7,564

Net book amount at 31 December 2008 3,308 – 808 4,116

cost as at 1 January 2009 10,872 – 808 11,680Additions – – 2,205 2,205Transfer from fixed assets in preparation 2,645 – (2,645) –Disposals (1,698) – – (1,698)cost as at 31 December 2009 11,819 – 368 12,187

Revaluation adjustments as at 1 January 2009 7,564 – – 7,564Amortisation charge 13 979 – – 979Disposals (1,698) – – (1,698)Revaluation adjustments as at 31 December 2009 6,845 – – 6,845

Net book amount at 31 December 2009 4,974 – 368 5,342

107

28 CURRENT INCOME TAX ASSETS AND LIABILITIES

28.1 Income tax - assets


Current tax 1,862 –Deferred tax 2,760 3,566Balance of assets as at 31 December 4,622 3,566

Current tax receivables represent the difference between the obligation to pay tax in the amount of EUR 3,133 thousand and the prepayments made amounting to EUR 4,995 thousand.

Deferred taxes in the amount of EUR 2,760 thousand are explained in Note 28.3 below.

28.2 Income tax - liabilities


Current tax – 1,198Balance of liabilities as at 31 December – 1,198

28.3 Deferred taxes


Available-for-sale securities 2,248 2,953Provisions for liabilities to employees 502 563Marketable securities 10 35Valuation of investment property - depreciation – 15Deferred tax assets 2,760 3,566

The largest share of deferred taxes consists of tax receivables from available-for-sale securities. Due to the decrease in their fair value and the recording of revaluation expenses, the Group had deferred tax assets.

108


Balance as at 1 January 3,566 (10,154)

Income statement changes in deferred taxes:trading securities– elimination of assets (26) (1)

available–for–sale securities – impairment– establishment of assets for impairment 1,621 1,910– elimination of assets for impairment (159) (50)

provisions from SaS/IfRS transition– elimination of liabilities – 1,889

provisions for liabilities to employees– establishment of assets 24 10– elimination of assets (85) (81)Investment property valuation (15) 11

Income statement changes in deferred taxes as at 31 December 1,360 3,688

Changes in deferred taxes in the statement of financial position:available–for–sale securities– valuation by fair value (3,081) 12,045– elimination 915 (2,013)

changes in deferred taxes in the statement of financial position as at 31 December (2,166) 10,032

Balance as at 31 December 2,760 3,566

Deferred tax movements:

29 OThER ASSETS


financial assets 2,160 2,871Receivables for credit / debit cards 725 853Other retail claims 2,059 2,024Fee and commission due 250 213Debtors 71 189Receivables for advance payments 60 621Other claims 79 98Impairment (1,084) (1,127)

Non–financial assets 7,812 9,095Goods and services inventories 7,662 8,733Deferred operating expenses 101 147Receivables for input VAT 49 215

total 9,972 11,966

109

Changes in impairments for other assets:

– amounts in thousands of EURother assets

Balance 1 January 2008 1,618Impairments 43Impairments elimination (534)Balance 31 December 2008 1,127

Impairments 57Impairments elimination (100)Balance 31 December 2009 1,084

30 DEPOSITS FROM CENTRAL BANK


Short-term loans from ECB in local currency 20,051 90,199Long-term loans from ECB in local currency 110,435 –total 130,486 90,199

The Bank in the Group obtained short-term loans from the European Central Bank on the basis of securities pledged and long-term loans from primary emission.

In 2009, total average annual interest rate for financial liabilities towards the Central Bank amounted to 1.60% (2008: 4.30%).

31 FINANCIAL LIABILITIES hELD FOR TRADING

– amounts in thousands of EURcontractual amount fair value

2009 2008 2009 2008Futures and forwards 63,849 71,263 1,652 3,463IRS 84,758 98,245 2,602 2,744Foreign currency swaps 87,653 161,477 1,727 4,603FRA – 25,000 – 36Options 10,000 10,000 70 92total 246,260 365,985 6,051 10,938

Futures and forwards fair value represents negative valuation due to the price of forward sales.

Interest rate swaps include negative valuation from interest rate swap transactions. In 2009 negative valuation came from transactions where the Group paid fixed interest while receiving lower variable (decrease in market-based interest rates) interest, which caused negative net valuation effects.

In 2009 the Group decreased the volume of operations in foreign currency swaps, which include forward and swap agree-ments. This item shows a decrease in negative valuation due to the reduced volatility of rates as compared to 2008.

110

32 FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE ThROUGh PROFIT AND LOSS

– amounts in thousands of EURInterest rate as at 31 December 2009 2009 2008

Certificates of deposit with maturity 2012 5.00% 1,519 1,458Subordinated bonds BCE10, with maturity 2017 5.00% 38,332 36,261total 39,851 37,719

Financial liabilities designated at fair value include those securities that are hedged, consistently with the risk manage-ment 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 drop – 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 38,332 thousand in 2009 (2008: EUR 36,261 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 additional capital I up to an amount representing 50% of the Group’s core 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 ad-ditional capital II 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 measure-ment 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.

Subordinated bonds BCE10 are listed on stock exchange and certificates of deposit are not.

33 FINANCIAL LIABILITIES AT AMORTISED COST – DEPOSITS FROM BANKS

33a Analysis by currency and maturity


at sight 1,406 1,171– in local currency 244 350– in foreign currency 1,162 821

Short–term 55,204 58,987– in local currency 55,204 44,811– in foreign currency – 14,176

total 56,610 60,158

In 2009, total average interest rate for liabilities toward banks amounted to 2.10% (2008: 4.22%).

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33b Analysis by territory


Slovenia 46,308 28,027European Union 7,076 26,720Former yugoslav countries 3,226 5,411total 56,610 60,158

34 FINANCIAL LIABILITIES AT AMORTISED COST – DUE TO CUSTOMERS

34a Analysis by currency and maturity and by type of customers


at sight Short-term long-term at sight Short-term long-termcompanies and individuals 88,479 429,262 232,440 84,500 480,869 58,200– in local currency 86,256 429,202 232,439 83,528 479,149 58,199– in foreign currency 2,223 60 1 972 1,720 1

General population 293,321 297,347 112,587 273,234 327,349 64,304– in local currency 287,433 292,401 111,527 267,791 318,884 62,387– in foreign currency 5,888 4,946 1,060 5,443 8,465 1,917

total 381,800 726,609 345,027 357,734 808,218 122,504total at sight, short–term and long–term 1,453,436 1,288,456

Total average annual interest rate for liabilities towards customers in 2009 amounted to 2.71% (2008: 3.29%).



Slovenia 1,440,879 1,279,133European Union 5,228 2,863Former yugoslav countries 5,870 5,140Other 1,459 1,320total 1,453,436 1,288,456

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35 FINANCIAL LIABILITIES AT AMORTISED COST – BORROwINGS FROM BANKS

35a Analysis by currency and maturity of the liability


In local currency 412,709 480,279Short-term loans 9,015 53,614Long-term loans 403,694 426,665

In foreign currency 6,736 13,858Short-term loans – 3,549Long-term loans 6,736 10,309

total 419,445 494,137

In 2009, total average annual interest rate for bank borrowings amounted to 2.56% (2008: 5.00%).



Slovenia 178,981 84,593European Union 240,464 404,545Canada – 4,999total 419,445 494,137

36 DEBT SECURITIES IN ISSUE


certificates of deposit in local currency 113,360 78,730 up to 1 year 2.74% 7,029 706 above 1 year up to 2 years 4.56% 54,384 70,817 above 2 year up to 3 years 3.48% 9,477 7,207 above 3 year up to 4 years 4.79% 39,927 – above 4 year up to 5 years 5.11% 2,543 –

Bonds in local currency 21,414 21,395 BCE9 bonds, maturity 2010 (EUR) 3.80% 21,414 21,395

total 134,774 100,125

Bond BCE9 is listed on stock exchange and certificates of deposit are not.

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37 SUBORDINATED LIABILITIES


Subordinate bonds due in 2010 (EUR) 5.15% 10,381 10,376Subordinate bonds due in 2011 (EUR) 4.90% 13,027 13,022Subordinate certificates of deposit due in 2014 (EUR) 2.01% 10,275 10,319Subordinate bonds due in 2016 (EUR) 6.50% 12,484 –Subordinate bonds due in 2017 (EUR) 2.99% 49,467 49,411total 95,634 83,128

In the beginning of 2003, the Group issued subordinate bonds nominated in the amount of EUR 10 million, at real interest rate of 5.15%, with maturity date 1 April 2010. Interest is paid annually. The first interest rate coupon was due on 1 April 2004, and the last one is due on 1 April 2010.

In 2004, the Group again issued subordinate bonds in the amount of EUR 12.5 million at real interest rate of 4.90%, with maturity date 15 February 2011. Interest is paid annu-ally. The first interest rate coupon was due on 15 February 2005, and the last one is due on 15 February 2011.

In October and November 2007, the Group issued subor-dinate certificates of deposit in the amount of EUR 10.25 million at the interest rate of Euribor 6M, plus one percent-age point, with maturity of seven years. Interest is paid semi annually.

Based on the Decision on the calculation of capital in banks and savings banks, bonds with maturities in 2010 and 2011 represent the Group’s subordinated debt, which is included in additional capital I up to an amount equalling 50% of the Group’s core capital, and exhibit the following charac-teristics:

– the bonds are not especially insured or guaranteed, the Group’s property being the only collateral,

– liabilities from bonds are subordinated to plain debt in-struments in the event of bankruptcy or winding up pro-cedures and are only redeemed, once all non-subordinated liabilities to creditors and subordinated liabilities includ-ed in additional capital II have been redeemed, therefore these represent a high risk security,

– the funded subordinated bonds may only be used to cover the Group’s loss in the event of bankruptcy or winding up procedures and are not to be used to cover loss during the time of the Group’s regular operations.

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 deemed innovative financial instruments and are included in the calculation of core capital (Tier 1) in accordance with the decision of the Bank of Slovenia dated December 4, 2007,

with any eventual surplus included in additional capital I. The following are the main characteristics of the issued in-novative subordinated bonds:

– the instrument does not have a set maturity, it can how-ever 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 guar-antee 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 redemp-tion as compared to other creditors,

– liabilities from these bonds are subordinated in full to li-abilities toward regular creditors and the liabilities based on subordinated debt instruments, meaning that in an event of bankruptcy or winding up procedures they are re-deemed 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 pay-ments from bonds, should it not have recognized distrib-utable 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 call-able, 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 invest-ments, the Management Board of Banka Celje d.d., on May

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13, 2009, adopted the decision for Banka Celje to issue subordinated registered bonds – 12th issue (designated BCE12). As at December 31, 2009 EUR 12,484 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 maturing 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 intends to include them in the calculation of additional capital taking into account legislative restrictions. 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 additional capital II. The BCE12 subordinated bonds represent a high risk security investment.

All of the subordinated bonds are listed on the stock exchange.

38 FINANCIAL LIABILITIES ASSOCIATED TO TRANSFER ASSETS


Short-term financial liabilities to foreign banks in domestic currency – 30,991total – 30,991

In 2008 the Group borrowed short-term loans from foreign banks, where securities were put up as collateral – repos.

39 PROVISIONS


Unresolved legal proceedings 43a 7,901 7,957Provisions for commitments and contingent liabilities 43d 2,695 3,372Employee related provision 2,783 2,893Other provisions 602 855total 13,981 15,077

As at 31 December 2009 there were provision formed amounting to EUR 7,901 thousand for pending legal actions from the denationalization proceedings of office building. Additionally, the Group formed EUR 162 thousand worth of provisions to this effect and transferred EUR 218 thousand to other liabilities to be paid out on the basis of a court order.

Other provisions fully apply on 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.

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Changes in provisions:


provisions or unsettled disputes

provisions for off-balance

sheet liabilities

Retirement benefit

provisionsother

provisions totalBalance 1 January 2008 3,933 3,566 3,039 1,164 11,702Provisions made 4,024 (194) 103 69 4,002Provisions (directly) used – – (249) (378) (627)Balance 31 December 2008 7,957 3,372 2,893 855 15,077

Provisions made 162 (677) 252 28 (235)Provisions (directly) used (218) – (362) (281) (861)Balance 31 December 2009 7,901 2,695 2,783 602 13,981

40 OThER LIABILITIES


Liabilities from card operations 3,159 5,605Liabilities from salaries 2,482 2,593Liabilities toward suppliers 1,778 2,429Costs accounted for in advance 1,167 1,049Taxes payable 397 401Fees and commissions due 49 66Liabilities toward denationalization claimants 218 –Other liabilities 1,324 1,351total 10,574 13,494

All other liabilities, except for taxes payable, are financial liabilities, carried at amortized cost.

41 ShARE CAPITAL

41.1 Subscribed capitalThe 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 only bear the right to compulsory dividend payments. 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. Should preferred share holders not have received dividends for the year, they are given voting rights, same as the holders of regular shares.

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 share capital at 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 from authorised capital in 2009.

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Bank shareholders with shareholdings exceeding 3% are listed in the following table:

– in %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%hypo Alpe Adria bank a.g. Klagenfurt 3.33% 1.72%

Number of shares and amount of share capital by types:

– amounts in thousands of EURShare capital

Number of shares ordinary shares preference shares totalBalance 31 December 2007 422,123 11,274 2,818 14,092

Balance 31 December 2008 508,629 13,584 3,396 16,980

Balance 31 December 2009 508,629 13,584 3,396 16,980

41.2 Treasury shares boughtAs at 31 December 2009 and as at 31 December 2008 the Group portfolio included 251 ordinary treasury shares in total amount of EUR 31 thousand; these shares are recorded as a deduction of the Group’s capital. In 2009, as well as in 2008, the Group did not purchase or buy treasury shares.

41.3 Share premiumShare 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 the share premium stood unchanged at EUR 51,542. It included capital reserves from the general revaluation capital adjustment in the amount of EUR 13,337 thousand and the paid-in capital surplus amounting to EUR 38,205 thousand.

41.4 Profit reserves Changes in reserve balance:


Statuary reservesother reserves

from profitRetained earnings total

at 1 January 2008 2,904 109,566 271 112,741Increase from part of net profit for the year – 3,425 362 3,787Increase from past dividends not paid – 22 – 22at 31 December 2008 2,904 113,013 633 116,550

Increase 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 2,904 119,793 377 123,074

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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 statutary reserves and capital reserves to reach 10% of the share capital. As at 31 Decem-ber 2009 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 core capital in ac-cordance 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.

41.5 Revaluation reserveChanges in the revaluation reserve:

– amounts in thousands of EURtotal

at 1 January 2008 32,014Losses from changes in fair value of available-for-sale (34,571)Transfer to impairment 7,825Sale / disposal of available-for-sale securities (9,035)at 31 December 2008 (3,767)

Profits from changes in fair value of available-for-sale 4,657Transfer to impairment 4,817Sale / disposal of available-for-sale securities (1,047)at 31 December 2009 4,660

In 2009 the Group reported positive effects from available-for-sale financial assets in a gross amount of EUR 6,552 thousand. A detailed overview according to type is shown in Note 21: Changes in available-for-sale financial assets. Thus, taking tax into consideration the increase in equity reported in the statement of financial position for 2009 amounted to EUR 4,657 thousand.

42 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 2008 business year in the amount of EUR 9.92 per ordinary and preference share was con-firmed at the Bank’s 24th Shareholders Assembly on 11 June 2009.

43 CONTINGENT LIABILITIES AND COMMITMENTS

a) Legal proceedingsAs at 31 December 2009 the Group’s provisions for pend-ing legal actions amounted to EUR 7,901 thousand from the denationalization process, according to which the de-nationalization 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 2008: EUR 7,957 thousand). The Supreme Court of the Republic of Slovenia did not yet provide a decision on procedure revision, the Bank filed for in connection with the verdict of the Administrative Court in Celje, based on which part of the decision on denationalization, issued by the Ministry of Culture, has been finalised.

b) Capital commitmentsAs at 31 December 2009 and 31 December 2008 property and equipment have not been pledged as security for li-abilities.

c) Potential and assumed liabilitiesThe basic aim of these instruments is to ensure, that assets are made available when so requested by the clients. Guar-antees 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, guarantees 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. however, the likely amount of loss, though not easy to quantify, is considerably lower than the total unused commitments, since most commitments to extend credit are contingent upon customers maintaining specific credit standards.

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d) Breakdown of contractual amounts relating to bank guarantees, documentary letters of credit and assumed liabilities


Guarantees and stand-by LCs 84,578 92,917Documentary LCs 1,260 1,660Commitments to extended credits 152,177 190,643– maturity up to 1 year 141,387 172,309– maturity above 1 year 10,790 18,334total 238,015 285,220Provisions for off-balance sheet risk 39 2,695 3,372total net 235,320 281,848

In 2009 the guarantees and stand-by letters of credit total includes service guarantees in the amount EUR 47,498 thou-sand (2008: EUR 54,675 thousand).

e) Guarantees

– amounts in thousands of EURas at 1 January 2008 54,456Approved guarantees 58,880Guarantees due (59,591)as at 31 December 2008 53,745

Approved guarantees 48,125Guarantees due (54,394)as at 31 December 2009 47,476

Commission and fee income from service guarantees amounted to EUR 811 thousand in 2009 (2008: EUR 874 thousand).

44 CASh AND CASh EQUIVALENTS

Cash and cash equivalents in the cash flow statement represent instruments with maturity of less than 90 days.


Cash and balances with the Central Bank 18 40,240 49,044Treasury bills part 24 – 9,979Loans to banks part 22 86,209 37,908total 126,449 96,931

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45 RELATED PARTy TRANSACTIONS

45.1 Claims and commitments and contingent liabilities


2009management Board

and Supervisory Board members

management personnel

Shareholders with more than 20% of shares total

Loans 202 414 2,784 3,400Securities – – 37,590 37,590Liabilities assumed 17 54 – 71Guarantees – – 1,314 1,314Liabilities from derivatives – – 10,173 10,173total 219 468 51,861 52,548

loan repayments during the year 20 312 130,042 130,374

Deposits 380 862 42,232 43,474Subordinated debt and certificates of deposit – 50 4,712 4,762total 380 912 46,944 48,236

Interest income 6 26 1,446 1,478Interest expense 22 42 443 507

The Group conducts transactions with related parties in accordance with market prices and conditions.


2008management Board

and Supervisory Board members

management personnel

Shareholders with more than 20% of shares total

Loans – 533 2,642 3,175Securities – – 45,135 45,135Liabilities assumed 34 161 – 195Guarantees – – 955 955total 34 694 48,732 49,460

loan repayments during the year 12 286 30,698 30,996

Deposits 1,411 744 – 2,155Subordinated debt – 50 4,710 4,760total 1,411 794 4,710 6,915

Interest income – 35 1,561 1,596Interest expense 88 47 366 501

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45.2 Gross amounts paid out

– amounts in thousands of EURmanagement

Board membersSupervisory

Board members management personnel totalFixed revenue 378 – 1,571 1,949Variable revenue 134 – 243 377Other revenue 77 – 231 308Remuneration – 30 – 30Director's fee – 16 – 16total 589 46 2,045 2,680

Banka Celje d.d. had three Management Board members in the first half of 2009 and in the second half only two members. The Bank’s Supervisory Board included seven members, and fourteen employees have individual contracts of employment with the Bank. In addition to the director, another employee in the subsidiary signed an individual contract of employ-ment with the company. Other receipts include annual leave pay, additional pension insurance premiums and annuity savings as well as benefit charges.

45.3 Gross amounts paid out to Management Board and Supervisory Board members

– amounts in thousands of EURRevenue

Supervisory Board members fixed variable totalPresident of the Supervisory Board 2 – 2Member of the Supervisory Board & Deputy CEO 2 9 11Member of the Supervisory Board 1 – 1Member of the Supervisory Board 2 – 2Member of the Supervisory Board 3 7 10Member of the Supervisory Board 3 7 10Member of the Supervisory Board 3 7 10total 16 30 46

– amounts in thousands of EURRevenue

managemant Board members fixed variable other totalPresident & CEO 165 38 32 235Member of the Management Board & Deputy CEO 140 28 25 193Member of the Management Board 73 68 20 161total 378 134 77 589

46 EXPENDITURE FROM SUBORDINATED LIABILITIES

In 2009, the Group paid EUR 5,546 thousand of interest from subordinated bonds issued and EUR 475 thousand of inter-est from issued subordinate certificates of deposit which are included in the interest expenditure table.

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47 AVERAGE COMPLEMENT OF EMPLOyEES IN 2009 AND AT 31 DECEMBER 2009

On December 31, 2009 the Bank had 571 employees, of which 31.52% were educated at least at the higher education level, 18.56% possesed vocational education diplomas, 45.36% held high school diplomas and 4.56% of the employees were educated at lower levels. In 2009, the average complement of employees at the Bank was 586. Information on the employees is represented in more detail under item 3.8 in the business report.

At the end of 2009 the subsidiary employed five workers and in 2008 six workers.

48 INFORMATION ON ThE RESULTS OF ORGANIZATIONAL UNITS ABROAD

The Group has no subsidiaries or associated companies abroad.

49 POST REPORTING DATE EVENTS

Changes in management bodiesOn January 1, 2010 Aleksander Vozel, M. Sc. joined the Bank’s Management Board. his term expires on December 31, 2013.

RatingsThe international ratings agency Fitch Ratings affirmed the ratings of the Bank in the Group in February 2010, being long-term BBB, short-term F3, individual C, support 3 and a stable outlook.

Realization of collateralThe Bank in the Group realized some of its collateral represented by securities in 2009 and is selling these in 2010 with all the diligence of a good manager in line the conditions in the market.

Regular bonds issueIn January of 2010 the Bank’s Management Board considered the information on the issue of regular bonds in line with its business policies for 2010. To replace long-term financing from bonds and with the intention to acquire additional financing, a 5-year bond in an amount of EUR 40 million was issued. Sales were concluded by the end of April 2010.

BANKA CELJE GROUP CONSOLIDATED ANNUAL REPORT 20096eccfa35-4570-41ff-b63d... · 2017-10-16 · 2.1...

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